Intro to ESG, Part 2 - Deciphering corporate carbon targets

Does it seem like everyone is announcing Net Zero targets these days? Along with the many COVID messages I am getting, it seems I can’t open my inbox without seeing a corporate announcement for a net zero target. This is an encouraging development, and I applaud the corporations who are taking this important step. But like many new developments in the sustainability/ESG space, it comes with new terminology that can be confusing. To help you better understand what corporations are actually targeting, I’m going to review what “net zero” and other related terms mean.

The five most commonly used GHG targets are: Intensity reductions, absolute reductions, net zero, science-based, and carbon positive.

Intensity reductions: These are set as a percentage reduction in GHG intensity, with intensity referring to the amount of generated carbon dioxide (CO2) per unit of product. The unit of product depends on what the company does or sells, and can be anything from a barrel of oil, a Kilowatthour of electricity to a dollar of revenue. An example for an oil and gas company could be “We will reduce our GHG intensity by 30% per barrel of oil from our 2018 baseline”. By setting this type of carbon target, a company is committing to improving its efficiency and becoming less carbon intensive.

The biggest advantage of intensity reduction targets is that they are compatible with growth. The company could double in size, and even double its absolute emissions, and could still meet its target as long as it is actually reducing its carbon per unit of product. Another important benefit is that is comparable among peers. The biggest disadvantage is that emissions can still go up, and as my mentor used to say, “the environment does not care about intensity”.

Some Canadian companies with intensity targets are: Suncor is targeting a 30% reduction from 2014 to 2030; Imperial Oil is targeting a 10% reduction (just in oil sands) by 2030; CNRL is targeting a reduction in average GHG intensity from oil sands to below average US crude GHG; CIBC is targeting a 10% reduction from 2018 to 2023; CN is targeting a 29% reduction from 2015 to 2030; ARC Resources is targeting a 25% reduction from 2017 to 2021; Baytex Energy is targeting a 30% reduction from 2018 to 2021, and Whitecap is targeting 20% from 2017 by 2023.  

Absolute reduction: This is a commitment to reduce total absolute emissions and it’s uncommon. The biggest disadvantage to absolute reduction targets is that they can hinder growth plans. Because offsets do not reduce emissions just offset them, a company with an absolute reduction target must actually reduce its emissions. Adidas has committed to reducing its own and its suppliers’ GHG emissions by 30% by 2030 (from 2017). Hewlett Packard is committed to reducing absolute manufacturing-related GHG emissions in its supply chain by 15% from 2016 to 2025 and NRG has committed to reducing absolute emissions by 50% by 2025.

Net zero (also known as climate neutrality or carbon neutrality): Companies with a net zero target are committing to reducing their emissions as much as possible and then capture, offset through credits or offsets, or remove carbon from the atmosphere to have a net impact of zero emissions. A big advantage to net zero targets is the large toolbox of activities companies can draw on to offset their emissions, without having to rely solely on operational reductions. Please note, however, that not all net zero targets are created equal, you have to read the fine print. Sometimes the target includes Scope 1, Scope 2 and Scope 3, sometimes just 1 and 2. Sometimes the companies promise to achieve neutrality by 2040 or 2050; other times, no date is specified.

The rush to net zero targets is sparked by the latest research showing that to avoid the worst climate impacts, global GHG emissions must drop by half by 2030, then reach net-zero around 2050. Launched just a few weeks ago, the UNFCC Race to Zero campaign represents 449 cities, 992 businesses, 38 large investors, and 505 universities committed to achieving carbon neutrality. Among those on the list that have hit my inbox in the last year include: Shell, Total, BP, Amazon, Nestle, Adidas, Carlsberg,  Maersk, NRG, Xcel Energy, CNRL. Notable enough, in 2019, Maple Leaf Foods became the first major food company in the world to achieve carbon neutrality. However, we must remember that carbon neutrality is not a “one and done”, it is an annual exercise.

Science-based targets: A target is considered science-based if it is in line with what the latest climate science says is needed to meet the goals of the Paris Agreement (and therefore limit global warming to below 2°C above pre-industrial levels). Science-based targets must be reviewed by the Science Based Target Initiative (SBTi) and formally approved through their target validation service. There are three different ways to set science-based targets. The most common is by sector. For example, if a  country needs to reduce emissions by 60% by 2030 to meet the Paris Agreement, a little bit of math is required to figure out what percentage of the country’s emissions are your sector’s emissions and then the sector carbon allowance gets divided by the number of companies in the sector. One important caveat, due to the rigour associated with science-based targets - the target must include Scope 3, for companies whose Scope 3 emissions cover more than 40% of their total (Scopes 1, 2 and 3) emissions.

According to SBTi, as of June 2020, 387 companies have approved science-based targets and 895 companies are taking science-based climate action. General Mills was the first company ever to set a science-based target. A few companies with science-based targets are Walmart, CocaCola, Syngenta, Puma, Pfizer.

Note: Some science-based targets align with carbon neutrality, but not necessarily. For example, Walmart’s science-based targets are to reduce Scope 1 and 2 GHG emissions by 18% by 2025 (from 2015 levels) and to work to reduce carbon emissions from upstream and downstream Scope 3 sources by one billion tonnes between 2015 and 2030.

Carbon positive (also called carbon negative): I know what you are thinking, aren’t positive and negative opposites? Yes, but in this case, they are describing the same outcome. Both targets refer to going beyond carbon-neutral and removing more carbon than the company emits. There are very few companies setting this ambitious goal. Unilever is committed to becoming carbon positive by 2030 “by eliminating fossil fuels from our operations and directly supporting the generation of more renewable energy than we consume.”(source), while Microsoft has committed to become carbon negative by 2050 which means they “will remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975” (source).

Are there any other ESG-related terms that you would like to read about? Any other confusing carbon-related ones I missed?