August 08, 2022

[ESG Talk] Aftermath of COP26: Do you have a net zero strategy?

PUBLISHED : November 23, 2021 - 09:48

UPDATED : November 23, 2021 - 09:48

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Lee Yeon-woo

For the 26th United Nations Climate Change Conference -- or COP26 -- world leaders gathered for two weeks in Glasgow to check the progress of the nationally determined contributions and reaffirm their commitments for climate change transition. Although there are equivocal attitudes to its outcome and some unsatisfied groups, the global leaders in public and private sectors have made leaping progress if we recall how the Kyoto Protocol rolled out in the end. COP26 will be remembered as the most important milestone in climate change transition in the years to come.

COP26 produced several breakthrough agreements. First, nearly 200 countries agreed to end inefficient fossil fuel subsidies. Second, around 110 countries signed the Global Methane Pledge for the first time. Lastly, the world’s two biggest emitters -- the United States and China -- shook hands for climate cooperation. There are other significant outcomes such as a carbon market rulebook, India’s commitment and financial sector’s active role which will move forward the science-based approaches. By far, most people agree that this was a major departure and an important step change.

What net zero really means for business

Companies that diligently tracked climate change issues would know that net zero was discussed vibrantly throughout the event. As nations announced their NDC progress, both public and private sector recognized that even with the current targets, the world will still face an increase over 2 degrees Celsius. Therefore, efforts to tackle global warming by reducing greenhouse gas emissions by 1.5 degrees Celsius until 2050 has been reinstated by emphasizing net zero.

At COP26, 74 countries which account for more than 80 percent of global GDP and 70 percent of global CO2 emissions made commitments for net zero. More than 3,000 global companies showed their commitments to the UN’s Race to Zero campaign. South Korea was mentioned as one of the most ambitious goal-setters with the revised NDC of 40 percent reduction target.

Global business leaders agree that net zero is now the new standard, a new organizing principle for businesses. However, what happens after making the commitment? What does it really mean when it comes to business decisions? What should CEOs do in 2022? According to McKinsey & Co.’s analysis, companies must now accomplish 200 years of work in a condensed period of 30 years. There are industry differences, but the transition to net zero will require the largest reallocation of capital for most companies. In the midst of supply challenges in procuring green materials and utilizing green infrastructure, how can business leaders manage and deliver proper ESG performance?

Pledge, plan and perform

Net zero is not an easy or a short-term task. It requires strong commitment due to short-term losses. Some headwinds in the aftermath of COP26 was the criticism that goals were too ambitious and unrealistic. Many climate change experts in South Korea also expressed doubts when large Korean multinational companies made pledges for net zero by 2050 this year. The concerns mostly come from the production sites because of the huge cost and the huge chains of suppliers who are not ready to burden the cost and risk transition-led technical challenges. Especially without detailed action plans, pledges to net zero only becomes a timely marketing blurb which can cause companies to face investor risks from greenwashing.

Therefore, what companies must now do is to put the detailed action plans into the net zero pledges. The commitment should now turn to specific steps for net zero. The United Kingdom Chancellor of the Exchequer Rishi Sunak reassured at the COP26 that the UK Treasury would require UK-listed companies to release net zero plans by 2023. ESG and climate change transition standards tend to follow the practices of top-notch pursuers. Other countries will likely follow how governments engage with the private sector in disclosing and reporting ESG practices.

Experts say that the basis of competition in the current times changed, and there is a premium on having a well-planned net zero road map and efficient execution. Therefore, whether it be by regulative pressure or competitive force to gain a sustainability advantage, global companies must dedicate a meaningful volume of corporate resources to aligning net zero goals with action and company performance.

Net Zero Strategy will reflect company’s true ESG value

Many expressed concerns and doubts about the 2021 COP26’s outcome around net zero. There is no easy nor quick solution. But companies that build and execute bet zero strategies will accumulate sustainability advantage in the long run. In the ESG era where risks are harder to define and predict, companies must integrate strategic perspectives to the existing compliance and risk management scheme. This means business leaders must simultaneously look ahead for the changeable ESG and climate change risks with the current strategic direction of the company.

Eventually, the three Ps -- pledge, plan and perform -- will be essential factors that reflect the key ESG value to the customers, stakeholders, and society because each process will reflect company’s consistency, robustness and grit, and most importantly, company’s integrity. Remember that what the company intended to say or do does not always equate to how it is perceived. Delivering a consistent and clear ESG message in the net zero strategy that integrates compliance and strategy along other upcoming transition risks will be the critical sustainability advantage beyond 2022 for business leaders.

By Lee Yeon-woo
Lee Yeon-woo is an expert adviser at the Korean law firm Bae, Kim & Lee. -- Ed.

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