More than half of UK businesses have net-zero plans, but how can these targets be reached?

Following the announcement by the Chancellor during COP26 that all UK financial institutions and listed companies will be expected to publish independently reviewed net zero transition plans from 2023, EY conducted a survey in May to explore how prepared these businesses are.

The level of scrutiny that these plans are likely to receive when they publish from next year has been brought into sharp focus following the recent news that the Government’s own Net Zero Strategy has been ruled ‘inadequate and unlawful’ because it is too vague.

The survey, of over 510 c-suite and senior decision makers at the UK’s largest companies with an annual turnover of £35m, was indeed revealing.

Turning net-zero plans into reality remains a challenge

Broadly speaking, the businesses surveyed understand the issues around decarbonisation and the net zero transition, but there is still a significant gap in turning a broad understanding of the issues into rigorous transition plans, that then leads to action. This is evidenced by nearly two-fifths of respondents (39%) saying they were uncertain on how to approach a net zero plan.

Understanding businesses’ trepidation and uncertainty around developing net zero plans, EY Carbon launched earlier this year. EY Carbon’s remit is to advise and support listed businesses as they prepare their net zero plans ahead of independent scrutiny and verification. The team is dedicated to helping these businesses develop robust, ambitious plans, while building longer-term sustainability strategies.

Unlocking potential of net-zero plans is a challenge

The survey also revealed that while there is awareness of the potential competitive advantage to be gained through pioneering net zero plans, businesses are facing significant challenges to unlocking that potential. As an example, current sustainability endeavours by some businesses are often not integrated within their corporate strategy. And this view is supported by 45% of survey respondents revealing that the creation of net zero plans is often in competition with other priorities in their business. This is what we are also seeing in the market from many businesses, which are hesitant to commit to transformation and are targeting more ‘low hanging fruit’ decarbonisation initiatives. Ultimately this is holding back progress at a pace consistent with the 1.5C target of the Paris Agreement.

Private Equity ahead of the curve

That said, one sector which is grasping the value-creating opportunity around sustainable businesses is Private Equity (PE). One of the reasons behind this is perhaps PE houses see this in the price premiums they pay for companies that satisfy their own investors’ environmental priorities. At present, ESG is presenting value uplift opportunities that PE are keen to capture in the medium-term. Longer-term, this first mover advantage could erode with investors taking this more for granted – and sustainability will become a value protection play.

Businesses need more support to execute the transition to net zero

While businesses have a good high-level understanding of the key areas to focus on to reduce their emissions, there are still areas where they need support to turn their net zero transition pledge into concrete action.

Here are some of the actions we have identified as key to making tangible progress:

  • Turning high-level plans into detailed roadmaps for change, and developing the in-house technical know-how to create these roadmaps.
  • Capability to execute against their plans at the pace that matches their public pledges. This task is complicated by the fact that there is a skills gap in the market in relation to climate expertise for them to recruit.
  • The economic case and access to funding and incentives to be able to invest in and move quickly on their plans.
  • Government support was at the top of the list for survey respondents. The Government is in the process of incentivising some sustainable business activity and investment through measures such as cash grants, public investment, and tax reliefs. Identifying and making use of these mechanisms is paramount for businesses looking to invest sustainably.

Overall, the expectation for businesses to publish net-zero plans from 2023 is undoubtedly an extremely positive step in the fight against climate change.  It does mean that businesses will need to move from purpose statements and pledges, to detailed roadmaps for change at significant pace. This presents a real and significant challenge for companies, but with robust and rigorous planning, coupled with the support of a specialist adviser, success in a net zero economy is achievable.

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie