Big Plans, Little Trust: Why Leaders Need to Get Net Zero Reporting Right
Every business leader will be feeling the pressure to articulate a net zero transition plan, as stakeholders continue to demand more action from companies to tackle the climate crisis. But as we see more companies being called out for perceived ‘greenwashing’ – it has never been more important to report net zero strategies in a clear, transparent, and credible way.
Net zero is a multi-faceted and extremely complex subject. Reporting in this area is new, and rapidly evolving – whilst also often facing criticism for a lack of substance and clarity. With regulators across all continents considering proposals for expanded climate and transition reporting, net zero is set to become a permanent feature of company communications.
Whilst net zero strategies are still in their infancy, and guidance around best practice continues to evolve (just this month the Glasgow Financial Alliance for Net Zero published a draft framework for the financial sector, for example), it is becoming increasingly clear that simply setting a goal is not enough. Stakeholders remain sceptical and need to see the detail behind plans, regular progress updates, and assurances that leaders are taking this seriously, rather than leaving it to the next generation to deliver. So then, in a world of big plans and little trust, what should companies focus on when communicating in this area?
Presenting information in an accessible format
The data behind net zero plans and the multiple workstreams involved make for complex reading. To avoid misinterpretation of key messages, infographics, timelines, and visual summaries should be presented in an easy-to-locate area of the annual report or website. M&G cuts through this complexity with a simple and uncluttered timeline presenting four strategic focus areas to get the company to net zero.
Disclosing detail and communicating progress
Surprisingly, many companies with a net zero goal disclose very little detail around how they will actually get there. Typical corporate strategies have key milestones and goals set for the near future, so planning for and communicating a 2050 goal is new and unchartered territory. Clearly it becomes more difficult to commit to concrete actions over this longer time horizon – and particularly when the world is transforming at pace. Reporting should provide more detail on actions and progress made towards short-term targets, with high-level ‘direction of travel’ disclosure covering the longer time frame. Croda – who stands out for a commitment to be climate positive by 2030 – does a great job of breaking down the targets and actions it is taking, as well as aligning with the UN Sustainable Development Goals.
Demonstrating management incentive by linking to pay
Investor calls for the incorporation of ESG metrics within executive remuneration have grown. Including a specific measure linked to the net zero strategy within executive remuneration packages demonstrates accountability and improves credibility of low carbon plans. ESG metrics should represent a sufficient weighting of total reward – around 20% for according to some investors – although this and the carbon element will greatly vary by industry. SSE and Schroders both meet this 20% threshold with Schroders leading the way by including a proxy metric for its scope 3 emissions. This is particularly impressive and innovative as most companies are currently unable to incorporate scope 3 due to measurement challenges.
Transparently acknowledging the journey and the scale of the challenge
For many, the rush to commit to rapidly reducing emissions has attracted criticism for ‘style over substance’ or greenwashing. In this context, it may therefore feel tempting to say less rather than more. However, to build trust it is important to acknowledge the journey and current limitations – no one has all of the answers – what matters is the commitment of sufficient time and resources to find them.
It is widely acknowledged that the lack of tools and methodologies available to measure carbon emissions are a significant challenge for companies, with many scope 3 emissions sources currently unable to be reliably measured. Companies are increasingly likely to face criticism for disclosure that focuses only on scope 1 and 2 emissions or is vague as to which types of emissions are included in reported data. In this area, Nestlé leads the way with a ‘What’s not included’ caveat in its emissions reporting making it immediately clear to readers which emissions have been excluded.
Another challenge is the use of carbon offsets – a highly contentious topic despite almost all net zero plans relying on some form of emissions offsetting. Companies should be transparent about the level of offsetting that plans rely on, and realistic about the achievability of offsetting as a significant pillar of net zero strategy. Heineken’s communications include a brilliant principles-based disclosure around its use of offsetting as ‘a last resort’, giving readers a strong sense of commitment to the use of carbon removal in a responsible way.
Reporting will continue to evolve, however organisations that lead the way in best-practice reporting will ensure ambitious net zero plans can – and will – receive more trust and credibility. By prioritising transparency, companies can help to foster accountability, influence peers, and help to make meaningful positive environmental progress.