The term “Net Zero” has been a part of the public conversation for nearly two decades, but do we really know what the term means? While the phrase is often used by the media, college professors, activists, CEOs, scientists, and politicians, it does not always carry the same weight or meaning for each segment.

Net Zero: Defined

Net Zero seeks to balance the past and current impact of our activities on the environment through incremental policy change aimed at reducing or eliminating all greenhouse gases by 2050.  A 2050 target deadline brings the EU into alignment with the timeline outlined in the European Green New Deal and honours the commitments made during the signing of the Paris Agreement. Net Zero requires companies to evaluate their entire business operation from supply chain to production, identify emission sources, establish guidelines and targets to reduce those emissions, and create a comprehensive and actionable plan to reduce carbon dioxide (CO2), nitrous oxide, methane, and other greenhouse gases.

While there is broad agreement about the general meaning of Net Zero, the importance of concrete action and what that action should be are often worlds apart. This disconnect has resulted in Net Zero facing an increasingly destructive crisis. While the concept has seen a tidal wave of corporate support, meaningful follow-through has remained both challenging and rare.  In a report published by Net Zero Tracker on 6 November 2023, while 66% of the annual revenue of the world’s largest 2000 companies is now covered by a net zero target, there is still a significant gap between these commitments and the actual implementation of climate action.  Companies can, however, make sincere efforts to deliver a net-zero future by ensuring their advocacy is underpinned by science-based benchmarks.  One good example is Ørsted.  It was the first energy company to have its net-zero target validated. It achieved a 99% reduction in emissions from its entire energy portfolio in Scopes 1-3, including its natural gas portfolio.

The sharpest minds in climate science have repeatedly put forward 2050 as a potential tipping point that could determine our ability to stave off the worst impacts of worsening climate change. The most vulnerable nations, such as Somalia, Syria, and Afghanistan, among others, according to the International Rescue Committee (IRC), are already beginning to feel the devastating impact of a changing climate, rendering some areas uninhabitable. If allowed to continue unchecked, the impacted areas will increase, displacing more and more of the global population and quickly exceeding other nations’ capacity to safely absorb those populations without causing instability and security concerns among their own citizens.

What Does Net Zero Mean to You?

While the science community is aligned and has been sounding the alarm bells on the dangers of climate change since the 1970s, corporate interests in the private sector have been just as vested in obscuring the seriousness of the threat and kicking the can down the road.

This was a frequent topic of discussion at the 2023 World Economic Forum in Davos, where concerned world leaders gathered to identify ways that they might inspire cooperation and foster collaboration with the private sector to address the most pressing global climate concerns and begin to make measurable progress.

At the January 2023 gathering of the World Economic Forum in Davos, UN Secretary-General António Guterres called out the “murky” meanings given to the term net zero by the private sector, which has historically looked to downplay the impact of fossil fuel emissions on the climate in an effort to protect the profitability of their business interests.

“Our climate goals need the full engagement of the private sector.  The truth is that more and more businesses are making net zero commitments, but benchmarks and criteria are often dubious or murky. This can mislead consumers, investors, and regulators with false narratives, and it feeds a culture of climate misinformation and confusion and leaves the door open to greenwashing.” 

–UN Secretary-General, António Guterres (01/2023)

CSRD: Enforcing New EU Sustainability Standards

As the climate crisis continues to worsen and scant progress is being made by the worst offenders, world leaders have decided that it is time to get serious. The Corporate Sustainability Reporting Directive (CSRD) is part of this strengthened resolve. The CSRD will serve to shore up the existing accountability standards initially established by the Non-Financial Reporting Directive (NFRD). The enhanced reporting standards of the CSRD will become active for different classes of business in a scheduled roll-out that will begin in 2024 and be completed with all companies reporting by 2028.  The phased implementation is designed to allow companies to adapt to the new requirements and ensure a smooth transition.

In 2024, only those companies that are currently required to report to NFRD will need to meet CSRD reporting standards. However, the first expansion wave will begin in 2025, when all businesses classified as large businesses will need to begin reporting.

The EU created two pieces of legislation aimed at closing the clever language manipulations and loopholes being used to allow the most destructive corporate actors to skirt the current regulations. The EU Taxonomy clarifies the six core sustainability objectives and defines sustainable activity as actions that further our progress towards one or more of these six objectives.

EU Sustainability Objectives

1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems

The second layer of legislation took shape with the latest iteration of the CSRD’s ongoing efforts to modernise the current ESG investment reporting framework.  The CSRD is intended to impose tighter reporting requirements on EU businesses.  The European Commission (EC) expects that approximately 49,000 entities will be required to report under the CSRD, versus 11,000 under the existing NFRD.

Who Is Required to Report Under CSRD Guidelines?

The complexity of the CSRD makes it difficult to provide a definitive statement on which companies will have a new obligation to report in 2024. Because an organization could easily have an obligation to report under specific conditions at a specific level but have no obvious general obligation to report, it is strongly advised that any business with potential exposure take the precaution of retaining qualified legal counsel to review the company structure (including supplier practices and operations) and provide a more definitive answer.

Having mentioned the above, the directive will generally apply to three types of companies:

1. All companies with securities listed on an EU-regulated market: This includes both EU and non-EU entities with listed debt or equity securities (with limited exceptions).
2. “Large” EU companies that are not listed: Large is defined as companies that exceed certain asset, revenue, and workforce size thresholds in two consecutive years. An EU subsidiary of a US company would be required to report if it exceeded those thresholds.
3. EU companies that are part of a “large group” and not listed: Reporting is required for an EU entity (including an EU subsidiary of a US company) if it is the parent of a group that exceeds certain asset, revenue, and workforce size thresholds in two consecutive years.

In addition to reporting based on the above criteria, consolidated sustainability reporting will be required for non-EU-headquartered companies at a global level if a company generates a certain amount of revenue in the EU and has at least one EU subsidiary or branch that meets certain criteria. The directive outlines exemptions that depend on how your company consolidates its sustainability reporting.

Turning attention to the specifics, large companies find themselves subject to these regulations if they meet at least two of the following three criteria:

1. More than 250 employees and/or
2. More than EUR 40 million turnover and/or
3. More than EUR 20 million in total assets

What Will Companies Need to Report?

Companies that are required to report using the updated CSRD criteria should expect significant changes in what must be reported as well as how reporting is managed at all levels of the organization. The increased scrutiny is intended to help close any procedural gaps and loopholes being used to skirt the new legislation.

• Sustainability goals, plans, best practices, and current performance.
• Targets for greenhouse gas emissions reduction.
• Diversity (or lack of diversity) in key decision-making roles on corporate boards.
• Established Environmental, Social, and Governance (ESG) goals and the progress that has been made in reaching them so far.
• How sustainability issues are or will impact their specific business.
• The impact their business is having on the local environment and the world as a whole.

Conclusion

The Net Zero concept has gained prominence, yet there is still a worrying gap between what corporations promise to do and what they really do. The 2023 World Economic Forum echoed UN Secretary-General António Guterres’ demand for sincere commitment when it emphasised the need for transparent benchmarks. A step towards accountability is the EU’s CSRD, which will be implemented gradually starting in 2024. The CSRD seeks to compel large firms to report on a variety of sustainability elements, despite its complexity. The success of this directive hinges on genuine collaboration, transparent reporting, and decisive action to achieve Net Zero targets and address the urgent climate crisis.