Net-zero, not top-down

Green Daily

Climate groups prod Biden to declare climate a national emergency.
EU watchdog criticizes BlackRock's appointment as ESG adviser.
Europe tests waters for leaders' deal on tougher climate goal.

Company after company has announced plans to cut their greenhouse gas emissions to net-zero by 2050. Occidental Petroleum Corp., Toronto-Dominion Bank, Eskom Holdings SOC Ltd. and Equinor ASA are among those that have made such a pledge in just the past month.

The problem is that, pledge or not, most companies won't reach that target unless there is total commitment from all levels of management, not just the top.

Ninety-three of the 161 companies on the Climate Action 100+ list of the world's most significant emitters have proclaimed that climate-change performance is a factor in setting their executive compensation, according to BloombergNEF. However, that also means 42% of them have not.

Tying a CEO's income to such goals can be quite the incentive to go green. But the majority of the companies, 126 of the 161, have simply nominated a board member to oversee climate-change policy. It turns out that to be successful, an aspiring net-zero company needs more.

"Net-zero target typically needs to be overseen at the executive level," said Kyle Harrison, a New York-based analyst at BNEF. But "setting a net-zero target requires input from many departments, including operations, investor relations, compliance and accounting."

Richard Mattison, chief executive officer of S&P Global Trucost, which assesses and prices risks relating to climate change and broader ESG factors, agreed. He said that while linking executive pay is "super important, equally important is for management teams to be very transparent about the financial risks associated with climate change and to show a real willingness to change business models to address global warming."

That's because net-zero pronouncements often require fundamental adjustments in the ways that companies operate, which is not something easily done from the top-down only.

In many cases, industries have to almost wholly remake themselves. Utilities are exploring carbon-capture, utilization and storage (CCUS) to reduce emissions from their fossil-generation assets and manufacturing facilities, while technology companies are creating digital products to help their customers decarbonize, in turn reducing their own hard-to-abate Scope 3 emissions, Harrison said. This will lead to cross-sector cooperation and decarbonization opportunities, he added.

Mercedez-Benz, for example, can sell its electric vehicles to help companies like Unilever achieve their 100% electric-fleet goals, while Microsoft Corp. can offer its software to customers that can then use it to develop supply chains that are less carbon-intensive.

The companies also will need a supportive regulatory environment to meet their targets, Harrison said. In the past month, countries including China, Japan, South Korea and Canada have put forward legislation to reach net-zero targets.

This will likely result in the implementation of policies that will provide greater support to clean energy, electric vehicles and carbon capture, and thus "open the door for individual corporate actors to more easily work towards targets of their own," he said.

Sustainable finance in brief

The Arctic National Wildlife Refuge in Alaska

President Donald Trump's attempt to further open the Arctic to oil drillers before President-elect Joe Biden takes over is landing in the lap of insurers.
BlackRock CEO Larry Fink contends that the way in which companies approach environmental, social and governance issues is becoming a key issue for investors.
Fund giants including Vanguard and Fidelity have been given low ratings on incorporating ESG factors into investment decisions.
Allstate tells Wall Street to take a hike as it focuses on smaller, diverse firms for its big bond sale.
A Latino advocacy group is pushing California companies to appoint more Hispanic directors.

Bloomberg Green publishes the Good Business newsletter every Wednesday, providing unique insights on climate-conscious investing and the frontiers of sustainability.

Like getting the Green Daily newsletter? Subscribe to Bloomberg.com for unlimited access to breaking news on climate and energy, data-driven reporting and graphics, Bloomberg Green magazine and more.

More investors than ever are seeing the benefits of incorporating sustainability into their portfolio strategies. Join us for Bloomberg's Sustainable Finance Week, Nov. 30 to Dec. 4—five days of virtual events and insight, designed to accelerate the mainstreaming of sustainable finance.