Comment: COP27 has given companies a clearer steer on getting to net-zero. Now it's time to act

Electrical power pylons with high-voltage power lines are seen next to wind turbines near Weselitz, Germany November 18, 2022. REUTERS/Lisi Niesner

November 21 - It is an inconvenient truth, universally acknowledged, that a company in possession of a good fortune must be in want of an actionable net-zero strategy. With 40% of Forbes 2,000 companies now committed to a net-zero target, twice as many as last year, businesses are connecting the dots between climate change and their bottom lines.

The trouble is, it is only when a company asks "how?" that it grasps the magnitude of the business transformation that will be required to reach net zero.

At COP27, a U.N. High-Level Expert Group report into corporate greenwashing stressed that net zero is entirely incompatible with what remains the business-as-usual approach for many companies, including investment in fossil fuels, deforestation and other environmentally destructive activities. Consumers are also increasingly savvy in looking beyond a company’s lofty commitments, wanting to see demonstrable action and progress that shows net zero as more than a marketing opportunity.

COP27 was branded the “implementation COP”, meaning that governments and organisations were expected to take ambitions voiced in Glasgow at COP26 and demonstrate credible plans to enact them. To standardise this practice and level the playing field, the U.N. High-Level Expert Group report proposed regulation of net-zero pledges and progress reporting. This is a clear signal that companies can no longer proclaim their own interpretations of net-zero, and must provide substance and credibility by means of a science-based transition plan.

Fortunately, regulators are already demonstrating their intent to hold companies to account. In the UK, HM Treasury launched the UK Transition Plan Taskforce to develop the gold standard for private-sector climate transition plans. The draft framework sets a high bar, emphasising a focus on concrete, near-term action and evaluation against a business’s financial plan. For example, disclosing planned capital expenditure and research and development requirements will assure stakeholders that the low-carbon transition is being committed to the business strategy.

The COP27 climate summit in Sharm el-Sheikh, Egypt, November 20, 2022. REUTERS/Mohamed Abd El Ghany/File Photo

Separately, the UK Financial Reporting Council Lab has released guidelines for companies on preparing for net-zero disclosures, based on investor expectations, and observed best practices. This is welcome guidance for companies looking for practical steps to disclose their transition plans, and provides the investor’s perspective on what information is needed to support their decisions. The report is clear that without evidence of the scope, timing, assumptions and, ultimately, the achievability of targets, investors cannot credit a company’s efforts.

Proactive companies will welcome this challenge as an opportunity to head off accusations of greenwashing. Investors can also anticipate metrics and standards with which to benchmark their investments. We expect that the pending UK Green Taxonomy will heavily lean on the taskforce’s guidance to define the criteria for green assets and activities.

However, care must be taken to ensure parity between regulatory measures across jurisdictions. Companies have learnt from initial attempts at climate-related reporting that a unifying disclosure framework is critical to success. To date, the array of regulatory requirements and standards has caused great confusion for businesses trying to satisfy their various stakeholders.

For this reason, the commitment of many regulators to adopt the pending International Sustainability Standards Board’s (ISSB) global baseline, and the work of the European Financial Reporting Advisory Group (EFRAG) to ensure interoperability with the new EU disclosure standards are welcome steps by the regulators to streamline requirements.

Defining a transition plan isn’t just a question of compliance: there’s a compelling business case for companies to align with net zero. Inaction could result in a loss of up to 30% of a company’s value over the next five years, and significant decline in revenues, spooking investors as consumers transfer their loyalty to brands delivering on their green promises.

Businesses along a flooded street in Northwich, Britain, January 21, 2021. REUTERS/Molly Darlington

In contrast, companies at the forefront of the transition have a competitive advantage, as recognised by their investors, customers, and employees. For example, the number of consumers shunning non-sustainable products has increased by 50% in the last year alone. For corporate laggards, clearer guidance will be a huge support, allowing them the opportunity to catch up with organisations that already have robust plans in place.

In order to turn their commitments into a measured calculated response to the climate crisis, companies should ask themselves the following questions: What is the cost of a transition initiative? How will it reduce emissions? How will it contribute to a broader sustainability agenda? How will it reduce climate-related risks? How can we quantify progress against our targets? Companies need to be able to answer all of these to establish a comprehensive strategy.

A common downfall with net-zero objectives is making them overly deterministic. As the UK Financial Reporting Council Lab identifies, it is important to understand the dependence of a company’s transition on external factors. A swell of global policy ambition will provide the tailwinds for companies to smoothly transition, giving them incentives and accessibility to low-carbon technologies. In contrast, divergent policies and a patchwork of operating environments will create greater uncertainties and hinder a company’s ambitions.

But transition risks, including new legislation, increasing litigation and reputational damage, can all be alleviated with a robust net-zero roadmap, if taken from a risk perspective. Justifying the return on investment in terms of climate-risk reduction is a powerful message, particularly where traditional cost-benefit analysis struggles to demonstrate to executives the upside of low-carbon investments.

By taking a closer look at external pressures and evaluating a business’s level of emissions from a risk perspective, organisations move away from a deterministic, unachievable commitment to a definitive, commercially viable transition plan.

This is what regulators are calling for, what investors require and what companies need to make net-zero commitments a truth they can universally acknowledge.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Sustainable Business Review, a part of Reuters Professional, is owned by Thomson Reuters and operates independently of Reuters News.

Dr Andrew Coburn is founder and CEO of Risilience, a Cambridge-based deep tech firm that spun out of the University of Cambridge's Centre for Risk Studies, working with large corporations to understand their near and long-term climate risk, taking positive steps to hit net-zero. Andrew is one of the leading contributors to the creation of the class of catastrophe models that have become a conventional part of business management in financial services, and of public policy making for societal risk.