Mind the credibility gap: Why corporate net-zero plans are still riddled with loopholes

New data out this week has revealed that ever-more businesses are setting net-zero targets and disclosing emissions. But such plans and disclosures are often full of loopholes and, even more frequently, not backed up with any tangible investment commitments.

Mind the credibility gap: Why corporate net-zero plans are still riddled with loopholes

CDP revealed on Wednesday (18 October) that a record 23,000+ companies globally are now disclosing some environmental information using its platform – a 24% year-on-year increase.

Those disclosing include listed companies worth $67trn. This is equivalent to more than two-thirds of global market capitalization.

The vast majority of these companies disclose climate-related information. But less than one in five are disclosing data relating to water security, and this falls to under one in ten when it comes to forest disclosures.

Only 1% of the companies are reporting on three areas.

By the UN’s estimates, nature can provide around 30% of the emissions reductions needed to deliver the Paris Agreement. So one has to question the extent of the credibility of climate plans from companies disclosing emissions information but nothing on forests or water.

“We won’t get anywhere with a climate-now and nature-later response to how we address climate change,” Taskforce on Nature-Related Financial Disclosures (TNFD) co-chair David Craig stated at a launch event for the framework.

CDP intends to “reflect” the recently launched TNFD framework in its disclosure within its questionnaire within the next year.  This means change could be on the horizon in terms of nature being embedded in corporate climate strategies.

The TNFD includes a suite of recommended disclosures covering not only operational impacts but also financed impacts, upstream and downstream impacts. It is hoped that the first TNFD-aligned corporate reports will be released in 2026.

CDP is set to change its technology platform in 2024 in a bid to make it quicker and easier for businesses to disclose across climate, water, forests and plastics.

Sidelining Scope 3

So, nature-related disclosures remain the exception, while emissions disclosures are now the norm. But not all companies that have begun reporting their climate-related impacts and risks are using these findings to inform meaningful updates to their strategies.

Investor engagement initiative Climate Action 100+ this week released its latest assessment of the climate-related strategies at 170 of the world’s highest-emitting companies.

All of these firms have long-term climate goals and 77% of them have targets entailing net-zero across their direct (Scope 1) and power-related (Scope 2) emissions. Almost nine in ten have medium-term greenhouse gas emissions reduction targets, up from eight in ten a year ago.

But only 35% of the companies have long-term net-zero targets that cover their most material sources of Scope 3 emissions. The proportion is 33% for medium-term targets

It bears noting that separate research from Centrica Business Solutions recently concluded that around half of European businesses are not factoring Scope 3 emissions into their net-zero plans, largely due to a lack of perceived top-down pressure from regulation and legislation.

By Climate Action 100+’s standards, fewer than one in five of the companies it assessed have medium-term targets that are credibly aligned with a 1.5C pathway.

This lack of ambition is, in many cases, translating into a lack of meaningful action. Only 44% of the firms assessed have reduced their emissions intensity over the past year. And of these firms, just over half (56%) had reduced emissions intensity at a rate compatible with a 1.5C pathway.

Climate Action 100+’s global steering committee lead Francois Humbert said: “Urgent action is needed to shift the weight of focus from mere commitments to implementation. Although it’s encouraging to see more companies disclose their net -zero transition plans, there’s a missing link between how these can meet the Paris Agreement goals.”

Steering committee Rebecca Mikula-Wright, chief executive of the Asia Investor Group on Climate Change, added: “Investors do welcome the net-zero targets made by heavy emitting companies, but are still concerned by companies’ slow progress in actually implementing their plans, particularly in nearer-term timeframes.”

Finance and focus

A lack of ambitious targets is not the only thing holding back decarbonisation at the Climate Action 100+ focus group of companies.

The initiative has also found major challenges in relation to the financing of the low-carbon economy and the lack of internal leadership focus on climate-related issues.

On the former, the report reveals that two-thirds of the companies are not disclosing their investments made in climate solutions over the past year. The same proportion provide little to no information on how they plan to allocate spend on low-carbon technologies and processes in the future.

On top of this, only 2% have either already stopped investing in unabated high-carbon assets or outlined clear plans for a future ban on this kind of investment. The majority of the firms still risk locking in high-carbon assets which will either potentially jeapordise the delivery of their climate plans, or become stranded assets.

This is surprising until you look at Climate Action 100+’s assessment of boards’ climate competencies.

While boards at nine in ten of the 170 firms have oversight of climate-related risks and opportunities to some degree, the initiative concludes that only 5% of the firms have boards with sufficient climate-related capabilities and competencies.

Moreover, only five have developed their low-carbon transition plans in consultation with other key stakeholders including staff from other functions and at lower levels of seniority.

It is, therefore, little surprise that these firms broadly seem stuck in the ‘business-as-usual’ mindset and are not planning to significantly skew spending plans towards the low-carbon transition.

This lagging is coming at precisely the wrong moment. Principles for Responsible Investment (PRI) chief executive David Atkin said: “This year’s results follow the update of the International Energy Agency’s (IEA) Net Zero Roadmap which shows that – even though the path is narrowing – the 1.5C goal of the Paris Agreement can still be achieved.

“The need for corporate action on climate change has never been more urgent.”

The IEA made clear in the roadmap that there must be no expansion of global oil and gas extraction capacity beyond that already agreed upon before the end of 2021. There should also be no new or extended coal mines, nor any new unabated coal-fired power plants.

This is because, in a 1.5C-aligned global transition to net-zero energy systems, fossil fuel demand will fall 25% by 2030. By 2050, it will be 80% lower than current levels.

Without corporate investment to make that happen, the Paris Agreement’s more ambitious pathway will fall out of reach, putting the livelihoods of billions at stake.

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