The transition to net-zero: what are Canadian companies committing to?

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You don’t have to read the business pages regularly to realise that in the last 12 months an increasing number of Canadian companies are making major commitments to reducing their greenhouse gas emissions (GHGs).  It is now a weekly occurrence that another major business is announcing its intention of becoming ‘net-zero’. 

There is no doubt that ambitious action by all sectors – including business – is critical if we are to avoid the worst impacts of climate change, grimly outlined in the recent IPCC Report. Business action is also essential if Canada is going to meet its national targets and international climate commitments.

But how ambitious are these targets and what will the potential impact be?

This article provides a desktop review of climate commitments made by 64 large Canadian companies (at least 1000 employees) as of the end of September 2021, including net-zero targets and/or targets under the Science Based Targets Initiative (more on this later).

Specifically, we look at three key aspects:

• the types of targets being set;
• the coverage of value chain emissions (generally the hardest emissions to address); and
• the use of offsetting as part of company climate plans.

The ‘net-zero’ target

One recent report defined net-zero in simple terms as, “…the practice of a company, sector, or economy neutralizing the further climate impact of all of its GHG emissions beginning in a certain year by reducing all emissions possible and then offsetting residual emissions with removal strategies”. Net-zero is applauded for its ambition by some and generates skepticism in others.

The approach is conceptually aligned with the goal of the Paris Climate Agreement, which aims to limit human-induced temperature rise to ideally no more than 1.5 degrees by reaching a net-zero state by 2050 for global GHG emissions as a whole.

Investors are also making demands in this regard. Larry Fink, CEO of the world’s largest asset management firm, Blackrock, recently announced that companies would be asked to disclose a plan for how their business model will be compatible with “a net-zero economy” and how this plan will be incorporated into their long-term strategy and reviewed by their board of directors.

However, a 2050 target is an exceptionally long timeframe for any corporate commitment, well outside the lifetime of current management. We should always be cautious of promises made for others to keep.

Some critics also say net-zero allows companies “off the hook” for reducing their emissions by giving the option buying emissions offsets rather than making substantive changes to their own business. A long-term adoption of a net-zero approach may also have the effect of postponing the urgent and immediate action required to avoid the worst effects of climate change.

With these challenges in mind, it is important to look more closely at actual climate commitments that companies are making, which are often (but not always) focused on net-zero.  As part of a new research initiative at Ivey examining the strategic response of businesses to climate change, here are some of the key things we found from our review of 64 large Canadian companies:

What types of targets?

There is significant diversity in the nature of the targets companies are setting. To illustrate this point, Box 1 below presents an overview of climate targets for four well-known Canadian businesses from different sectors. 

Several different elements drive the key framing of many corporate targets.

One key element is the concept of different “scopes” of emissions. This is derived from the GHG Protocol, the internationally recognised standard for measuring GHG emissions. Scope 1 includes a firm’s direct emissions; scope 2 are indirect emissions associated with off-site electricity generation; and scope 3 are indirect emissions associated with both the upstream and downstream value chain, including product use and post-consumption fate. Firms often commit to targets that vary by scope, reflecting the different opportunities and effort required. We talk more about scope 3, perhaps the most challenging category of emissions, further below.

Another element is the distinction between absolute and intensity targets, as evidenced in the examples below. In our review of 64 companies, 22 companies (34%) refer to an absolute reduction of emissions, while the remainder are intensity-based or unspecified. Intensity targets, usually reductions per unit product or per unit production, are generally viewed as less ambitious, as total emissions can be increasing as production levels increase. Our review suggests that intensity targets are common for emissions-intensive industries where current feasible emissions reduction options are based on improving the efficiency of current processes (rather than changing them completely).

One final element is inclusion of a near-term commitment to being “carbon neutral”. While there is no universally agreed definition of what this means and what emissions it covers, it is generally taken to mean that the company is balancing some component of its current emissions with offsets.  This approach is often taken for a marketing or strategic positioning perspective, like Maple Leaf Foods (in Box 1), which can position the reduced net impact of their products in a market where there is growing concern of the climate impacts of animal production.

Who has set Science Based Targets?

The credibility of corporate targets often attracts skepticism. To move beyond self-declared targets, one emerging avenue for companies to make ambitious and independently verified commitments is through the Science Based Targets initiative (SBTi).

Targets under the SBTi are “science based” in that they leverage the latest climate science, are specifically evaluated against sectoral emissions rates and consider options available in each sector to reduce emissions in the short and medium term. As a result, this emerging “gold standard” for corporate climate targets establishes reliable best practices for reduction target setting, as well as independently assesses and approves the legitimacy of corporate plans.

Of the 64 Canadian companies reviewed, at the end of September 2021, 19 (30%) had SBTi-approved targets, with an additional 18 (28%) advancing toward approval (58% of the companies in aggregate). You can search in the SBTi database by country to see the latest list of Canadian companies.

Up until now, the SBTi targets applied to a relatively near-term time horizon (5-15 years), so were evaluating the ambition of short- and medium-term emissions reduction plans. The SBTi has just published a new net-zero standard, which will enable future evaluation of the ambitious levels of longer-term commitments to net-zero.

Who is addressing scope 3 emissions?  

Substantial action to address scope 3 emissions – indirect emissions from the value chain – is becoming particularly significant for assessing ambitious corporate climate action. For many firms these are a major source of emissions in their sphere of influence, but also the most difficult to reduce as these emissions are from suppliers or customers.

Examples of scope 3 emissions for a vehicle manufacturer would be the emissions of a parts supplier in Taiwan making and then shipping the parts to your Canadian operations, as well as the downstream emissions of customers using their vehicle over its lifetime. It is fairly evident that these types of emissions are challenging to address, especially because of the lack of direct control.

Scope 3 emissions have been often placed in the “too hard basket” of climate action – but under the new emerging paradigm companies cannot ignore them. For example, if scope 3 emissions exceed 40% of total emissions, the gold-standard SBTi requires a company to set targets that covers at least two-thirds of their scope 3 emissions inventory.

Returning to our Canadian sample, only 21 companies (33%) have published detailed plans or targets to address at least a portion of their scope 3 emissions. Given the complexity and breadth of these emissions, unsurprisingly, companies often prioritise their efforts on categories of scope 3 emissions that are most important (or the easiest to tackle).

Some companies are choosing to take new and innovative approaches addressing their scope 3 inventory, well-aligned with their operations and capabilities. For example, Nutrien, a large Canadian fertilizer manufacturer, has developed a new initiative for product-use emissions that actively engages with growers to promote climate-smart agriculture that sequesters carbon in the soil. Working with suppliers, lululemon has dedicated resources to creating sustainable fabrics and manufacturing processes. McCain Foods has set an ambitious target to vertically integrate their manufacturing processes, combined with developing and owning three commercially operated farms utilizing regenerative agriculture by 2025.

How are companies using offsets to achieve their targets?

Carbon offsets refer to climate actions outside a company’s operations that can avoid or reduce emissions and can be implemented or purchased through a growing market to reduce (from an accounting perspective) a company’s net emissions. Typical offset projects include supporting the deployment of renewable energy or sequestering emissions through land regeneration or reforestation.

A long-term commitment to a net-zero target implicitly includes committing to some form of offsetting arrangements in the future, as it is probably unlikely that most companies can reduce all their emissions to an absolute zero level. A current commitment to being carbon neutral requires offsets now to balance current emissions.

As mentioned above, the role of offsets in climate action and net-zero pathways is an ongoing discussion within climate discourse. Our Ivey colleague Professor Tima Bansal addresses some of these issues in a recent blog piece in Forbes. It is also important to note that the SBTi strongly discourages the use of offsetting to achieve science based targets.

Here are some of the notable findings from our desktop review of the most recent climate plan documents of 64 companies with respect to offsetting:

• Firstly, 39 companies (61%) make no explicit mention of offsetting in their current plans.
• 18 companies (28%) are currently offsetting their emissions. In most instances these offsets are to meet a near-term carbon neutral commitment. This includes Maple Leaf Foods, discussed above, and many of the major banks. A number of these companies have made additional commitments to reduce their reliance on offsetting over time, like engineering firm Stantec and RBC.
• For companies currently using offsets, there is significant variation in the level of detail provided on offset projects and purchases: from detailed quantitative data on the removed or avoided emissions (and verification of the information) to very little information at all. As a general observation, this does not help the credibility problems of offsets.
• 12 companies (19%) noted that they will likely need, or continue to use, offsets in the future.
• Six oil and gas companies, like Suncor in Box 1, are focused on innovating and investing in their own carbon capture, utilisation, and storage (CCUS) projects to prevent production emissions entering the atmosphere (instead of the possible alternative approach of purchasing third-party offsets).

What are the likely implications and impacts of these commitments?

From this review of major Canadian company climate commitments, it is reasonable to say that leading Canadian companies have significantly ramped up their ambitions to reduce their GHG emissions. Recently set goals and targets promise substantial cuts in emissions well beyond historical commitments, are more comprehensive in scope, and are increasingly tackling challenging areas like scope 3 emissions.  

Over half of Canadian companies in our sample are seeking or have science based targets through SBTi, which is a key benchmark of ambition and independent verification.

The companies setting these ambitious targets are also the ones that have often set the agenda for business action on sustainability in Canada. These leaders are establishing an example for others to follow and making it less defensible for others not to act.

And most importantly, if these ambitions are achieved, the promised reductions can make an essential contribution to Canada’s national climate targets: a 40-45% reduction by 2030 and net-zero by 2050.

However, as always with such commitments, targets are only as good as the actions to implement them. Here there is perhaps some reason for concern. A recent landscape study of Canadian TSX index companies with stated reduction targets reported only 15% of firms provided detailed plans for achieving their targets, 62% provided some level of details, and the remaining 23% provided limited or no details at all.

This is where the growing forces for disclosure and accountability on corporate climate action will play a critical role. Many companies are already making detailed disclosures in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, and a new proposal from the Canadian Securities Administrators – currently out for consultation – will essentially make TCFD reporting obligatory for all listed firms.

A final thought: Capturing the strategic opportunity

Given both the challenges and responsibilities of corporate climate action, at a minimum, senior leaders need to align their climate commitments with their firm’s business strategy. Yet, we believe that competitive advantages can develop by going further. With the upcoming and unprecedented transformation and disruption, firms that thrive will be those that take a strategic approach to climate action – effectively embedding ambitious emissions reductions with long-term business strategy, innovation, and value creation.

Ivey’s new research initiative, Canadian Corporate Strategies for Net-Zero: Planning for the Long Term, is engaging with Canadians leading companies to explore this question further. We are interested in building important insights on ambitious and actionable net-zero strategies that position firms to succeed in a net-zero future.