Thanks to decades of advocacy, some very real climate-related disasters, and meaningful progress on the global policy and regulatory stage, climate consciousness is finally in vogue with mainstream companies and investors.  

By Ariel Fromer Babcock, CFA 

This heightened attention brings with it a flurry of commitments to decarbonize. But the casual use of language when it comes to climate commitments may be leading us down an unintended path. A clear consensus on climate terminology would go a long way toward separating the truly serious from the greenwashing. 

As Jess Shankleman and Akshat Rathhi recently pointed out, some companies that have committed to transforming their business to achieve net-zero emissions are now conflating that term with being “carbon neutral.” While an innocuous-sounding substitution, the implications are anything but.  

So, let’s be clear about what we mean.  

Net Zero

“Net zero” refers to the balance between the amount of greenhouse gas produced and the amount removed (genuinely removed and permanently sequestered) from the atmosphere. Put simply, a net-zero commitment means the organization will be run without adding any new greenhouse gas emissions to the planet.  

Paris Aligned

Some businesses layer on “Paris Aligned” to their net zero commitments. This important modifier attaches a time horizon and a set of interim decarbonization targets to the net zero commitment. Saying your organization has made a “Paris Aligned net zero commitment” indicates a goal to achieve net zero by 2050 (or sooner), decarbonize the business, and report on interim progress as set out in the Paris Agreement. Without that “Paris Aligned” modifier, companies are free to decarbonize at their own pace, without any comment about their pathway to net zero – or how long it may be before they get there.  

Science-based

A further step beyond Paris Aligned is “science-based”. Science-based targets provide companies with a clearly defined pathway by specifying how much and how quickly they need to reduce their greenhouse gas emissions. Targets are considered science-based if they align with what the latest climate science (according to the Science Based Targets initiative) deems necessary to meet the goals of the Paris Agreement – limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C. A key distinction between ‘science-based’ and ‘Paris Aligned’ is the flexibility to adjust to the latest climate science – science constantly evolves while policy is less nimble. Companies committing to decarbonize alongside science-based targets signal that they will adjust their approach as the science evolves to stay abreast of the most cutting-edge research.    

Carbon neutral

How is “carbon neutral” different from the rest? A carbon neutral commitment does not necessarily imply reduction of carbon footprint. Instead, a carbon neutral company commits to reduce or offset its emissions. In theory, a company could claim carbon neutrality by changing nothing about the way their business is run and simply purchasing carbon credits from elsewhere. Emissions from a carbon neutral company may go up over time, and their purchase of carbon offsets would go up too. As authors from Yale recently summarized, “‘Carbon neutrality’ communicates that an entity has paid for emissions reductions by other entities, or ‘offset’ its emissions, without necessarily reducing its own emissions or changing its own behavior in a substantive way.” 

Unless the carbon credits being purchased represent permanent removal and sequestration (not simply ‘avoided emissions’) this approach is at best a shell-game with no real benefit for the planet. At worst – when carbon neutral companies in developed countries purchase their offsets from the developing world – it represents a new form of corporate colonialism by locking up valuable natural resources that could further economic growth in emerging markets to support the carbon-hungry economic growth of richer nations.  

Being carbon neutral is certainly one step on the journey to climate-conscious capitalism. But if the goal of decarbonizing our economy is to set the stage for a more sustainable future, carbon neutrality doesn’t bring it any closer to reality. Long-term investors would be wise to pay attention to that difference.   

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