Defining Net Zero

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By: Russell Pearlman

No one expects any single organization to save the planet. Achieving net-zero carbon emissions by mid-century would cost an estimated $1 trillion to $2 trillion of additional investments per year, or 1% to 1.5% of the world’s gross domestic product, according to the UK’s Energy Transition Commission. According to the majority of climate scientists, reaching “net zero,” or balancing greenhouse gases emitted with those removed from the atmosphere, is critical to keeping the world’s average temperature from rising by more than 1.5 degrees centigrade.

So it’s not surprising that a slew of companies have issued bold statements promising to get to net zero in a decade. The list includes names from a host of industries—airlines, cars, even Big Oil. But in providing key oversight, experts say, directors themselves have to answer one nagging, if not basic, question: What does being net zero actually mean for their firms in the first place?

What isn’t net zero is the amount of investment dollars at stake. More than 120 institutional investors controlling $43 trillion have signed on to the Net Zero Asset Managers Initiative, committing to finance only those organizations aligned with net-zero emissions by 2050 or sooner. That means that organizations that don’t make concerted efforts to reduce their carbon footprints could eventually find it difficult to attract capital. Still, while that money is key, directors need to make sure management runs a viable business. “You don’t want to be net-zero cash pursuing net-zero carbon,” says Dennis Carey, a Korn Ferry vice chairman and coleader of the firm’s Board Services practice.

Just as they shouldn’t be devising business strategies, boards shouldn’t be drawing up an emissions reduction plan. But they can ask their executives some pointed questions about how their business will survive and thrive in a world which has dramatically curtailed the growth of carbon emissions. At the same time, directors should make sure that executives have such a plan, experts say, along with key performance indicators that can highlight whether the firm is making progress. Part of that involves making sure management has a good idea of how large, exactly, the organization’s carbon footprint is now and, importantly, what it will be 5 to 10 years from now based on the company’s business strategy. “Director oversight is needed to hold companies to account on their commitments to achieving a net-zero future,” says Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change.

That guidance might involve telling management to tone down the climate-related bravado. Promising to be net zero within a few decades may be flashy; more than one-fifth of the world’s largest corporations have pledged to reach net-zero carbon emissions by 2050. But it’s a promise that could be difficult to keep, and the CEOs who are making such commitments now probably won’t hold their current positions long enough to see this goal through. Directors might be better served guiding management to pursue more modest but still definitive goals. “Make sure the goals you enunciate are achievable, and that you have evidence that you are meeting those goals,” Carey says.

Another oversight suggestion: tell executives to seek outside help. No single organization can reduce the world’s emissions to net zero, and none will be able to completely offset its own emissions. Executives everywhere will need to work with their big suppliers and seek out new technologies from innovative organizations.

Perhaps most importantly, directors should consider looking at whether executives are incentivized to get to net zero. To get big organizations to take definitive actions, directors should tie a larger portion of executive compensation to hitting net-zero-related targets. “This is not just going to happen willy-nilly,” Carey says.

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