Despite the net-zero promises made by many global companies, those with a viable plan to reach net zero are few and far between. A recent CDP study showed that fewer than 1 in 200 companies with a net-zero pledge have disclosed a viable plan to get to net zero.
We spoke with Mark Van Clieaf, managing director at FutureZero and co-author of "Net-Zero Business Models," to discuss where companies fall short in their net-zero pledges and what they can do to keep their net-zero promises. Van Clieaf has been in the consulting world for over 30 years, working with organizations such as the International Corporate Governance Network, the National Association of Corporate Directors and hundreds of global companies.
Our conversation is about the current disconnect between net-zero promises and net-zero action, and the five eco-efficiency processes and systems companies should focus on. We also addressed challenges ahead for the energy sector, and what companies and investors need to do to make net-zero promises real.
This interview has been edited for clarity and length.
Matt Orsagh: One of the main things I took away from the book is that most companies are not prepared to get to net zero. Explain the "carbon shock scenario," or the implications that a price on carbon have for companies?
Mark Van Clieaf: Over 90 percent of companies do not have credible net-zero transition business plans today. Most companies and most institutional investors do not have robust processes in place for risk management scenario stress testing, as suggested by [the Task Force for Climate-related Financial Disclosures], of their business model for the cost of carbon and carbon shock to come.
Mark Van Clieaf, managing director at FutureZero
We calculated a carbon adjusted return on capital stress test with an investment universe of over 19,500 of the largest listed companies from around the world. We looked at both a $75 and $100/[metric ton] cost of carbon, for Scope 1 and Scope 2 [greenhouse gas, or GHG] emissions. There are three key takeaways: 1) Every sector globally has business models with high carbon intensity (greater than 50 metric ton CO2 equivalent/$1 million in revenue ); 2 ) There are over 8,500 listed companies, based on their current business model carbon intensity (Scope 1 and 2), that will require complete business model transformation to become a financially viable and sustainable business model; 3) The world overall is not moving fast enough, as most of the absolute GHG emissions growth curves for the world continue to rise.
Added to this new world is the expectation from investors and bond rating agencies that Scope 1 and 2 and material Scope 3 GHG emissions at investee companies must be effectively measured, reported and disclosed where they are material risks to the business model. CPP Investments, the $530 billion pension fund, as one example, is now street testing their investment portfolio around the world using $75 and $150/metric ton carbon shock stress tests for their investee companies.
The bottom line is there will be no place to hide from the coming carbon shock and the increasing price of carbon around the world to be realized onto income statements and balance sheets of companies, including impaired assets.
Orsagh: You describe the areas all companies need to focus on to have a credible and legally defensible net-zero transition plan. What are those key focus areas?
Van Clieaf: There are five core eco-efficiency processes and systems that are at the foundation for all net-zero business models. These focus on the eco-efficiency of a company’s operations.
- 100 percent carbon free energy with 24/7 power reliability
- Energy conservation and energy efficiency
- Zero emission buildings
- Zero emission transportation fleets, including upstream, core business and downstream transportation and logistics to customers
- Policies and plans for zero emission business travel, including virtual travel and when to use.
Orsagh: Can companies and investors just follow the key sustainability and climate change guidance frameworks for measurement, reporting and disclosure?
Van Clieaf: No. These climate and net-zero frameworks, while a good foundation, are materially incomplete and are mostly measuring lagging indicators not leading or process indicators. We need to build better bridges between the real economy where capital is invested and the financial economy (institutional investors) who are allocating capital in their investment portfolios.
When we compare the research insights from the 200 net-zero companies we reviewed — which include the five eco-efficiency plans, processes, metrics and targets, and required innovation for zero emission products and circular design business models — we identified that 68 percent of these best-in-class metrics and targets being applied today by leading companies are not part of these key guidance frameworks. This includes TCFD; Climate Action 100+, Climate Engagement Canada, Transition Pathway Iniatiative, Net Zero Asset Owners Alliance Target Setting Protocol (3rd edition), and [Glasgow Financial Alliance for Net Zero] Net Zero Transition Planning baseline.
Most of the institutional investors will need to stop voting for and approving metrics and incentives that are not aligned with the required transition to sustainable business models and net zero.
These climate and net-zero guidance frameworks, while a good foundation, are really carbon reduction and or temperature centric and not focused on the business model value drivers and key processes required for eco-efficiency in operations, future value driven innovation that is sustainable, and a positive and growing carbon adjusted return on capital.
Orsagh: The electrical power sector in the North America needs to do a lot of work on its net-zero business strategies and goals, according to your research. Where is this sector in its net-zero business model transition?
Van Clieaf: In North America, the power generation sector (25 percent) and transportation sector (27 percent) together contribute 52 percent of GHG emissions. While absolute GHG emissions for North America have declined in the last 20 years at a compound annual growth rate rate of 0.83 percent, this is nowhere close to the required year-over-year emission reduction of 6 perenct to 8 percent per year needed for the next 30 years.
Achieving a global net-zero economy requires 100 percent carbon free energy with 24/7 reliable power grids and complete power grid decarbonization. In 2021, the combined generation mix of the North American power sub-grids which are all interconnected, is over 52 percent fossil fuel power generation mix, from the sub-grid generation mix of 96-100 percent clean power in Ontario and Quebec to greater than 70 percent fossil fuel power on Long Island, Ohio, Florida, Indiana and Washington, D.C.
While there is growing adoption of electrical vehicles in North America, there is a foundational systems problem. The power grids and related infrastructure the EVs are plugging into is over 52 percent fossil fuel-powered today.
The change management challenge for the power sector becomes even clearer when we review the most current 2022 survey results recently released by the Smart Electric Power Alliance (SEPA). First, 90 percent of utilities do not have 2030 interim GHG reduction targets or incentive designs for top officers aligned to transitioning the utility business model to become a 100 percent carbon free. Second, the aspirational targets to become a carbon free energy utility business model for over 74 percent of utilities is by 2045 or 2050. These dates are 10 to 15 years too late.
Orsagh: What can companies do to adopt better net-zero business models?
Van Clieaf: The first step is to determine how big is the business model transformational challenge facing the company. If a complete GHG accounting and carbon footprinting for Scope 1, 2 and 3 GHG emissions has been completed, and the enterprise CO2e tons/$1 million in revenue is under 10 tons/$1 million, then the company can probably achieve net-zero business model through the key eco-efficiency drivers and processes we highlighted in the book.
If the GHG accounting and carbon footprinting identifies a much higher carbon intensity business model — in the 70 tons/$1 million and higher — then a complete business model transformation will be required. From a change management point of view, this will require significant innovation at multiple levels in the enterprise including eco-efficiency, zero GHG emission products and business model redesign, including possible circular design of products and business models.
The biggest risk today in many companies are their "board approved" performance metrics, targets, incentive designs and leadership assessment, development and selection processes that are not aligned with the required transformation. This includes the required innovation in core business processes, products and business models required to achieve net zero and becoming a sustainable business. This also requires extending the strategic horizon for planning for the company well beyond the usual three- to five-year planning cycles.
Orsagh: What can investors do to make sure that companies are walking the walk not just talking the talk about a clean energy transition?
Van Clieaf: Most of the institutional investors will need to stop voting for and approving metrics and incentives that are not aligned with the required transition to sustainable business models and net zero. They need to ensure companies have integrated performance metrics (including R&D investment, innovation, revenue from new net-zero products, GHG reduction) and incentive designs (including rolling three-to-five-year pay delivery targets) that will accelerate the required levels of innovation and investments required.
The engagement meetings being held between corporates and institutional investors need to go beyond just targets and discussion about high level net-zero ambitions and [capital expenditure], and go deeper into helping ensure the investee companies have organizational alignment, leadership capacity for innovation and change management plans for the net-zero transition.