What is ‘net zero’?

Put simply, ‘net zero’ means that the total greenhouse gas (GHG) emissions of an organisation (or city, or state) are equal to or less than the emissions it removes from the environment. In particular, the Science Based Targets initiative (SBTi) has defined what it means to reach net zero on a corporate level as: achieving a state in which the activities within the value chain of an organisation result in no net impact on the climate from GHG emissions, and which is consistent with limiting global warming to 1.5 degrees.

Which emissions are included when we’re talking about net zero?

This is the key point. GHG emissions are put into three categories, or ‘scopes’.  In order to reach net zero, an organisation needs to tackle its impact across all of these.

• Scope 1 emissions are those that a company produces directly – for example through burning fuel in a boiler on its facilities or driving its own vehicles.
• Scope 2 emissions are indirect emissions that are associated with the electricity or energy that a company buys, for example to heat or cool its buildings.
• Scope 3 emissions are those associated with organisations up and down a company’s value or supply chain. This is often the largest area and the hardest to measure as it includes emissions from goods or services bought and sold. Crucially for financial institutions like banks, it also includes all the loans and investments made.

Source: Greenhouse Gas Protocol

Can ‘offsets’ be used to reach net zero?

Importantly, net zero is not the same as carbon neutral, which is simply about balancing emissions from own operations (scope 1 and 2) and has no requirement to be consistent with limiting global warming to 1.5 degrees.  There is a role for offsetting in a net zero strategy, but it is complicated. The SBTi framework states that an organisation should:

• Reduce its emissions as much as possible, along its full value chain (so scope 1, 2 and 3) in order to be consistent with limiting global warming to 1.5 degrees
• Neutralise the impact of any emissions that cannot be eliminated by permanently removing an equivalent volume of carbon from the atmosphere.

Traditional offsetting is about compensating for one’s own emissions by contributing to initiatives that reduce or mitigate GHG emissions – for example by supporting a project to replace kerosene cooking stoves with solar-powered ones. Future emissions from the use of kerosene stoves are avoided, but no carbon has actually been removed from the atmosphere. This type of ‘compensation’ offsetting can complement a net zero strategy, but it is really important to note that avoided emissions can’t be used to ‘balance the books’ as some banks are trying to do.

In the quest for a science-based net zero target, organisations need to reduce emissions as much as possible, and then neutralise any emissions that are left over by removing carbon from the atmosphere, ideally through activities in their own value chain. This will hopefully include nature-based solutions that sequester emissions – such as restoring natural carbon sinks like forests, wetlands and peatlands.

Others look to new technology to offer the solution, such as carbon capture and storage, but we are a long way from scaling these options and the economics around a price on carbon are not developing quick enough.

What does this mean for banks?

For banks, it is beginning to look at the reduction of scope 3 emissions that is most significant, because this includes the GHG emissions of their loans and investments. No financial institution should be shying away from this responsibility. It is a huge challenge.

The first step is around measuring these emissions effectively and consistently. In 2016, in the wake of the Paris Agreement, Triodos was involved in the development of the Partnership for Carbon Accounting Financials (PCAF) in the Netherlands. Alongside several other financial institutions, we wanted to produce a globally recognised standard for measuring the carbon footprint of loans and investments.

Triodos implemented the PCAF methodology in our own reporting for the first time in 2018 and extended the scope of its accounting to cover 100% of loans and fund investments in 2019. Transparency around the challenges involved is key, and Triodos leads the way by publishing the confidence we have in our data, and how we plan to improve this year on year.

Triodos does not invest in fossil fuels and so as you might expect our climate impact report shows that we have a relatively low climate intensity from our loans and funds. Importantly we present these ‘avoided emissions’ in reporting, beneath actual emissions. This is because, while avoided emissions play a very positive role, they do not remove existing carbon from the atmosphere. Offsetting high carbon projects against avoided emissions is not a reasonable definition of net zero.

What about a ‘just transition’?

In order to set a robust net zero target, we are most conscious of the need to reflect critically on our portfolio – particularly as we want to support a sustainable and just transition. We don’t want net zero targets to adversely affect our mission and the positive impact we strive for, or the holistic nature of our impact. We’re looking for the transition to a net zero economy to be a just one - you could call it ‘Just Zero’ - through which we continue to deliver on our mission to finance positive impact while supporting social inclusion.

For Triodos, sustainable banking means using money consciously today without compromising the needs of future generations. A just transition is one that considers these needs, addresses wealth inequality, and delivers both social and environmental outcomes in tandem.

No one should be pretending net zero is easy

If they are not doing so already, all banks need to reflect critically on their lending and investments portfolio. The setting of targets is useful to show intention - which is why Triodos has previously voiced its support to the Net Zero Banking Alliance that agrees to align operational and attributable emissions from portfolios with pathways to net-zero by 2050 or sooner. But it is all our responsibility to ask those promoting their targets the important question – ‘how’?

We must hit the target without missing the point. Setting net zero goals needs to be done carefully rather than announcing arbitrary targets too quickly and using them in marketing campaigns that give the impression that it can be ‘carry on as usual’ and delay meaningful action or system change. We will continue to urge the financial sector to stop investing in fossil assets and any new upstream exploration activity, as recommended by this year’s International Energy Agency (IEA) report. We will call for a 'reset of the economy'. Only if we recognise the urgency and take action together, can we combat climate change effectively.