Net zero targets: allocate capital today to avoid cost blow outs in the future

Author Jamie Ayers

Date November 2020

In many sectors of the economy, technologies exist that can reduce greenhouse gas emissions to zero. Renewable energy generation and procurement as part of the solution continues to rise[1], electrification of fossil fuel consuming equipment is possible and efficiency opportunities also remain. However, the critical question is what combination of portfolio transformation, technologies and contracting mechanisms provide the pathway to create and capture the most value? Getting it wrong can be costly, however taking no action at all can be even more expensive. This is definitely a world where first movers obtain an advantage. At a time when more and more companies are pursuing net zero ambitions, Energetics looks beyond the step of setting the target, to planning the pathway to achieving a net zero goal.

Net zero ambitions are growing

Investment is shifting to the clean economy. As far back as 2018, the World Green Building Council announced the Net Zero Carbon Buildings Commitment, which included signatories from across the Australian market, which commit to net zero scope 1 and 2 emissions by 2030. In 2019 an alliance of the world’s largest pension funds and insurers, responsible for directing more than US$2.4 trillion in investments, committed to carbon neutral investment portfolios by 2050. Here in Australia, research released by the Investor Group on Climate Change (IGCC) in October 2020, featuring analysis by Energetics, showed that $63 billion in new investment opportunities could be created over the next five years with the strengthening of federal climate targets and policies in keeping with the achievement of net zero emissions by the middle of the century.

We have also seen international net zero emissions commitments made by countries across the globe which ranged in ambition and coverage. 70% of Australia’s exports are to countries or states with net zero targets. Here in Australia every state and territory has either a net zero target or are in the process of developing one.

The push to net zero emissions is on, but the key question of how it is achieved remains.

The target is set. Where to from there?

For most businesses, the distribution of available capital is a balance of risk and reward. Investment decisions should be strategic. This includes how they invest in emissions reduction projects and should form a part of the target setting approach. Too often targets are set without a true appreciation of the impact of organisational growth, capital restrictions, or even the cost to meet the specified target. With commitments moving towards zero, it is more important than ever to understand the financial and carbon implications of changes to the portfolio, targets and investment. Further, energy and carbon markets are in a constant state of flux. Technology continues to improve, and the costs of implementation continue to fall.

In developing net zero strategies, engagement across the business is a must. The establishment of information symmetry between sustainability, communications, finance, procurement, operations and the executive provides the foundation for a strategy which can be implemented successfully. Failing to engage any of these stakeholders introduces the risk of failure through unallocated capital, resources or misaligned expectations. This failure may not prevent an organisation from achieving the emissions reduction target, though it is likely to result in additional capital requirements to meet the established targets due to poor investment decisions made in the development of the strategy. With energy price volatility and some known-unknowns impacting potential carbon price forecasts, the tail end risk for organisations which don’t develop a comprehensive strategy is material. Invest time and resources in developing your net zero strategy and your approach to offsets to deal with residual emissions (see Energetics' article, "What are the differences between net zero and science-based emissions reduction targets?" in which offsets are discussed).

Reduce cost risks and the achievement of your net zero target will come with zero regrets.

My next article will examine in more detail, the process by which emissions reduction pathways are developed. 

Energetics can support you in the setting of your net zero emissions target and the pathway to its achievement. Please contact us for more information.

 

Footnote:

[1] See Energetics’ corporate renewable power purchase agreement tracker. In 2020, new records were set for deals across Australia supporting renewable energy projects and offtake size.