The Race to Net-Zero:
Is the global business community on course to beat the clock?
Across sectors and industries, from start-ups to multinationals, companies everywhere are talking about their sustainability credentials — and in particular, their intention to reach net-zero. Businesses have recognized that a net-zero pledge can be a powerful public message, in the face of growing pressure to tackle the climate crisis and an expectation that business be part of the solution.
But amidst all the rhetoric, how much progress are we really making? Are we on course to reach net-zero by 2050, or are businesses simply jumping on the bandwagon on the road to net nowhere? We surveyed 1,000 business leaders to find out more.
Identifying the barriers to net-zero
The journey to net-zero cannot be travelled alone. Supply chain emissions (Scope 3 emissions) typically account for more than 70% of a business's carbon footprint, so any organization seeking to make progress toward net-zero must do so in tandem with its suppliers.
But our research reveals that too many companies are still attempting to go it alone — perhaps feeling there is no alternative, when faced with the complexity of understanding their extended value chain.
41% say their organization has no view of their Scope 3 emissions and no plan in place to tackle them. And only 40% of organizations have started auditing their suppliers. This opacity renders net-zero an unviable prospect.
Business leaders certainly recognize the scale of the challenge they are facing. 62% acknowledge that building a net-zero supply chain would be the biggest transformation their organization has ever faced. However, a majority expect new regulation on Scope 3 emissions reductions and reporting within the next five years and accordingly, they recognize the need to start preparing for that regulation — failing to develop a net-zero transition plan may be perilous.
Supply chain opacity
There continues to be a lot of consternation about how companies look at their supply chains.
With respect to Scope 3 emissions, there's concern about having to divulge information that is very remote from the company making the disclosure — and concern about the liability that may be associated with that."
Facing pressure from all sides, some organizations are eager to demonstrate that they are good corporate citizens, with net-zero ambitions.
But business leaders fear that certain promises may be overzealous: 40% believe their organization is at risk of setting objectives they are unable to meet.
Organizations that talk a good game but fail to back up their net-zero commitments with concrete plans and actions could be accused of greenwashing — and that threat is a barrier to advancement in 45% of organizations we surveyed. At the same time, organizations face the risk of litigation for failing to take action to reduce their emissions.
Everyone is worried about this on some level. Every conversation I have is about how organizations can be meaningful in setting targets — and not get sued."
For some organizations, the fear of being accused of greenwashing is leading to inaction — or at least resistance to publicly sharing net-zero objectives.
Indeed, those found guilty of greenwashing face significant financial and regulatory penalties, though perhaps most damaging is the reputational harm, as the accusation alone can diminish a company’s credibility with its key stakeholders.
The funding gap
Combatting the climate crisis and implementing the transition to net-zero requires unprecedented financial investment. A 2022 McKinsey study estimated that to achieve a net-zero transition by 2050, global spending on physical assets would need to reach USD 9.2 trillion per year, an increase of USD 3.5 trillion from current levels.
Unsurprisingly, 70% of business leaders believe that huge upfront investment is a barrier to their organization’s
net-zero transition. Moreover, 58% say their organization has not allocated nearly enough budget to make the transition
This funding gap undermines net-zero strategies, but it does not necessarily indicate a lack of conviction from business leaders around the need for change — the issue is more nuanced. In fact, 69% believe that transitioning to net-zero offers an opportunity to increase growth in the long-term, and when viewed through that prism, net-zero spending should no longer be considered a burdensome operating cost, but rather an investment in the future.
As businesses face rising costs and uncertain market conditions, however, leaders can sometimes fall back to short-term decision-making. To further complicate matters, businesses lack critical information to determine their
net-zero investments, which is causing hesitancy to spend.
The existing net-zero spend
An inability to calculate current spending on net-zero is one major contributor to the funding gap. Based on our research, companies believe they are spending, on average, 5.8% of annual turnover on net-zero transition.
The plan for a net-zero transition
Even where there is a willingness to invest, companies are struggling with how they are actually going to achieve net-zero. Only 38% of organizations have a net-zero transition plan
in place; without a plan, many organizations
simply do not know where to invest.
Three core areas would benefit from much greater clarity:
Blind spots in the C-suite
During a speech at the COP27 climate conference in Egypt, UN Secretary-General António Guterres stated that with greenhouse gas emissions growing and global temperatures rising, our planet is "fast approaching tipping points that will make climate chaos irreversible".
Guterres has called for a reduction of emissions by 45% by 2030 so we can reach net-zero emissions by mid-century.
Such commitments are certainly necessary steps on the path to net-zero, but the feasibility of turning words into action remains in doubt, according to our research.
49% of respondents are worried their leaders have overpromised regarding the speed and scale of their transition. The situation was particularly acute in Singapore and Hong Kong, where 67% believe that leaders made net-zero commitments without comprehensive data or information about their current status and what it will take to transition their business.
Good intentions from leadership are a start, but they must be backed by robust steps across all business operations and broad engagement throughout the organization. Progress on net-zero cannot be made in silos. At present, just 49% of net-zero transition plans have been rolled out across the entire organization and 48% of sustainability leaders believe there is a gap between their corporate ESG strategy and the aspirations expressed by leadership and the reality on the ground.
Equally alarming, 53% believe their organization does not understand sustainability well enough to incorporate it into their financial planning. This is particularly problematic for public companies, where relevant data must be published in financial statements; it also contributes to the net-zero funding gap.
There's often a disconnect between what the C-suite is saying on sustainability and their aspirational statements about what they want the company to do, compared to what the company is actually doing, and what it can substantiate it's doing. That creates a lot of risk."
Inconsistent reporting standards
As organizations grapple with sustainability regulation that varies significantly across markets, frustration
is growing about the lack of harmonization.
Without a consistent reporting framework, businesses are struggling to disclose meaningful and comparable data that would provide a composite view of progress on net-zero transition. Those lacking good baseline data will also struggle to assess their own net-zero performance with any certainty.
New regulations are forthcoming. The International Sustainability Standards Board (ISSB) aims to help meet the demand for transparent, reliable and comparable reporting, by delivering a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.
At present, however, companies continue to wrestle with a complex regulatory environment with uneven reporting frameworks across jurisdictions.
The incompatibility of reporting data around the world is yet another factor that organizations can cite as grounds to delay the transition to net-zero, even in the face of compelling evidence about the need to take action.
Our research bears this out: at a global level, 57% claim unclear and inconsistent reporting standards are a barrier to net-zero.
A lot of companies, especially those in UK, are already subject to mandatory obligations to disclose their greenhouse gas emissions. There are also a growing number who choose to disclose on a voluntary basis. So, the level of transparency on corporate greenhouse gas emissions is very much on the increase. The number of businesses making net-zero commitments is also on the rise, but this is a greater challenge for many businesses particularly with respect to emissions in their value chains, outside of their direct control, for which reliable emissions data is hard to obtain. Net-zero is a relatively new concept that has only emerged in recent years, so companies are keen to avoid making commitments to stakeholders that they may struggle to meet."
Breaking the deadlock:
Six solutions for driving real progress on the path to net-zero
Recognizing the power of partnership in tackling climate change, 73% of business leaders are willing to collaborate with competitors on net-zero transition.
As the signs of climate change increase in their intensity and frequency, businesses are under pressure from many directions to accelerate their emissions reduction efforts. Industry collaboration — along the supply chain and between competitors — is an important way to advance net-zero progress including by achieving systemic change before the window for net-zero transition closes.
I have recently seen companies become very focused on how they can match words with deeds. And there is a strong conviction that collaboration with competitors is the key to achieving success at a level of effectiveness that even the most efficient company could never achieve on its own."
We’re seeing clients willing to share information and their recipes for sustainability. There are situations where it’s necessary and possible with the appropriate safeguards; for example, if companies want to receive government incentives, they may have to work together through associations in order to qualify.”
It is satisfying to see that the draft EU Guidelines now recognize that cooperation agreements may be necessary to fill the gap when market failures are not solved by public policy and regulation.
The Commission is certainly trying to assure businesses that competition law will not stand in the way of legitimate sustainability cooperation."
Cooperation can help by:
Achieving results at scale, quickly
Industry collaboration can tackle common net-zero issues across an industry — effecting change on a scale and timetable that no one company could achieve alone. It can create markets by ensuring that there is adequate supply, or demand for, greener products and services. Collectively, organizations have the power to encourage better environmental performance from common suppliers and respond to the demands of their own customers.
Removing first-mover disadvantage
A net-zero supply chain can create long-term value, but can mean significant risks and cost increases in the short term. None of the business leaders we surveyed said their organizations would accept a 30% or above loss of revenue in the short term to fund the net-zero transition. Collaboration can break the net-zero standstill that might otherwise happen as organizations look to each other to make the first risky move.
Fair industry standards for net-zero transition
Ensure that standards for driving net-zero supply chains are developed and implemented in a legally compliant way.
A clearly defined scope for competitor collaboration, with supporting compliance programs
Keep collaboration projects on track and implement guardrails for information exchanges to avoid risk arising from competition law infringement.
Those developing collaboration initiatives should work with their legal teams from the outset to ensure competitor collaboration complies with competition law. Key tips include:
The case for competitor collaboration
Conduct due diligence on collaboration initiatives to verify that there is a true benefit which could not be achieved through independent action alone.
*Trench Rossi Watanabe and Baker McKenzie have executed a strategic cooperation agreement for consulting on foreign law
Improvements in target setting
Reaching net-zero requires transformational change across organizations worldwide.
Achieving that transformation means unravelling complexity by setting out achievable and measurable short-term goals. Aspirational aims — set for future generations to deliver — are no longer sufficient.
Science-based targets (SBT) provide a framework to develop a measured, measurable pathway for companies to reduce greenhouse gas emissions and 45% of organizations say they are committed to achieving SBT.
At present, however, only 18% have had their SBT validated by the Science Based Targets Initiative (SBTi) and defined a clear path to deliver them. Closing the gap between intent and action should be top of the to-do list for business leaders.
Of course, reaching net-zero is not yet feasible for some organizations, in which case there is no merit in stating unattainable objectives. To make true progress in the battle against climate change, it is imperative to set achievable targets — and meet them — with a focus on transparency, metrics, planning and concrete action.
The SBTi supports private sector organizations in delivering against emissions reduction targets and has also developed sector-specific guidance for organizations.
Chief Sustainability Officer, Baker McKenzie
At Baker McKenzie, we’re on the same journey as many of our clients, reducing our carbon emissions to meet our near-term 2030 targets. Like many organizations, we recognize that there are challenges around emissions reductions, in particular when it comes to Scope 3 emissions, and that it can be very helpful to exchange information with industry peers to share best practice and facilitate efficient and rapid progress.
As one of the founding members of the Net Zero Lawyers Alliance, we collaborate with other member law firms on how to facilitate systemic change initiatives in law and legal practice to advance net-zero transition, and to support clients in their climate ambition. The alliance has shown us how beneficial industry collaboration is to meet net-zero goals and to drive progress beyond the legal industry.”
Business leaders have a collective responsibility to progress the transition to net-zero. They cannot sit on the sidelines and justify their inaction by arguing that net-zero is someone else’s problem to solve.
It is incumbent on all organizations to do the same and our research suggests that the trend here is positive.
Companies will start to look at each other much more. The transparency isn't there yet, but there is a role for industry organizations to start to ask the questions — to help their members focus on the right areas."
of organizations are now doing some form of benchmarking — even if this is only occasional
Integrating sustainability into corporate decision making presents an extraordinary opportunity for business to align their operations with the transition to net-zero carbon and net biodiversity gain.”
Global harmonization and new regulation
Organizations are wrestling with variances in sustainability regulation worldwide, so many business leaders would welcome new, harmonized measures to replace the existing patchwork of different frameworks.
New regulation has sometimes been met with resistance in the past, as compliance can be burdensome and costly. But when it comes to sustainability regulation, the desire for clear guidance and a level playing field is considerable. The private sector has recognized that it can make more progress with government support.
Given that just 15% of respondents say their organization has published its net-zero transition plan, this level of transparency would require a wholesale shift in approach. Again, business leaders say the will to change exists, they just need the right framework — one that takes into consideration business and sector specificities.
Time is of the essence. With new regulation expected, the private sector has a role to play in setting the direction of travel. It is important for business to use its collective power to push regulators to harmonize standards in a way that makes sense for business; informed regulation is essential to achieving net-zero.
of sustainability leaders and general counsel hope that new global reporting standards will come into force in the next five to ten years
To make meaningful progress toward net-zero, organizations need an integrated, holistic strategy that breaks down internal silos and builds connections across departments.
Leadership teams must embed their net-zero targets within every level of their organization, encouraging a community approach and bringing discrete areas of the business together to ensure understanding and action are aligned. Middle management must be engaged and should facilitate grassroots initiatives as well as directives driven from the top down.
Sharing ownership of net-zero responsibilities can feel like a risky move, as it shifts the focus away from a singular role or discrete set of roles within a team and requires coordination across different groups.
Done poorly, this can result in no one having accountability. But sharing the responsibility is a prerequisite for organizations wishing to transform at scale. Adequate governance structures provide helpful guardrails to keep progress on track.
General counsel can play a pivotal role in joining the dots across an organization, from setting strategy and developing governance structures, to assisting with commercial decision making, financing and providing operational support. At present, the talents of the general counsel are seemingly underutilized: only 30% of general counsel are confident they have sufficient involvement in and knowledge of the sustainability strategy within their organizations.
In addition to keeping collaboration efforts on track, general counsel can help their organizations quantify and measure risk. This allows business leaders to act with greater legal certainty in a range of areas, such as engaging with their value chain, developing meaningful disclosures in response to reporting requirements, educating the organization on the meaning of net-zero, implementing renewable and other net-zero strategies and advising on effective and safe competitor collaboration that does not run afoul of competition law.
Over the last two years, the scope of the general counsel’s role and their involvement in a company's ESG strategy has increased materially. As key stakeholders demand greater transparency, and regulators increase ESG reporting requirements on a greater number of companies — beyond those listed — legal departments have become more central to the work needed for companies to report effectively.
Not only is effective reporting key to addressing stakeholder expectations and ensuring legal compliance, but it must also be undertaken in such a way as to protect the company against the rising tide of transparency-related litigation. General counsel are ideally placed to ensure companies have a robust stakeholder governance framework in place and that the narrative of ESG reporting is accurate and backed up by identifiable and reliable data.”
Harnessing leaders’ changing attitudes
With the clock ticking — and the future of the planet at stake — the urgency of reaching net-zero is paramount. Recent years have seen a systemic shift toward purposeful business and responsible capitalism, which has prompted business leaders to consider the role their organization will play in society and the steps they must take to ensure their business is prepared for the future.
Where short-term revenues once drove much of corporate decision-making, businesses now increasingly recognize that creating long-term value will require a different approach, as their stakeholders place increased prominence on environmental, social and governance factors.
72% of business leaders now believe that a robust sustainability strategy can be a powerful differentiator and they are seeking to define — and execute — ambitious plans.
Consumers, meanwhile, are watching with interest, as concern about climate change grows with each successive generation. A 2022 Pew Research report found that 75% of people across 19 countries in North America, Europe and Asia-Pacific labelled climate change a major threat.
Recognizing the societal impetus for change, 69% of business leaders say that transitioning to net-zero offers an opportunity to increase growth in the long term. It can boost competitiveness, strengthen internal engagement around strong shared values, attract investment, increase brand loyalty and enhance business resilience — all of which can lead to commercial gains.
Greenhouse gas emissions that result from activities outside of an organization’s ownership or control, but within its value chain (e.g. all emissions generated due to business operations that fall outside of Scope 1 or 2).
Why the focus on net-zero?
Because it's both specific and measurable – and because it can be used as a proxy to illustrate the broader challenges organizations face in the sustainability space, at both a financial and an operational level.
Supply chain opacity
The funding gap
We surveyed 1,000 business leaders, evenly split between general counsel and senior strategic sustainability roles. Respondents were spread across nine global markets: UK; France; Germany; USA; Japan; Singapore; China; Hong Kong; and Brazil. The sample was split across six industries: Consumer Goods & Retail; Energy, Mining & Infrastructure; Financial Institutions; Healthcare & Life Sciences; Industrials, Manufacturing & Transportation; and Technology,
Media & Telecoms.
Supply chain opacity
The funding gap
Making exaggerated, misleading or unsupported statements about sustainability efforts.
As things stand, the reputational risks may be more significant than the risk of legal liability. But it’s an evolving picture, and the risk of litigation, shareholder activism and regulatory enforcement is growing.”
For more information on
of organizations say the future threat of litigation has led to their organization not publicly disclosing net-zero statements or targets
There is no standard recognized way to calculate net-zero investment. Companies are having a hard time discerning what constitutes an investment related to net-zero and what doesn't.”
Mattias Hedwall, Partner, Stockholm
Adam Farlow, Partner, London
Jo Hewitt, Partner, London
David Hackett, Senior Counsel, Chicago
Jennifer Klass, Partner, New York
Graham Stuart, Partner, London
Luis Gomez, Partner, London
Grant Murray, Lead Knowledge Lawyer, London
Renata Amaral, Partner, Trench Rossi Watanabe
Reagan Demas, Partner, Washington, DC
Benchmarking is a good place to start when answering the age-old question: what does good look like?
It can propel net-zero efforts by facilitating meaningful data comparison across sectors, providing
useful insight for businesses and also for investors, who may be seeking reliable data on sustainability-related risks and opportunities, to help them make informed financial decisions.
Ruth Dawes, Partner, Sydney
Beatriz Araujo, Senior Counsel, Head of Corporate Governance, London
The value of a net-zero transition
As businesses grapple with economic headwinds, business leaders can struggle to justify spending on net-zero, because it has a long-term horizon of 2050, and they aren't able to assign it a concrete financial value. The pressures of the day may see a reversion to short-term decision-making but failing to take steps now to transition to net-zero could threaten a company's future viability.
of respondents have recognized these benefits and report that they now have a strong benchmarking model in place
But all this comes with its own set of challenges.
Competition law is one of them. Whenever competitors come together, it raises concerns about maintaining healthy competition — regardless of positive intentions. In the short term, sustainability initiatives may lead to an increase in prices, as more sustainable products may be more costly to produce. They could also lead to less choice if harmful or energy-inefficient products are phased out. Although there may be plenty of benefits for businesses, consumers and eventually wider society, these initiatives need to be approached very carefully from their very inception to check they are compliant with competition law.
Competitors have been fined eye-watering amounts for breaching competition rules in connection with what was alleged to be a sustainability project. In many cases, the violation was actually plain to see, concerned with price fixing or holding back (rather than promoting) greener outcomes. In any event, businesses can be reluctant to work on solutions with their competitors out of fear of infringing competition law.
Determined to be part of the solution, a number of competition authorities have understood this and begun to take steps to help companies understand where the line is drawn between legitimate and illegal behavior in relation to sustainability goals. The European Commission took a great stride toward enabling sustainability cooperation when it published a new chapter on sustainability agreements in the draft revised Horizontal Guidelines. This explains when a sustainability agreement will be plainly illegal and where a cost/benefit analysis may be needed. The Commission has also declared an open-door policy for competitors seeking guidance on whether a proposed sustainability project would be a problem under competition rules.
But the EU is only one piece in the puzzle. The most effective sustainability projects will have widespread effects meaning that competition laws around the world need to be considered. It is often not clear how competition authorities would approach genuine sustainability agreements involving competitors.
Chief Sustainability Officer, Baker McKenzie
The path to reaching net-zero by 2050 may be fraught, but the reward is considerable for those taking action — while the consequences of inaction are unthinkable. With more companies making sustainability a core component of their business strategy, there is hope for the future. The world is watching: now is the time to turn aspiration into action."
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Supply chain opacity
The funding gap