Net zero thinking failing to spark in the energy sector

Nadine Viel Lamare, TPI Director Net zero? That may be the new buzzword that may help us keep the world from climate catastrophe, but few publicly listed companies in the energy sector have read the writing on the wall, with new research by TPI, the Grantham Institute and Oxford Martin School finding just one in ten committed to net zero in relation to their own emissions by 2050. 

In October 2018, the Intergovernmental Panel on Climate Change outlined that to keep global temperature rises below 1.5 degrees would need a reduction in our net carbon emissions to zero by 2050. However this will require action at national, supranational and corporate level and quickly. At a national level, so far, 15 countries including the UK have agreed to aim for net zero, either by 2050 or sooner. In addition, a number of states and cities have made similar commitments, so that about a sixth of global GDP is covered. If governments follow through on this, they will soon be passing laws and regulation forcing the private sector to slash their emissions. This means well run companies should be formulating their medium-term strategy in the expectation of reaching a net zero scenario themselves. 

Regulatory risk

Companies that fail to do this risk being overtaken by events; assuming governments take action, they will find their business model is no longer sustainable. Investors need to know which of these groups their portfolio companies belong to, so they can move their money or engage the companies to demand more commitment to a sustainable future. At the Transition Pathway Initiative, our role is ensuring investors have the information about corporate approaches to climate change to help inform their investment decisions. Using publicly disclosed data, TPI assesses how companies are aligning with a low-carbon future. We assess companies in two categories: Management Quality, their actual carbon emissions and their carbon emission targets. This is the first time we are have looked at data specifically on commitments to net zero in the energy sector. 

Net zero thinking in the energy sector

This data shows that net zero thinking is still at a very early stage in the energy sector, including coal companies, electricity utilities and oil & gas companies. 

So far, just 20% of the 132 companies we looked at had acknowledged the need for net global CO2 emissions to reach zero, and just 10%, 13 companies out of 132, had made net zero commitments in relation to their own emissions. 

This is perhaps unsurprising, given the slow progress TPI found in the sector earlier in the year. Just 28% of energy companies are aligned with the emission reduction pledges made by national governments in the Paris Agreement, a benchmark which itself falls well short of net zero. 

Companies with better governance of climate risk are more likely to have made a commitment to net zero, the report found. But even these companies have more to do. Although those high-scorers are now more transparent about the trade associations they belong to, none of them have made a commitment to ensure those trade associations' lobbying positions are aligned with their climate change policies. 

Since the next step on the road to net zero must involve alignment of regulation and corporate strategy, we must look for change here.