Transition to Net Zero: The Role of Technology in Organizations’ ESG Goals

According to a UN report by a high‑level expert group on net zero emissions by non-state entities, solving the climate crisis is a responsibility that is not up to countries alone. The UN report notes that non-state entities (industry, financial institutions, cities, and regions) play a critical role in the transition to net zero CO2 emissions by 2050. These players will either scale the progress toward ensuring a sustainable planet or strongly increase the likelihood of failure, it said.

To achieve net zero goals, countries and organizations have set varying targets for reducing emissions by 2030. However, according to a study by the NewClimate Institute, which assesses 24 major multinational companies, the 2030 targets of many companies address only a limited scope of emission sources. For 22 companies, the targets announced for 2030 will only result in a 15% reduction in median absolute emissions (21% under the most optimistic scenario) between 2019 and 2030. This is well short of the need to cut global greenhouse gas (GHG) emissions by 43% and carbon dioxide (CO2) emissions by 48% between 2019 and 2030, to limit the global rise in temperatures to 1.5 degrees Celsius above pre-industrial-era levels, the study adds.

When it comes to net-zero transition, most organizations think it is about:

• Building capability around measuring emissions and benchmarking the data across Scope 1, Scope 2, and Scope 3 emission norms for sustainability reporting
• Formulating a net zero transition strategy, setting achievable targets to reduce emissions, and using renewable energy instead of fossil fuels

However, net zero is not just about decarbonization and renewable energy. Companies must address challenges on multiple fronts. Moreover, investors have also started calculating the cost of not working toward net zero targets while evaluating enterprises.

Net Zero Transition: What Next, After Taking the Pledge?

Organizations that have laid the carbon accounting foundation will have to look for long-term value creation. Top priorities would be low carbon solutions, energy efficiency, engaging with suppliers, and using the performance and risk indicators to take timely actions and predict consumption.

Some of the commonly asked questions by the CXOs and investors are:

• How would organizations embark on the journey to become net zero?
• How do we scale the systems built when these requirements did not exist?
• What is the foundation needed?
• How to deal with incomplete and inaccurate data?
• How to deal with global regulations and taxonomy frameworks?
• How to influence suppliers and vendors to align with net zero goals?
• How to build resilience to the increasing physical risks arising from climate change?

ESG and Net Zero Challenges That Enterprises Face

• A well-defined net zero standard came into existence only in 2021. Hence, people still confuse the terms ‘carbon neutral’ and ‘net zero’.
• Net zero pathways need both low-carbon processes and low-carbon products.
• Every activity that consumes a non-renewable material or fuel should be tracked, ideally at each action level, process, or item produced.
• Scope 3 carbon footprint is a huge challenge.
• Scope 3 emissions are significant (comprising 65–95% of most companies’ carbon footprint) and indirect (owing to activities outside the company’s direct control). This can make it complicated to estimate and track them, let alone report them, according to PWC.
• Only 1/3rd of the data available to investors is helpful for their evaluation.

Net Zero Transition Plans: New Capabilities That Enterprises Need

Organizations need to leverage technology to build new capabilities in multiple areas simultaneously. Here are some key areas where it is a must:

New Capabilities to Assess the Current State and Set Targets

Current systems cannot integrate all the data points needed for Scope 1, Scope 2, and Scope 3 emissions. Hence, companies must build capabilities that address this issue to translate pledges into pathways.

A significant challenge for enterprises is multiple and fast-evolving regulations and applying what is relevant to the business. While setting targets, companies must consider global, industry-specific, and region-specific taxonomies and standards to define goals and targets acceptable to external stakeholders. Companies also need systems that incorporate global frameworks in their daily operations at scale.

New Capabilities to Communicate Net Zero Actions

What enterprises disclose as part of their non-financial reports is being increasingly scrutinized by regulators, investors, clients, employees, and competitors. Hence, organizations must be transparent and communicate their ESG performance, climate actions, policies, and roadmaps in a way that considers multiple stakeholders’ requirements. This will require an overhaul of reporting capabilities. While building these capabilities, avoiding greenwashing and green hushing should also be a primary consideration. Stakeholders are increasingly seeking more granular information for their analysis and evaluation. Communicating this information in the right way can create value for enterprises and give them a competitive advantage.

New Capabilities to Collaborate and Create Value

The climate resilience of suppliers has a direct bearing on the organization’s business. We are increasingly seeing instances where climate change in one region that impacts vendors has an effect thousands of miles away owing to constrained supplies and distribution capacity. This can increase production costs and losses if climate resiliency is not built.

Many companies prefer to leave out Scope 3 from their net zero pledges. However, conforming to Science Based Targets initiative (SBTi) targets will not be possible without taking Scope 3 into account. Hence, organizations must ensure that they collaborate with their suppliers and make them a part of their journey. If the vendors are ahead, the organization should strive to incorporate their best practices into its value chain.

New Capabilities to Determine Business Risks

ESG and climate risks should be viewed as multiplier risks, which will amplify existing business risks like operational risks, transition risks, and market risks. Consequently, dealing with climate risks in isolation will not be effective. It must be integrated within the enterprise’s risk management framework and with all the business units. Organizations should accurately determine the financial impact on business units and prioritize the risks accordingly.

New Capabilities on Emerging Technologies

Capturing data points from internal and external sources and automating the same can be a tedious and error-prone process. Enterprises will need new architectures on the cloud and data management capabilities aided by digital technologies to handle granular data and maintain the quality and reliability of the information.

Net Zero Energy Transition: Opportunities for Enterprises

In the process of conforming to emission targets and improving climate resilience, businesses can unlock significant opportunities to build a competitive advantage among their peers. Some of the opportunities include:

• Improving internal data management, governance, and reporting capabilities by leveraging technology and solutions
• Saving costs through energy reductions, waste management, internal carbon pricing measures, innovations, and sustainability by design principles
• Building trust through shared value creation and measures that positively impact the society and community
• Strengthening investor confidence owing to improved accountability and transparency
• Enhancing client engagement by improving performance and offering differentiated sustainable services and products
• Availing of tax incentives and reward programs
• Becoming a preferred vendor by improving ratings and performance on ESG indicators
• Attracting and retaining employees by demonstrating leadership in adopting sustainable growth
• Building long-term resilience against climate change

Key Steps to Achieve Net Zero Transition

Improve Data Integration Capabilities

• To achieve this, organizations need to ensure accelerated auto-capture of all data at a granular level for measuring the organization’s carbon footprint for day-to-day decisions. This can be done using IoT, sensors, enterprise systems, excel-based templates, and semi-manual processes, with a focus on data quality and traceability.

Align ESG Goals and Net Zero Targets

• Enterprises must set goals and targets aligned to regulatory and market requirements by incorporating net zero frameworks, UN Sustainable Development Goals (SDGs), decarbonization targets based on SBTi, materiality assessments, as well as industry-specific KPIs and benchmarks.
• Companies must integrate the relevant sections from all global and local regulations, taxonomies, and industry standards, in their policies, goals, and targets. This ensures multiple stakeholders get standard, comparable, and complete information.

Obtain a Complete View of the Current State

• Enterprises should incorporate platforms enabling them to analyze the measured carbon footprint data (Scope 1, Scope 2, and Scope 3), energy and water consumption, and waste management from every unit, sub-unit, region, with access to all supporting documents and references.

Implement Supply Chain Management and Scope 3

• Organizations can ensure cost optimization by capturing data from upstream and downstream suppliers from multiple data sources and implementing supply chain automation and Scope 3 emissions reduction.

Ensure Operational Efficiencies

• Enterprises should develop solutions for tracking and optimizing energy consumption, forecasting demand and supply, and transitioning to low-carbon, low-energy solutions.

Integrate Climate Risk Frameworks into the Business

• By embedding climate risks into the enterprise’s frameworks and business units, organizations can determine operational costs and revenue impact on business lines with scenario analysis.

Provide ESG Reports and Disclosures

• Enterprises must report their net zero data based on Global Reporting Initiative (GRI), CDP, Task Force on Climate-related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB), and US Securities and Exchange Commission (SEC) climate disclosure guidelines to ensure that the information is available in a standard, comparable format.

Implement Enterprise-wide Views on a Single Platform

• By bringing all the relevant information on a single platform, enterprises can get complete overviews, which can help in effective decision-making and timely action on climate change goals.