A net zero strategy is a company's way of showing responsibility, and it can improve internal and external stakeholder perceptions of a company's climate action. However, setting a target is just the beginning of earning a "social licence" to operate in today's world. Stakeholders are increasingly looking for measurable, verifiable action. Emission reduction projects can have positive business cases, e.g. energy efficiency, while other projects may have negative cost impacts on the business, e.g. alternative materials and feedstocks. By buying carbon offsets, for example, a CFO immediately sees the cost of the company's current emissions, which can be used to encourage teams to reduce emissions across the value-chain and to factor emissions – and, importantly, the expected price hike in future carbon credits – into their long-term investment decisions.
On the other hand, the TCFD focuses on the cost impact of climate risks and opportunities on the business. Scenario analysis is a key component of the TCFD, which essentially attempts to project how a company's most material climate risks and opportunities will evolve under different climate scenarios. This includes physical risks (e.g. flooding risk or heatwaves) and transition risks or opportunities (e.g. reduced/increased demand for products and services). TCFD recommends that companies understand the actual and potential impacts of material climate risks and opportunities from the perspective of a balance sheet (assets and liabilities) and/or income statement (revenue and expenses), which represents the "cost of inaction". Companies can then use this information to inform their business decisions and strengthen the resilience of their value chain.
Key point 3: Both TCFD and net zero require engagement and transformation across corporate functions
Deep operational changes are necessary to embed climate action within a company to protect against claims of "greenwashing". A company's sustainability team typically does not have enough control to make these changes on their own. When speaking to our clients, the common challenges we hear about are the difficulty of collecting data across departments, limited knowledge and understanding of climate topics, the lack of governance over climate topics, and gaining buy-in across the business. When everything falls under one net zero strategy, driven by the C-suite, these operational issues have a better chance of being resolved.
Companies can use a holistic climate action framework, such as the South Pole Climate Journey, as a roadmap for their climate action. Understanding their GHG footprint and key climate risks and opportunities should be the first step: these actions inform TCFD reporting and the development of a net zero strategy. Understanding your emission hotspots and risks will then inform the decision on whether to develop further insights.
1 While sustainability is broader than climate (e.g. water, waste, diversity, and social impacts), global warming, which is caused by rising carbon emissions, is at the core of many corporate sustainability strategies and can inform actions in other areas. Understanding your company's carbon footprint and risks, and setting roadmaps and targets, are important steps on any corporate journey to net zero.