Despite the growing awareness of net zero, many UK businesses have not yet got to grips with it. An August 2022 survey of decision-makers at some of the UK’s largest companies found that over half had set net zero targets, but without necessarily having a strategy to back it up. For UK businesses of all sizes, the proportion with a net zero strategy could be as low as 29%. But engaging with net zero is no longer an optional extra. There are solid business reasons to develop a net zero strategy today.
As of April 2022, it is mandatory for all large companies and financial institutions to produce reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). This means considering key areas of business decision-making (governance, strategy, risk management and metrics) in terms of how they relate to the climate.
A key part of TFCD reporting is to consider the business in the context of net zero targets for the industry as a whole and the UK’s overall target of net zero by 2050. This means having a transition plan for how your company will play its part in the decarbonisation of its sector.
The Energy Savings Opportunity Scheme (ESOS) will be changing in Phase 4 to include mandatory net zero assessments. We have explained why these changes are so significant for the scheme: it will be the first time any government has mandated private business to develop a net zero plan. This is all part of a shift in the focus of ESOS, away from gently encouraging businesses to seize energy-saving opportunities and towards requiring them to take their climate impact seriously.
SDR (coming soon)
The forthcoming Sustainability Disclosure Requirements will require businesses to report on their broader environmental impact as well as the climate. We don’t yet know if a net zero plan will be mandatory for this, but the SDR will definitely require businesses to show what steps they are taking to improve their environmental sustainability.
One of the reasons why government has brought in stricter rules on climate reporting is because investors want this kind of reassurance. The Institutional Investors Group on Climate Change (IIGCC) has repeatedly called for businesses to strengthen their climate strategy and for a regulatory environment that encourages this. In the past they have called for science-based targets to be adopted more widely and for executive remuneration to be linked to company action on emissions.
In September 2022 the IIGCC launched a global statement urging governments to, among other things, strengthen climate disclosures across the financial system. At the time of writing, the statement has been co-signed by 532 investors, between them representing USD $39 trillion (roughly GBP £35 trillion) of assets. The market signal could not be clearer: investors have the money to spend on businesses with a credible net zero plan.
The risks of a warming world
One of the reasons behind mandatory TCFD reporting is that it forces businesses to consider how they will operate in a warming world. The government needs UK businesses to plan for different scenarios to avoid another financial crash – and individual businesses need to do this kind of planning to avoid going to the wall.
Climate change can affect many aspects of a company’s operations, whether that means a heatwave affecting workforce productivity or flooding disrupting transport logistics. Businesses need to model how they would operate in a world on different warming pathways, from 1.5°C to 4°C and beyond. This does not strictly come under the category of net zero planning, but it is a serious credibility problem if you plan for the risks of climate change while failing to do anything to slow the rate of warming.
As the number of businesses making net zero plans reaches critical mass, this is affecting other businesses too. A credible net zero strategy means taking into account Scope 3 emissions; that is, emissions generated by other organisations connected to your business. This could include suppliers, transport services, waste disposal – literally anything where the activity is done for your business but not by your business.
For most businesses, they account for around nine-tenths of emissions. But of course, one company’s Scope 3 emissions are another company’s Scope 1 or 2 emissions. As businesses work on Scope 3 in service of their own net zero goals, they will inevitably be having conversations with other businesses in their value chain about their own emissions and targets. This can be a positive experience, strengthening working relationships. But failing to engage with net zero means that other businesses could see the relationship more as a liability than an asset – and make different choices about who to work with in future.
There are many reasons why ignoring net zero is no longer an option. The direction of travel for regulations is to get more stringent with time, making it a compliance risk not to get a grip on your company’s emissions. Perhaps just as importantly, the attitudes of investors, customers and the wider business community are changing too. This means opening your business up to reputational risk if you do not have a robust net zero strategy. Failing to have a net zero plan in place will soon mean taking unacceptable risks with your overall business strategy.