Corporate Net Zero Targets Must Drive Action Now

As fires raged across Canada this summer and the world experienced its hottest days on record, the imperative for urgent action on climate change has never been stronger.  

A pressing question is, “Who needs to take the lead?” Is it up to policy-makers, consumers, or business leaders? In fact, all of them have pivotal roles and a responsibility to act now. 

Business leaders have a particularly important role to play. Climate change presents a wide range of major risks for businesses, so taking action is good risk management. However, opportunity and future success must also be a key part of the agenda. The economy is being rapidly transformed by a wave of cleantech innovations and public policy, such as the Inflation Reduction Act in the US and similar subsidies in Canada. Companies in all sectors need to be attuned to opportunities for new markets and business models.  

Setting a Corporate Net Zero Target

Central to this response is setting an emissions reduction target to shape corporate net zero strategies and drive future action. Making commitments to substantively reduce greenhouse gas emissions (GHGs) has rapidly emerged as a major imperative for Canadian businesses. Net zero is a headline promise. Net zero requires an aggressive and dramatic reduction in GHG emissions – notably carbon dioxide – followed by capturing any residual emissions.

“Individual corporate strategies are critical – we cannot just have broadly formulated sectoral pathways.”

Of course, many companies have been acting to reduce the impact of their business activity on climate change for some time, but the more ambitious commitments and actions required for net zero are fundamentally different.

Here’s why:

1. Net zero is a long-term goal that has binding implications for future leaders and markets.
2. Net zero is a call for action now, with significant changes needed in current business strategies.
3. Individual corporate strategies are critical – we cannot just have broadly formulated sectoral pathways – to strengthen firm-level competitiveness, adjust to regional differences, and leverage opportunities for innovation.

This critical net zero target presents new opportunities, complex interactions, increased risks, and extended time horizons, which in turn, have significant implications for firms seeking to create value. Most importantly, climate action has moved from being “something for the sustainability team” to a strategic issue for long-term competitiveness.

1. Conforming to SBTi Recommendations

Consensus is rapidly emerging that firms must set, at a minimum, targets consistent with the Science Based Targets initiative (SBTi), which aligns with the findings of the Intergovernmental Panel on Climate Change and the goals of the Paris Climate Agreement. SBTi requires each company to aggressively reduce GHG emissions, including those of its value chain (i.e. Scope 3 emissions) to zero by 2050, consistent with broader efforts to limit global warming to 1.5°C. For most companies, SBTi also requires an intermediate milestone of halving their emissions in the next decade – a massive transformation by any measure.

2. Addressing Concerns of Greenwashing

Not surprisingly, as more companies commit to net zero targets, they will attract increasing scrutiny about the credibility of their commitment and progress. If followed up with little verification and demonstrated action, skeptical analysts, concerned consumers, and other cynical onlookers will claim corporate net zero “commitments” are merely unsubstantiated hype designed to mislead and delay, oftentimes termed greenwashing.

“If followed up with little verification and demonstrated action, skeptical analysts, concerned consumers, and other cynical onlookers will claim corporate net zero “commitments” are merely unsubstantiated hype.”

For consumers, Competition Bureau Canada has identified greenwashing as an area of concern and is beginning to assess complaints about corporate net zero climate targets. For business, the International Sustainability Standards Board, with its standard-setting responsibilities housed in Montreal, issued its inaugural standards in June 2023, which encompass climate-related disclosures.

The strategic dimensions of these commitments by firms are the focus of current research at the Ivey Business School, through our Corporate Strategies for Net Zero initiative. Several critical insights are emerging. 

Stakeholder Scrutiny on Corporate Net Zero Targets is Intensifying

To begin, we must stress that a wide variety of stakeholders are keenly interested in which companies are committing to net zero targets and what follow-on actions are being taken. Investors – and other major stakeholders in the financial sector, including asset managers, banks, and insurers – are viewing climate change as a critical factor influencing the long-term value of their investments. This connection to value is driven not only by exposure to the systemic risks of a changing climate and transition risks of a rapidly shifting economy but also by market opportunities in a world deliberately moving toward a more sustainable future. 

Investors are putting significant pressure on business leaders to better understand and clearly articulate the implications of climate change and net zero for their firm’s business model and future performance. They expect companies to have a robust climate strategy, with creditable net zero targets and implementation plans, preparation to shift their business models, and resiliency to manage risks during the transition. For example, the Climate Engagement Canada initiative, a group of 30 Canadian investors with $4 trillion in funds under management, is engaging with 40 of the country’s largest corporate emitters to drive comprehensive climate action.  

“The carbon tax will increasingly influence capital investment decisions and the location of new or expanded facilities.”

Regulatory pressure has translated climate inaction into a financial penalty with a gradually escalating carbon tax. Initially, starting at $20 per tonne of emissions in 2019, the rate is increasing annually, reaching $170 per tonne in 2030. For many firms, this increasing cost is becoming a material factor in business planning, especially for emissions-intensive sectors. Given that both the carbon intensity of energy sources and the pricing of renewable energy vary across Canada, the carbon tax will increasingly influence capital investment decisions and the location of new or expanded facilities.

Competitive pressures are building from other important stakeholders too. For consumer-oriented industries, a brand’s GHG emissions and carbon footprint are increasingly important drivers of consumer choice, with demands for more than just rhetoric. Firms also report climate-related performance as a vital aspect of recruiting and retaining talented staff, especially for younger professionals. For example, a global survey of 2,000 business students conducted by Yale in 2022 noted that 78% of respondents wanted to work for a company with good environmental practices, and over half indicated that they were willing to accept a lower salary to work for a company with better environmental practices.

Canadian Corporate Net Zero Strategies are Only Starting to Align

How have Canadian firms and business leaders responded? Unfortunately, the difficult news is that we are coming up short. One benchmark is the extent to which Canadian firms have committed to SBTi net zero targets at the end of 2022. While the United Kingdom’s economy is only about 1.6 times larger than Canada’s based on GDP, the UK has 10 times more firms with SBTi-validated targets. While some might attribute part of this huge gap to differences in our industrial mix, markets, and supporting public policies, it is difficult to sidestep the limited emphasis to date by Canadian business leaders. Our lagging progress forebodes critical challenges to our global long-term competitiveness.

“While the United Kingdom’s economy is only about 1.6 times larger than Canada’s based on GDP, the UK has 10 times more firms with SBTi-validated targets.”

Looking forward, we can and must do better while improving our business competitiveness. Critical questions must be answered by business leaders seeking to understand their firms’ readiness for making a commitment to reduce GHG emissions – regardless of how ambitious – and then to map the best pathway forward. These questions span from objectives to internal responsibilities, to new value-chain partnerships, to greater innovation. 

1. Why is My Firm Committing to a Net Zero Strategy?

Where to start? The foundational question is “Why?” Strategically, why must your firm reduce carbon emissions and commit to net zero? Understanding and articulating your firm’s answer underpins everything else. Is the appeal driven by, for example, expectations about stronger competitive positioning, your CEO’s vision for industry leadership, pressure from investors and consumers, or promising opportunities?  

Your firm’s rationale for committing to net zero drives multiple follow-on decisions, and depending on the course of action, will heavily influence who bears the costs or reaps the benefits. These costs and benefits need not be strictly financial, but also could include environmental and social outcomes, and can be intertwined with implications for your firm’s reputation and resiliency. 

2. Is This an Analytical or Aspirational Journey?

Managers appear to be gravitating toward one of two extreme strategic approaches. The first is analytical. By developing technical scenarios of customer demand, regulatory pressure, public policy incentives, and competitor actions, leadership teams clarify the trade-offs being made, investment required, and expected outcomes. Targets must be mapped onto a doable plan now. This approach is a great starting point, but a looming gap often is revealed between expected carbon emissions and net zero, creating paralysis to move forward. 

“The best approach requires combining notable aspiration with more analytical considerations by iteratively considering competitive positioning, capabilities, resources, and innovation.”

The second is aspirational. Business leaders aspire to have their firm leading the industry, establishing best practices, pursuing greener markets, and offering consumers carbon-neutral value. Yet, specific plans to reach net zero remain vague and reductions in GHGs are unverified, creating skepticism and disillusionment.  

We argue that for many firms, the best approach requires combining notable aspiration with more analytical considerations by iteratively considering competitive positioning, capabilities, resources, and innovation.

A few critical factors are worth noting. The extended value chain, with multiple tiers of suppliers, is likely to be opaque to many firms when the leadership team makes a specific net zero commitment. This unknown hinders action. How might your firm influence changes in sourcing and supplier technologies? Suppliers and customers can be influenced to some degree through purchase contracts or usage agreements. Moreover, to what degree might your firm’s reduced or net zero emissions appeal to new customers or extend your firm’s value creation?

Unfortunately, achieving net zero with a few minor tweaks to your value chain is unrealistic. No knowledgeable partner is likely to have the right expertise or technology because every firm faces similar hurdles, and the landscape is quickly evolving. Instead, joint sourcing and development with like-minded Canadian or global firms, partnering with governments and non-governmental organizations, or sponsoring targeted innovation through industry associations can provide the economics of scale to seed innovation and spur further investment. To do so, partners must be sought out who value mutual learning and collaborative development.

Urgent Action for Net Zero Targets is Needed Now

In short, the overarching objective is to rethink current business models and redesign value chains to align with this long-term net zero outcome. Climate change is a global issue and international dimensions are important considerations. Canada’s major trading partners are also pursuing comprehensive climate agendas, especially the EU and the US. Because Canadian business leaders manage both vital knowledge and resources in global value chains, we are responsible for playing a critical role. Careful strategic planning and accounting for progress by each business leader for their firm – coupled with a meaningful commitment to learn, develop, and innovate – are essential as we journey toward net zero.