In addition to reiterating the desire for continued disclosure in line with SASB and TCFD, Fink’s 2021 letter goes a step further by asking companies to disclose a plan for how business models will be compatible with a net zero economy. Specifically, BlackRock calls for companies to disclose how this plan is incorporated into long-term strategies and reviewed by boards of directors. The first challenge for CEOs putting this call into action is determining exactly what “net zero” means.
Fink’s letter adds that a net zero economy is “one where global warming is limited to well below 2 degrees Celsius, consistent with a global aspiration of net zero greenhouse gas emissions by 2050.” But this explanation belies significant nuance and potential for confusion for corporate target-setting. This confusion can be clarified through three questions:
1. What is the “net” in “net zero”?
The “net” in “net zero” is often glossed over, but the implication is that absolute GHG emissions will not reach zero. Rather, gross emissions will be counterbalanced resulting in a net value of zero. “Carbon neutrality” has been defined in different ways in corporate goal setting, but it has most often meant that carbon offset credits are used to avoid a quantity of GHG emissions equivalent to the organization’s remaining emissions in a reporting year.
But this definition is incompatible with the IPCC’s definition of net zero: “anthropogenic emissions of greenhouse gases to the atmosphere are balanced by anthropogenic removals over a specified period.” This is because many carbon offsets are issued based on the emissions avoided as a result of the project funded by the credit purchase, such as a new renewable energy project that reduces the need for higher-carbon generation options. These offsets are an important source of green financing, but the emissions from the purchaser’s activity continue to accumulate in the atmosphere.
To reach “net zero” as defined by the IPCC, avoidance offsets are insufficient and carbon removals — either from within the value chain boundary or purchased as credits — must be included. Standards are emerging, but carbon removal credits would certify that an equivalent quantity of CO2 has been removed from the atmosphere and sequestered for a specific amount of time, either through nature-based solutions such as restorative agriculture, or technology-based solutions such as direct air capture.
2. What emissions are included?
In corporate GHG goal setting, terms such as “net zero”, “carbon neutral” and “climate neutral” have often been used interchangeably. Such variety has given rise to targets with drastically different levels of ambition and compatibility.
For example, “carbon neutral” could be interpreted as only covering carbon dioxide emissions and excluding other GHGs. An even bigger source of variation is the operational boundary of targets. While it seems there is a new corporate “net zero” target announcement each week, some only include Scope 1 and 2 emissions, while others add specific Scope 3 emissions categories (e.g., employee business travel) or, in some cases, full value chain emissions, across Scope 1, 2 and 3 emissions.
3. What path should be taken to “net zero”?
The emphasized timeline for “net zero” targets in Fink’s letter and elsewhere is often by 2050. While this is implied from the science underpinning the Paris Agreement, achieving the stated goal of holding global average temperatures well below 2 degrees Celsius (and the aspirational goal of 1.5 degrees Celsius) depends more on the pathway followed to net zero than the destination itself.
Reaching net zero does not solve the problem, it simply prevents it from getting worse. This is due to the rapidly depleting global carbon budget. If global emissions do not begin to decline 8-10 percent annually in the next few years, the carbon budget for 1.5 degrees Celsius and well below 2 degrees Celsius will be exhausted long before 2050.