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Net-zero pledges come under renewed scrutiny by UN, investor coalition

06 April 2022 Max Tingyao Lin

Net-zero pledges have come under even greater scrutiny amid a lack of common standards for the widely used and relatively new term.

A total of 131 countries, 116 regions, 234 cities, and 695 companies have vowed to achieve net-zero emissions later this century as part of efforts to counter climate change, according to Net Zero Tracker, a data project developed by academics and nonprofits.

But those commitments are generally based on different methodologies for emissions calculation and diverse pathways to zero emissions on a net basis, so climate experts often question their actual environmental benefits.

To address those concerns, national governments have started to explore net-zero standards for countries under the UN Framework Convention on Climate Change (UNFCCC), and UN Secretary-General António Guterres separately launched an expert panel to establish what those mean to non-state entities.

"Governments have the lion's share of responsibility to achieve net-zero emissions by midcentury," which will be required to avoid climate disaster, Guterres said 31 March when announcing the panel. "But we also urgently need every business, investor, city, state, and region to 'walk the talk' on their net-zero promises."

"We need bold pledges matched by concrete action. Tougher net-zero standards and strengthened accountability around the implementation of these commitments can deliver real and immediate emissions cuts," he added.

Chaired by Catherine McKenna, who served as Canadian Minister of Environment and Climate Change between 2015 and 2019, the panel consists of 16 experts from different countries and professional backgrounds.

The High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities' members include Zhou Xiaochuan, a former governor of the People's Bank of China, the central bank of the world's largest GHG emitter; Arunabha Ghosh, CEO of India-based thinktank Council on Energy, Environment and Water; Günther Thallinger, chairperson of Allianz Group's ESG Board; and Rod Carr, chairperson of the New Zealand Climate Change Commission.

According to the UN, the panel will make recommendations on the below areas by the end of 2022:

  • Current standards and definitions for setting net-zero targets;
  • Credibility criteria used to assess the objectives, measurement, and reporting of net-zero pledges;
  • Processes for verification and accounting of progress towards net-zero commitments and reported decarbonization plans;
  • A roadmap to translate standards and criteria into international and national level regulations.

"Each pledge must deliver ambitious, real, immediate reductions in a transparent, verifiable way," McKenna said.

The initiative is well overdue as it can offer guidance and direction in the current situation where non-state entities are freely interpreting the term "net zero" in many ways, said Harry Fearnehough, a climate policy analyst at nonprofit NewClimate Institute.

"Many of which are misleading consumers, regulators, and shareholders. Clear guidance on what is right and what not is welcome," he added.

Fearnehough also noted that the experts have "an incredibly large job to do" as they need to develop standards for cities, subnational regions, companies, and investors. "Each actor group has very different requirements and starting points," he said.

With COP summits generally focusing on climate standards for countries, observers said the latest UN initiative could accelerate separate discussions over corporate net-zero pledges' merits. Net-Zero Business Daily by S&P Global Commodity Insights understands the panel has yet to decide on whether their recommendations will be presented at future UNFCCC meetings.

"The panel can make a significant contribution by pointing to the frontier of best practice amongst voluntary initiatives, calling out those actors and initiatives that are falling short, and highlighting the pathway to international standards and regulation," said Thomas Hale, an associate professor in public policy at Oxford University.

More checks on net-zero promises

Guterres' initiative comes as several nonprofits and investors have started to develop methodologies to assess climate commitments from the private sector.

In February, NewClimate Institute and Carbon Market Watch—another nonprofit—launched the Corporate Climate Responsibility Monitor, which examines how companies track and disclose emissions, set decarbonization targets, and reduce emissions from their own operations and across their value chains.

After scrutinizing 25 major businesses, the joint study found 11 companies to have "very low integrity" in their decarbonization plans, including some big names like BMW, Unilever, and Nestlé. The companies defended their performances.

Climate Action 100+, an investors' initiative that has 700 signatories with $68 trillion in assets under management, including BlackRock and Vanguard, recently completed its second round of benchmark assessments for corporate net-zero pledges.

The group selected 166 "focus companies" with $10.3 trillion in market capitalization across various sectors and evaluated their net-zero ambition; short-, medium- and long-term GHG reduction targets; decarbonization strategies; capital allocation alignment; climate governance and policy engagement; disclosure standards; and whether their planned energy transition happens in a fair way.

The results were mixed. Some 69% of the companies have now committed to net-zero emissions by 2050 or sooner across all or some of their emissions footprint, a 17% year-on-year increase, according to Climate Action 100+.

But only 17% of the companies have set medium-term decarbonization targets for 2026-2035 that are aligned with the International Energy Agency's scenario in limiting global warming to 1.5 degrees Celsius above pre-industrial levels. Just 5% explicitly pledged to align their capital expenditures with their targets for 2036-2050.

"The long-term direction is clear as shown by the increase in 2050 net-zero targets. However, this consensus is not yet tied to concrete action," said Valentin Jahn, a London School of Economics researcher involved with Climate Action 100+.

Some members of the group's steering committee expect the companies to face more scrutiny in the 2022 proxy voting season based on the benchmark assessments.

"Investors are calling on focus companies to credibly set out details of their net-zero transition plans and will step up their engagements to ensure companies move from target setting to delivery," said Stephanie Pfeifer, vice-chair of the committee and CEO of the Institutional Investors Group on Climate Change.

In February, US-based shareholder advocate the Interfaith Center on Corporate Responsibility said it had filed directly or acted as co-filer for 436 resolutions at 246 companies for the proxy season, including 103 climate resolutions. This compared with 54 climate resolutions a year ago.

Some of the companies, like Berkshire Hathaway and ExxonMobil, are on Climate Action 100+'s list of focus companies.

Long road ahead

Climate experts welcomed the efforts from various groups in developing net-zero standards while expecting the process to be long and drawn out due to the issue's complexity.

"Certainly there has been a difficulty in comparability of net-zero targets across companies, so efforts to standardize this are needed and welcome. But it's a lot harder to know who should 'own' these standards," said S&P Global Commodity Insights' Paul McConnell, ENR executive director for climate and sustainability.

Sara Giordano, a senior research analyst at S&P Global, suggested that the initial step could be to develop a common framework of carbon accounting, reporting, and transparency before applying it to different economies and industries.

"There are significant differences across sectors and countries that must be considered … [Those] should affect the level of climate ambition and commitment [from each entity] and how each pledge should contribute to overall goal of keeping the global temperature rise below 1.5 degrees," Giordano said.

When established net-zero standards with actual climate benefits, Hale believes national regulations, corporations' voluntary commitments, industry standards established by multinational bodies like International Organization for Standardization, and global campaigns such as those led by the UN will all have a role to play.

"We are now in a process of digging deeper into outlining precise requirements for all actors—companies, cities, countries, etc.—that will progressively be enshrined in regulation. This will be a dynamic process that will play out over decades," he said.

Posted 06 April 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability



This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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