A boards-eye view of the net zero transition
The race to net zero is the biggest transformation of our time, calling for decisive action from governments, businesses and individuals alike. While the collective will to drive change exists, the scale and complexity of an ever-evolving sustainability agenda make it challenging for businesses to keep up.
The challenge is significant, but together we can accelerate our net zero efforts.
Over the past year Chapter Zero and Deloitte teamed up to host a series of roundtable events within which more than 100 non-executive directors (NEDs) from across all sectors of the UK economy gathered to discuss the challenges and opportunities of the net zero transition.
We’ve distilled the discussions down to create a list of six key takeaways, each of which provide insight into implementing a successful net zero transition within your own organisation.
1. Striking a balance between ambition and attainability
Making progress while balancing trade-offs
Pressure is growing on businesses to take decisive action and to be transparent about the commitments they are making.
Setting a net zero target is an important first step for companies eager to demonstrate their ESG credentials to investors, clients and other stakeholders, but it can be a fraught process.
Attendees highlighted the difficulty of striking a balance between being ambitious enough to satisfy stakeholders without setting targets which cannot be achieved among the myriad other obligations.
We heard from attending NEDs that there were various actions they had taken to mitigate this risk and manage the complexities of establishing clear, achievable objectives. These included:
- Setting targets that are science-based and timebound in line with the Paris Agreement to limit warming to 1.5C
- Focusing on the long-term benefits and cost savings of switching to more sustainable products/services
- Knowing what disclosures are expected/required and being ready for them in the short and longer term
- Using robust scenario modelling that factors in uncertainty around transition pathways to inform decision making.
2. The need for meaningful action now
Walking the walk and not talking the talk
The need to decarbonise our economies has been recognised for some time, but recent years have seen the sustainability agenda gain more traction within boardrooms across all sectors and industries.
Across the last five years in particular many companies responded to the pressure to act by adopting net zero targets – making commitments that, at the time, sent a strong signal to the market that they are serious about their impact on the planet.
However, actions speak louder than words. With pressure mounting on these companies to deliver on their promises, we are starting to see who is walking the walk, rather than simply talking the talk.
We heard from NEDs that they were increasingly aware of the opportunity that adapting quicker than competitors would create, allowing them to set themselves apart and gain competitive advantage.
To achieve a meaningful transition the three key actions attending NEDs suggested were:
- Embedding climate considerations into their core corporate strategy, ensuring it becomes core to the decision-making process
- Maintaining focus on transformation by setting a combination of short (1 year), mid-term (3 to 5 year), and long term (7+ year) net zero transition plans
- Putting in place measurable interim milestones for each of those plans.
3. The difficulties of Scope 3
We are the company we keep
Many organisations have turned the focus of their early actions almost entirely on those areas for which they have control, adopting strategies which will reduce the emissions intensities of their own operations.
Every little helps in the race to next zero so, of course, this is a positive step.
However, the majority of emissions arise through the activities of our respective value chains, known as Scope 3 emissions. Scope 3 emissions are much more difficult to tackle due to the complex nature of modern-day supply chains. Regardless of the complexity of the task at hand, businesses are now being held to a higher level of scrutiny and account for activities carried out across their value chain.
Throughout the roundtable events NEDs spoke about the need to address Scope 3 emissions by:
- Establishing more stringent supplier requirements and working with your value chain to initiate behavioural change
- Embedding actions to address Scope 3 emissions into your sustainability strategy
- Continually evaluating and re-evaluating your suppliers to provide the opportunity to switch to more sustainable providers or collaborate to reduce emissions as required.
4. The importance of governance and accountability
Who owns the sustainability agenda?
Navigating the transition to net zero requires buy-in and accountability at the top of the firm.
NEDs had different reflections on the role of the CEO as the one driving the change, with some suggesting that, due to time commitments, other C-suite members should also bear the responsibility.
Across all of the events, there was consensus that the CFO should be fully bought in given that they hold the keys to the ongoing investment needed.
Every organisation is going to have to tailor the governance approach depending on size, structure and personalities. While it’s clear that no one size fits all, there are guiding principles that can help. These included:
- Ensuring the right sponsorship and delivery teams are in place to catalyse change across the business so that efforts are not completely siloed
- Assigning areas of accountability within the C-suite and in each department
- Embedding net zero considerations into the internal reporting and governance processes of the firm
- Setting sustainability as either a standing item on board meetings or establishing separate sustainability-focused board meetings to ensure it gets sufficient attention.
5. The psychology of decision-making and behaviour change
Making change happen
Across each of the roundtables there was a consensus among NEDs that transitioning to net zero will require tough choices and a shift in thinking when it comes to a firm’s priorities and what is considered within their control and responsibility.
But how do we change the hearts and minds of decision makers?
To ensure climate is considered throughout changing leadership and other competing priorities, companies need to adapt their decision-making processes. This could be done by designing compliance and remuneration policies that nudge individuals to make climate conscious decisions.
We also heard NEDs discuss the need for education and incentivisation across the firm to ensure that decisions made at all levels align with their net zero goals.
Key considerations to take away from this part of the discussions include:
- Linking remuneration policies of decision makers to net zero targets
- Embedding climate considerations into decision-making processes
- Providing climate training and employee engagement activity across the firm to promote climate goals and actions.
6. The need for internal and external collaboration
Collaboration is key to collective success
Collaboration both within and between organisations is essential to reach net zero.
Within firms, sustainability needs to be embedded across the whole organisation rather than siloed in one specialist team. Involvement of the whole organisation should be encouraged to allow cross-function collaboration and ensure a complete transition.
Collaboration should also face outwards with cross-firm, sector and government collaborations being needed to reach net zero. Many firms across different sectors will be facing similar challenges during this transition and more collaboration will enable sharing of best practice and greater levels of innovation.
NEDs discussed the best ways to drive this forward, concluding that consideration should be given to:
- Setting up working groups and engagement across sectors, and with government, to ensure the transition is being tackled from all angles and aligning everyone to common goals
- Incorporating sustainability into the organisation’s strategic vision to drive decision-making, considering the long-term strategy and applying a risk-based approach
- Including stakeholders such as suppliers, customers and shareholders when setting targets and deciding actions, helping tackle emissions across the value chain.
The discussions really emphasised that we can make significant progress by bringing our expertise and experience together, with a recurring theme being the need to learn and adapt together. Within this there was recognition among those attending the roundtable events that, while ESG specialists lack boardroom experience, many within the boardroom need to increase their understanding of sustainability.
This need for an exchange of knowledge is one that must be facilitated to increase the chance of a successful transition, but there is much to be learned from other thematic topics such as digitalisation which can form a blueprint as to how to drive cross-board collaboration on this issue.
Technical competence gets companies only so far and ESG needs to be broadened to deliver more holistic transformation.
Our guest authors write in a personal capacity and the views expressed within may not reflect those of Chapter Zero.
Useful Business and Finance checklists from the UN Integrity Matters report
The UN High-Level Expert Group have published implementation checklists for businesses and financial institutions with a net-zero pledge. The checklists transcribe the recommendations of the report into a list of criteria and provides guidance on what to consider through each stage of their progress towards being credibly 1.5°C-aligned.
Why should non-executive directors care about transition planning?
Ashley Alder, Chair of the Financial Conduct Authority, talks to Chapter Zero about why the net zero transition is such an important area of focus, why non-executive directors should care and where we go from here.
The Bank of England’s Climate Transition Plan
The Bank published its Climate Transition Plan in July 2023, which details the Bank’s target and strategy to reach net zero greenhouse gas emissions for physical operations.