Transition planning: The map is not the territory

Post Date
26 April 2024
Author
Julie Pike
Read Time
6 minutes
  • ESG advisory

The transition to a low-carbon economy will not be linear. Companies with Net-Zero commitments must be nimble as they progress along their decarbonisation pathways. They must be ready to meet the challenge of investing in emissions reduction opportunities as they begin to scale, whilst maintaining resilience to physical climate impacts across their value chains.

As companies begin to transition over the coming years, a key to success will be a company’s awareness of the limitations in its progress, and the knowledge that the landscape of expectations is ever growing. Highlighted below are some of the key issues businesses should consider, as they expand their map, to better understand the transition territory.

Net-Zero means signing up for the long haul

Achieving Net-Zero is a commitment for the long-term. It must endure successive company leaders, nascent technologies, shifting policy standards, and value chain disruption, with the latter potentially leading to significant costs to curtail emissions reductions investments. None of the companies publicly setting decarbonisation targets today know for certain whether they can meet them on time. This must be understood at board level when the commitment is made. The importance of this is highlighted in a recent survey by the Science-based Targets Initiative (SBTi) which found that 239 companies who had made Net-Zero commitments had seen these removed. 54% of survey respondents identified Scope 3 emissions as a major barrier to setting Net-Zero targets, and 53% said there was uncertainty about future technologies [1].

Fluctuating costs of carbon

The price of carbon is not fixed. It fluctuates by region, purpose, technology, and timeframe, making it difficult to budget for achieving Net-Zero over the long-term. An example of this is the cost associated with the UK’s Emissions Trading Scheme where prices are tracking around £35/tonne. While this is a downward trend for the cost per tonne of carbon dioxide, the EU allowance continues to fluctuate at a higher rate around €60/tonne [2]. Looking to the future, investors expect companies to disclose the cost of achieving Net-Zero through investment in capex, changes to business operations, products and services, and for residual emissions, carbon removals. This is difficult to plan for with certainty as the necessary technologies are yet to develop at scale. Price carbon too low or too high and the business case to transition is less attractive.

Backing the wrong technology

As emissions reduction technologies are nascent, there is a significant transition risk that companies may invest in a process that further down the line proves unsuitable. Committing to near-term Scope 1 targets can necessitate investing in ‘transition’ technologies to achieve early targets on time, before switching to different, more sustainable, technologies over the long-term. Road transport is a case in point. Here there is uncertainty whether fleet electric vehicles and charging infrastructure will be ready to meet near-term target deadlines. Biofuels are considered as a short-term investment to plug the gap, however, these may prove insufficient over the long-term as they produce biogenic emissions.

Preparing for the impact of physical risks

A Net-Zero commitment, decarbonisation pathway, and emissions reductions across the value chain can mitigate many transition risks. However, they cannot reduce the frequency or lessen the severity of supply chain disruption from extreme weather events. These will be subject to the collective efforts of companies and policymakers across all industries. The higher the average temperature rise, the greater the expected frequency and magnitude of climate-related impacts. Business models must be nimble enough to negate these risks through product range changes, switching regions of supply and factoring climate risk into growth strategies.

Climate science is evolving

As our understanding of the drivers of global warming deepens, so to do the mechanisms by which we will limit rising temperatures. This means that the greenhouse gas (GHG) standards and methodologies we are using today will become more technical and nuanced to particular industries. Today’s priority is to reduce emissions from fossil fuels, and just recently this has expanded to cover value chain emissions from forests and land [3]. Soon we must focus on accounting for carbon removals from the atmosphere and plan for the synergies and impact these activities will have on nature and biodiversity. Most companies’ initial value chain emissions mapping show where the hot spots are, and these maps are sufficient to receive SBTi validation and begin to change business practice. However, these maps will need to be constantly updated to keep pace with climate science.

Invest in data systems

As GHG methodologies continue to evolve, so will the requirement to measure and monitor more detailed key performance indicators (KPIs), both in terms of supply chain sourcing and product components. Many companies with Net-Zero targets must also commit to zero deforestation in their value chains by 2025 [4]. Demonstration of the achievement of this target will require detailed tracking of exactly where commodities are sourced from - from cradle to farm gate.

Achieving Net-Zero will likely necessitate new, low-carbon specifications of a company’s product portfolio. Companies must invest in software solutions that enable them to house all their data related to Net-Zero and supplier engagement to ensure that emissions reductions can be monitored and reported at a product level, particularly if reported performance will be the subject of company audits.

A Just Transition

Companies must navigate and promote a ‘Just Transition’ towards an environmentally sustainable economy, to mitigate the negative impacts of change on vulnerable eco-systems and populations. The transition to a low-carbon economy must be fair and inclusive to all stakeholders, creating decent work opportunities, not leaving communities behind. Failure to do so will tarnish brand reputations and could lead to the human rights infringements.

In conclusion

When it comes to the need to transition, the agenda is moving fast. A short time ago Net-Zero commitments were considered achievable through energy efficiency and the purchase of cheap offsets; this has not proven to be a credible pathway. Unfortunately, there is no silver bullet. To successfully transition to a low-carbon economy, companies must invest in resources to monitor an ever-evolving landscape of shifting priorities and interconnected KPIs. By doing so, companies build their climate resilience for the future ahead, and ensure it has a positive impact on the planet.

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References

[1] https://www.edie.net/hundreds-of-businesses-drop-net-zero-commitments-due-to-scope-3-challenges/

[2] https://www.slrconsulting.com/insights/carbon-and-energy-newsletter-march-2024/

[3] https://sciencebasedtargets.org/sectors/forest-land-and-agriculture

[4] https://sciencebasedtargets.org/sectors/forest-land-and-agriculture

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