Read our news story: Climateworks report shows what net zero best practice means for business and reveals examples of Australian companies getting it right
What does it take to limit global warming to 1.5 degrees?
In late 2015 in Paris, nations agreed to limit global temperature rise to well below 2 degrees Celsius, striving for 1.5 degrees. Since then, research has increasingly shown that climate impacts are hitting harder and sooner than climate assessments indicated even a decade ago (United Nations 2019). The latest United Nations report demonstrated that each increment of warming avoided will make a significant difference to the frequency of extreme weather events, the level of global sea rise and the melting of Arctic ice (IPCC 2021). Many scientists and institutions now agree that limiting warming to 1.5 degrees is imperative, including Climate Bonds Initiative, Race to Zero and Climate Action 100+.
Climateworks’ Decarbonisation Futures report illustrated pathways to net zero for Australia, using scenarios modelling. Two scenarios modelled pathways reaching net zero by 2050, which limited warming to 2 degrees. A third, ‘all-in’ pathway modelled emissions reductions in line with limiting warming to 1.5 degrees, by modelling strong action from policy, technological progress and businesses and individuals. This scenario models Australia reaching net zero by 2035 – the nations ‘fair share’ of action to limit global warming to 1.5 degrees Celsius.
The role of corporate net zero commitments
Net zero commitments from companies demonstrate that climate action is on their agenda and that action is underway at that organisation. But, perhaps more importantly, they also normalise the corporate sector contributing to Australia reaching net zero emissions. As corporate net zero commitments increase in scale, the norms of the sector do too – positively influencing other companies, boards, and consumers in their expectations of climate action from the sector. The corporate sector represents the majority of Australia’s emissions. Climateworks, through the Net Zero Momentum Tracker project, has monitored, assessed and tracked the progress of 215 organisations – 158 from the corporate sector – toward net zero emissions since October 2019. These companies represent the property, transport, retail, banking, superannuation, resources and energy generation/retail sectors. They are accountable for two thirds of
Australia’s national emissions and represent two thirds of market capitalisation in the ASX200. This report
was informed by an updated analysis of 30 of the 158 companies previously assessed.
When we embarked on the Net Zero Momentum Tracker project two years ago, we found many companies were not considering or addressing climate change. This has shifted. In the two years there has been a large increase in net zero commitments. But these commitments alone are not enough.
If Australia is to reach net zero emissions, a transformation of how companies set and act on net zero commitments is required. This can be achieved by not only setting a net zero commitment by or before 2050, but also: setting medium-term targets; addressing operational, value chain, customer and financed emissions; and setting demonstrable, tangible near-term actions. While companies are facing increasing pressure to take action on reaching net zero, action is not occurring at the scale and pace required.
Through tracking the net zero commitments of those companies that represent the highest emitting sectors, Climateworks has found the majority of net zero commitments from Australian companies are not yet ambitious enough for Australia to meet international obligations, or play its part in limiting global temperature rise.
Our assessments are informed by our Decarbonisation Futures study which illustrated pathways to net zero for
Australia, using scenarios modelling. An ‘all-in’ pathway demonstrated that emissions reductions in line with
limiting warming to 1.5 degrees is possible for Australia, but this scenario requires the nation reaching net zero
Our latest analysis finds that:
- In their net zero commitments, companies are consistently underestimating how significant the change needs to be within their organisation from 2025 onwards if they are to be in line with limiting warming to 1.5 degrees
- Net zero commitments are overwhelmingly focused on reducing emissions a company creates with everyday operations, but this is not always the main source of emissions – value chain, customer and financed emissions are often more significant
- Many net zero commitments are not backed by sufficient action for reducing emissions
- Scope 1 and 2 should cover operational emissions and scope 3 should cover value chain, customer and financed emissions, but some company net zero commitments lack clarity of scope regarding what emissions are included (and excluded), how they are measuring reductions and against what baselines
- Net zero commitments that rely heavily on offsets won’t be able to sustain net zero in the long term. ‘Carbon neutral’ is sometimes used interchangeably with ‘net zero’. Such commitments must be examined to determine whether offsets are being used for unavoidable emissions only.
Many companies have taken the first step of setting a commitment, which is significant. As net zero commitments become the norm, this report seeks to demonstrate ‘best practice’ so that companies are able to set net zero commitments and targets that will be effective in reducing emissions at the scale required to reach net zero by 2035.
Best practice corporate net zero commitments
As momentum increases and more companies make commitments, getting them right is more important now than ever. Based on our experience, four principles demonstrate best practice in creating net zero commitments that align with limiting global warming to 1.5 degrees Celsius.
Best practice net zero commitments must cover
- A long-term net zero commitment by or before 2050
- At least one medium term target that is appropriate and ambitious
- Addressing operational, value chain, customer and financed emissions
- Demonstrable, tangible near-term actions.
To illustrate best practice, we have curated a selection of case studies from different sectors in Australia. These examples demonstrate the level of ambition and action required to align with the Paris Agreement.
A long-term net zero commitment by or before 2050
A long-term target that aligns with limiting warming to 1.5 degrees Celsius varies based on the sector to which a company belongs. Change needs to happen at the appropriate pace by sector, for Australia as a whole to
reach net zero by 2035. For example, the electricity sector is crucial to all other sectors decarbonising. If
this sector reaches net zero by 2035, it enables other sectors to decarbonise in line with limiting warming to 1.5 degrees, too.
Making a long-term commitment to reach net zero emissions requires a shift from incremental change to a long-term ‘backcasting’ approach, recognising the scale of change required. Carbon-neutral targets that have a heavy reliance on offsets are not considered to have met this principle, unless the company has appropriate emissions reductions plans in place and only uses offsets for residual emissions.
Lendlease has committed to achieving net zero operational emissions by 2025, and absolute zero emissions – including upstream, such as those from the manufacturing of building materials, and downstream emissions such as those from tenant power consumption – by 2040.
At least one medium-term target that is appropriate and ambitious
A long-term commitment alone is not sufficient for a company to be considered Paris-aligned. Commitments must include at least one medium-term target – a midpoint between the long-term net zero commitment and when it was set. Setting medium-term targets that are in line with a 1.5 degree trajectory; and relevant to the sector of the organisation, helps companies to decarbonise at the pace set by their long-term commitment. Our research shows a lack of recognition of how steep the trajectory is between medium and long-term targets, especially from 2025 onwards. Targets also need to be reviewed regularly to ensure alignment is maintained in line with advances in technological progress and scientific understanding.
Dexus has committed to reduce total scope 1 and 2 emissions by 70 per cent and total scope 3 emissions (including tenant electricity emissions) by 25 per cent, by 2030. By 2025, the company will source 70 per cent of their electricity needs from renewable sources (from a 2018 baseline).
Australia Post has also set medium-term targets aligned with relevant sectoral (transport) modelling, committing to reduce total direct and supply chain emissions 15 per cent by 2025 (from a FY2019 baseline).
The ALDI South Group and Coles have set sector aligned medium-term targets for operational emissions. Coles will reduce emissions 75 per cent by FY2030 (from a FY2020 baseline) and The ALDI South Group will reduce emissions 26 per cent by 2025 (from a 2016 baseline).
Although many super funds have set medium-term targets, they have not been assessed against this principle because their investment portfolios cover diverse sectors. Best practice for the superannuation sector requires analysis of where super funds have invested.
Addressing operational, value chain, customer and financed emissions
Although net zero commitments have increased, they are generally focused on operational emissions. Emissions that occur along the value chain for products or services are harder for companies to directly control and are often overlooked in both short and long-term commitment settings. Value chain (or upstream) emissions are rarely considered, and for most sectors, are the most significant source of emissions. As companies control who they purchase from, net zero commitments and actions should address emissions arising from goods and services purchased by the company. In many instances, companies have some influence over customer (or downstream) emissions, and this should also be reflected in commitments and actions.
Dexus has targets for operational as well as supplier and tenant emissions across all buildings under their control. These targets are in line with the property sector’s decarbonisation pathway for Australia to stay within the 1.5 degree scenario.
Fortescue has set targets for its entire value chain and operations. These targets also cover the operations of its customers including crude steel manufacturers, in line with a 1.5 degree trajectory.
Demonstrable, tangible near-term actions
Long and medium-term commitments must be backed up by immediate and ambitious action. These actions fall into two categories: 1) decarbonisation activities that have direct impact on emissions reduction and ensure commitments are met; and 2) enabling activities that create a corporate environment to support both operational and value chain emissions reduction well into the future.
1) The four pillars of decarbonisation activities
Action falling under these pillars has an immediate impact on reducing emissions. Climateworks’ Decarbonisation Futures shows that mature, low and zero-emission technologies already exist in many sectors. In the past five years, many technical obstacles have been overcome. For example, renewable energy and electric vehicles can now be immediately deployed by companies to reduce emissions. Achieving net zero emissions across all sectors of the economy requires Australian companies to take bold and decisive actions under the following four areas, in the following order:
Improving energy efficiency: companies can take action by reducing energy waste, including improving energy productivity and shifting away from energy-intensive products and services.
BlueScope’s decarbonisation pathway to 2030 includes initiatives to optimise operating assets through energy efficiencies, procurement of low-carbon energy sources, increased scrap use and partnerships with industry and research bodies to progress the technical and commercial viability of emerging technologies. In the company’s Western Sydney paint line, improvements made to process control equipment and system logic have enabled
better management of oven pressures and exhaust, reducing the cold air being drawn into paint ovens. This resulted in a 10 per cent reduction in electricity consumption and 25 per cent reduction in natural gas consumption.
Using renewable electricity: companies are now able to switch to 100 per cent renewable electricity.
ALDI AU’s supermarket operations are powered with 100 per cent renewable electricity, reducing carbon dioxide emissions by 85 per cent. Onsite generation occurs through an extensive network of solar panels across stores and warehouses. By the end of 2021, the company will have installed over 104,000 solar panels across 274 stores and six warehouses.
ENGIE is supporting customers to decarbonise, committing to support customers to decarbonise 45 megatonnes of carbon dioxide equivalent by 2030 from 20 megatonnes in 2020. This will occur through the provision of products and services such as green energy production, decentralised energy network services, the sale of energy saving certificates, carbon certificates and the purchase or resale of green energy.
Electrification and switching to zero-emissions fuels: companies can move away from fossil fuels to zero or near-zero emissions alternatives.
Australia Post has introduced 2,529 electric bikes and 1,235 electric delivery vehicles nationally,
becoming the nation’s largest electric vehicle fleet operators for last mile delivery.
Reducing non-energy emissions: companies, where applicable, can reduce emissions from materials other than fuels.
Woolworths has reduced the amount of refrigerant leakage by 37 per cent (from a baseline year of 2015), are installing transcritical carbon dioxide systems using natural refrigerants in 55 stores through replacements, upgrades and new store installations and are phasing‑down high Global Warming Potential refrigerants in accordance with the Australian
Government phase‑down schedule under the Montreal protocol.
Companies should use offsets only when the three types of activities that directly reduce emissions (as listed above) are not feasible.
2) Enabling or ‘supporting’ action
These activities do not directly reduce emissions, instead creating a supportive environment to set companies up to move on the ‘four pillars’ of action and ensuring that climate action remains an organisational priority through changes in leadership and strategy. These include:
Getting involved in alliances, networks or engagement activities: participating in alliances and networks brings together organisations grappling with similar issues to develop and share solutions and actions aligned with sectoral trajectories.
Setting up governance and internal practices: including accountability, remuneration and incentive structures; procurement policies addressing upstream and downstream emissions; monitoring, verification and reporting systems; organisational and initiative level communications plans and appropriate capital allocation.
Climate strategies and transition plans: should be immediately established, operationalised and embedded within a corporate’s organisational culture and values, ensuring overall strategy aligns with climate commitments and that all key stakeholders and shareholders are supportive, including regular reporting, reviews and updates.
How did we assess these organisations?
Our Net Zero Momentum Tracker project has monitored, assessed and tracked the progress of 215 organisations – 158 from the corporate sector – toward net zero emissions since October 2019. These companies represent the property, transport, retail, banking, superannuation, resources and energy generation/retail sectors. They are accountable for two thirds of Australia’s national emissions and represent two thirds of market capitalisation in the ASX200. This report was informed by an updated analysis of 30 of the 158 companies. The sample was selected with the intention of drawing out illustrative examples of best practice – highlighting the level of ambition and action required to meet the Paris Agreement. This report draws on two years of analysis, based on public information, which has been updated and
verified by companies to ensure accuracy.
The analysis assessed each of the 30 company’s longterm and medium-term decarbonisation commitments against Climateworks’ Decarbonisation Futures ‘all-in’ scenario (Climateworks 2020). The scenario maps a least-cost decarbonisation trajectory for Australia in line with limiting warming to 1.5 degrees Celsius. Each decarbonisation commitment was assessed using the relevant sectoral trajectory from the scenario. To assess whether companies considered all emissions created by their activities, the full range of emissions sources of each company were compared with those addressed by their decarbonisation commitments. The full list of companies and their commitments are listed in appendix one.
The analysis also assessed actions that support the companies’ decarbonisation trajectory in line with the 1.5 degrees pathway, classifying these into four categories: those improving energy efficiency, using renewable electricity, implementing electrification and switching to zero-emissions fuels, and reducing non-energy emissions. Actions supporting the decarbonisation of the companies’ suppliers and customers emissions were also considered.
Corporate Australia can attain global best practice
The corporate sector has made significant progress in recognising the importance of setting commitments to reduce emissions. Decarbonisation targets are becoming the norm and are increasingly expected by investors, lenders and the broader community. For some sectors, expectations have shifted beyond just targets to operationalisation of those targets through strategies, governance and capital allocation.
Although a step in the right direction, most company commitments made are not ambitious enough for Australia to meet its full obligations under the Paris Agreement, or limit global temperature rise to 1.5 degrees Celsius. They do not meet the four principles identified by Climateworks as best practice in commitment and action setting.
Companies may perform well under particular principles. This report includes examples of where companies are able to demonstrate: a long-term net zero commitment that is sector appropriate and ambitious; interim targets that are sector appropriate and ambitious, address operational, value chain, customer and financed emissions; or demonstrable,
tangible near-term actions. To be aligned with limiting global warming to 1.5 degrees Celsius, a company must satisfy all four of these principles – such as Dexus and Fortescue have demonstrated.
In the transformational decade, climate commitments and actions need to be bigger and bolder than ever. The corporate sector, representing the vast majority of Australia’s emissions, has a critical role to play. This requires companies to: reach net zero emissions without relying on offsets; ensure short-term commitments reflect the significant change required from 2025; move beyond operational emissions and commit to reducing value chain emissions; as well as take immediate steps to improve energy efficiency, transition to renewable energy sources, electrify infrastructure, and where applicable implement actions to reduce non-energy emissions. These shifts will demonstrate momentum in the areas that matter most to limiting global warming to 1.5 degrees Celsius.
Climateworks is well placed to support Australian companies to better understand best practice and sector-relevant norms which can support them in the transition to net zero at the scale and pace required. This report is part of our ongoing commitment to supporting Australia’s corporate sector to attain global best practice for climate action. If these efforts are matched with action from government, individuals and finance, Australia can reach net zero by 2035,
and contribute to limiting global warming to 1.5 degrees Celsius.