Better read the fine print!
While 2020 was the year of companies committing to Net-Zero targets, 2021 is proving to be the year we are getting to see how organizations are progressing toward their goals. As of March 2021, one fifth of the world’s largest public companies have committed to achieving Net-Zero targets.
Although climate related disclosures have yet to be mandated, over 90% of the S&P 500 companies are now creating Environmental, Social, Governance (ESG) Reports and sharing greenhouse gas emissions numbers. We can now get a glimpse as to how organizations are doing on their Net-Zero agendas through these reports. Looking through recent sustainability reports, and disclosed emissions information it has become clear that the devil is in the details.
Investors and stakeholders should be aware of not just the reductions in high level numbers in their ESG reports, but the activities companies are employing to reduce their emissions. Renewable Energy Certificates (RECs) and Carbon Offsets, while beneficial to tackling the global problem of climate change, are used by some firms to reduce emission numbers and achieve “net-zero”. To fully understand the issues and the implications of using offsets and credits, let’s take a step back and look at Net-Zero - what it is and how it is tracked.
Net-Zero greenhouse gas Emissions? Or Carbon Net-Zero?
Net-Zero is when the amount of emissions produced or released into the atmosphere equals the amount of emissions removed from the atmosphere. When stating a net-zero agenda, most organizations are committing to a percentage reduction of their greenhouse gas emissions based on an earlier year that they use as their baseline.
Greenhouse gases include Carbon Dioxide (which makes up 76% of human-caused emissions, Methane (16%), Nitrous Oxide (6%), and Fluorinated Gases (2%).
Companies can either state they are going Net-Zero on all GHGs or Carbon Net-Zero (aka Carbon Neutral). Carbon Net-Zero is solely focused on CO2 emissions, however other emissions may be significant for an organization. For example, fluorinated gases (e.g. refrigerants or gases produced from aluminum processing), are not naturally sourced and come from bi-products of human activities. Although they make up a small amount of the overall greenhouse gases emitted, they trap substantially more heat and have extremely long atmospheric lifetimes.
Source: NRDG.ORG - Greenhouse Effect 101
What is the primary cause of human -generated greenhouse gases? Electricity & Heat
The burning of coal, oil, and natural gas to produce electricity and heat accounts for one-quarter of worldwide human-driven emissions, making it the largest single source. Other causes are: manufacturing of goods and raw materials, transportation, the operation of buildings, and agriculture & changes in land use.
To track the amount of GHG emissions produced by a company, emissions are grouped into 3 categories - Scope 1, Scope 2, and Scope 3 Emissions.
Scope 1 Direct emissions account for the GHGs produced by organizations' controlled or owned resources such as fuel combustion on site such as gas boilers, fleet vehicles and air-conditioning leaks.
Scope 2 Indirect emissions are emissions from electricity purchased and used by the organization. Emissions are created during the production of the energy and eventually used by the organization.
Scope 3 emissions cover all other indirect emissions, and for most organizations this can be the largest portion and very hard to quantify. Emissions from business travel, procurement, waste & water management are all part of Scope 3 emissions.
Net-Zero commitments are primarily focused only on reductions to Scope 1 & 2 emissions, as Scope 3 emissions fall outside of an organization’s immediate control and can be harder to calculate. Organizations typically set Net-Zero commitments for Scope 1 & 2 emissions for a specific date and then set a later target date for Scope 3 emissions.
How do companies achieve Net-Zero?
Reduction and efficiency activities are at the top of the list. Typically organizations start with their operations and production facilities and look for opportunities to reduce emissions. Companies can look to:
Shift to renewable energy by installing solar panels,
Review a production process and identify areas for energy reduction,
Assess their fleet of vehicles to reduce fuel usage and/or convert to electric,
Make investments in energy efficient heating & cooling systems and other equipment.
These quick wins focused on Scope 1 and 2 emissions are a natural start. Turning to Scope 3, business travel can be another area companies can quickly make an impact. COVID-19 has taught us that business travel is not as necessary as we once perceived.
Once all emissions reduction activities have been identified, companies will look at what is left and will turn to investments to remove the impact of these emissions thus, helping them to achieve net-zero. Investments in carbon capture technologies, carbon offsets and renewable energy certificates are used to reduce the remaining carbon footprint. Carbon offsets can be used to offset Scope 1,2, & 3 emissions and RECs can only be used to reduce Scope 2 emissions numbers.
While investing in future technologies, reforestation, and land protection projects are critical to the global response, are companies leaning too much on these?
A company shouldn’t be able to just throw credit and offset money at the issue, continue to operate in the same manner, and be able to claim net-zero. The use of offsets and RECs is currently unregulated and companies can employ them as much as they want to achieve their carbon reduction numbers. Thus allowing an organization to avoid making real change in reduction efforts while using offets and credits to claim they are progressing to net-zero.
The increase in demand for carbon offsets and credits is increasing with corporate net-zero pledges. In a recent report by McKinsey it is predicted that the global demand for voluntary carbon credits could increase by a factor of 15 by 2030 ($30B-$50B) and a factor of 100 by 2050.
Looking at some examples of how companies are using carbon offsets and credits in reporting their carbon footprint can illustrate how these instruments significantly change a company's reported GHG reductions.
One American multinational organization reported in their 2020 ESG Report that they have set a goal to achieve Net-Zero greenhouse gas emissions by 2050 on Scope 1,2, & 3 emissions; and that they have already achieved Carbon Neutrality on Scope 1 & 2 emissions as of 2019. When looking deeper at their ESG Goals & Performance Data Report, of their +2 million MWh of energy consumed in 2020, 1.6M (or 81% of total energy consumption) in Renewable Energy Certificates were purchased to reach carbon neutrality. Meanwhile actual energy consumption (purchased electricity) only decreased slightly (1,816,629 MWh down to 1,654,354 MWh) from 2019 to 2020.
Another global company reports that 100% of power is from renewable sources. Their total energy consumption was actually 1.9M MWh but their total direct renewable electricity from solar & fuel cells was just 17,173 MWh. The fine print shows that 1.6M MWh (or 84% of total energy consumption) is from the purchase of contractual instruments.
Finally, a third multinational organization in 2018 & 2019 included carbon offsets and RECs in their energy consumption numbers reported and showed that they were net-zero on scope 1 and 2 emissions. In 2020 they are no longer counting carbon offsets and RECs in their emissions numbers reported. They are continuing to reduce their emissions year on year (an 11% reduction in 2020), while still investing in offsets and RECs.
All three companies have Sustainability landing pages dedicated to their commitment to the environment and protecting our planet. All three tout their achievements and make these prominent in their reports. All three have ESG reports that share their data not only on the environment but on other key metrics, such as diversity equity and inclusion and wage information. But, only if you read the fine print do you get a true look at the reality of the situation. Your view on the ESG risk associated with an organization may change depending on how far you dig into their reports.
Investing in Carbon Offsets and Renewable Energy Certificates is an important aspect of tackling the issue of global warming. These funds are invested into technologies to capture carbon, and they pump money into rural areas protecting rainforests and planting new trees. All organizations should be making investments in these areas in order to protect our planet. This should be done as part of corporate giving to tackle a global issue and meet sustainable development goals.
However, while these instruments can be used in a company's’ emission reduction efforts, they should not be used as a primary means of reducing carbon emissions. Real work needs to be done to reduce actual carbon footprints in order to meet the targets set out in the Paris Climate Agreement and keep the planet from warming above 1.5 degree Celsius.
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