Rethinking Corporate Net Zero - with Robert Höglund

Welcome to the CDR Policy Scoop, where we unpack carbon removal policy in 30 minutes or less. Mein Name ist Sebastian Manhart. Und ich bin Evet Amme. Wir hatten diese Gespräche. On Tuesday, the 3rd of February. Our guest today was Robert Hirglot, the manager of the Milky Wire Climate Transformation Fund. Founder of CDI FYI. We discussed what is behind the conditional net zero target concept that Robert has put forward and whether this extra layer really helps to simplify how corporates.

approach their net zero targets. And ultimately, what would its implementation mean for carbon Enjoy the show Oh, somebody's gonna speak. Hi everyone. Good to see you, Robert. Good to see you too. Yeah, good to see both of you. Welcome back, Robert. You're our f most frequent guest, but there are always so many different topics to talk about with you. Yeah.

I'm happy. So now today we're gonna talk about some of the latest thinking you've been doing on net zero targets, corporate net zero targets. Do you maybe should we start by just What prompted this? Like why did you even sit down and think, okay, we need potentially a different way to go about this? I can't recall exactly why, but like six months ago I I wrote this LinkedIn post saying Nessero is not for hard to abate companies.

And then I threw in that, well, but maybe they can set conditional net zero targets for even if they're hard to bait. And then that stuck with me. thinking about w you know, if that concept could be developed more. And then for our Milky Wire Climate Transformation Fund, we did kind of a more five year retrospect, really going back to what did we do right? What were the questions we tried to answer? What are the remaining questions?

And one of the learnings from that was really that there's a need for a new narrative. where basically the net zero decade is is over, maybe starting after Paris and then ending with the election of Donald Trump again. And the kind of narrative that was prevalent that companies just set these targets and they work together to reach them is in a need of an update and we need a bit different narrative of what we actually can expect from companies.

and sort of what is what is good and how does all this fit together. And I think it's about high time for that. And I see other voices also kind of starting to to grapple at this and and and figuring out how to to present it. So that's why I wrote this first article, a new lens on net zero, introducing conditional targets, and and more articles are

Going to follow, kind of more operationalizing this. But importantly, it this is kind of uh an overlay on existing standards. It's not proposing like a whole new standard or challenging SPTI or anything. It's more that companies have their their targets, but how should we actually view them? And what are the most important things that companies should be doing? And how does that differ between different types of sectors and business models?

But what I hear and it came out recently uh at our school with Alexia is that the current landscape is already so incredibly complex. So adding another layer on top of it looks to be increasing that complexity. So what's the plan? Like how how will this help? Well the purpose is to simplify the complexity really, not to add more more complexity, by explaining what what is actually going on here and being concrete, what we're talking about.

is that some emissions are within corporate control, pretty clearly. Whereas others are outside of their direct control, if it's like their ability to uh to control it or if there is their financial ability to do something about it.

And we should treat these two different parts of of companies' inventories differently and have different expectations. So I think by by putting this kind of layer on top of what we have what with corporate targets, we it can be clearer what companies are actually gonna do and they can be having clearer expectations also and not have the kind of false sense of it is being under control because we have ten thousand companies with targets and thousands of companies with net zero targets.

And also push more for the type of systemic change that that is actually needed that is not directly within corporate control. One thing that stood out to me when you talk about operational net zero is and you actually posted about this today as well, about the financial ability of a company to actually decarbonize its scope one and two emissions, right?

And today you posted how the green premium varies just massively depending on the industry. And some of those numbers were were really high, like north of a thousand dollars, right? Yeah. And so To me what I struggle with a little bit with your concept is It doesn't seem black or white, right? Like there seems to be such a spectrum both on the operational net zero, but also the conditional net zero.

And that's where the complexity I I fear comes in because we can't define exactly where to draw the line, right? W what should companies do versus where what is not reasonable. So how do you approach, especially thinking maybe about the financial ability? Where are we drawing the line on that? Yep. No, it's grayscale all the way down. Like there's no clear cut. But I think it's better to be honest about that than to pretend that that kind of clear cut exists.

Like describing it doesn't change reality. The reality is is there anyway. Like you can have a net zero target and not talk about part of it being conditional. but then you're just pretending it's not there. I think by by kind of shining a light on it, it makes it clear to everyone what what we can expect. So just to take some examples. Like for some companies

They have relative big control of their supply chain and they have financial muscles. Like IKEA is a good example. They are vertically integrated, they design and manufacture their own products. and they can choose to switch uh materials to to quite a large degree. They can mandate what their suppliers do. And they can probably reach quite a large share of their emission reductions with actions that they take.

and the cost of of of doing so may not be like huge compared to the profits. I don't have like exact numbers for them, but I think it it it's a good example. Whereas if you talk about let's say um a cement company like uh that has multiple cement facilities uh producing it.

They have the the agency they like they could install CCS. No one is stopping them. They could capture the CO2. They own the facility. But the financial ability is not there if we don't have policy that sort of sets a level playing field.

the cost of installation would raise their prices quite a lot and There's maybe some demand for for green cement so they could do it on maybe one facility or so, but reaching net zero across all other facilities across the world would really require that you have policies in place in all those different jurisdictions. at least the majority of their competitors to to do the same. So even if you sort of have

control, you may still be it might may still be financially unavailable. And exactly what is like financially unavailable, that is gonna be like a subjective thing. Like on the one end, you could say that, well, if it takes more than a company's entire profit, across like an average over a number of years, then it's probably pretty clearly not viable.

But should it take ten percent of profit, one percent of profit? That's subjective. And that's not something that we can hide from anyway. So You've been writing about it now twice. You mentioned that there's more in the pipeline. So it sounds like you're not going about it as if it was another theoretical exercise. You actually want to build it into something that could be used in practice.

What has the first feedback been from from different corporates? Do they feel like this is an answer to some of the questions they have? What what are their key concerns when it comes to implementing something like this? No, that's a great question. I had a lot of high quality feedback. I would say that it's overwhelmingly positive where people agree, especially with the diagnosis.

I mean people point out what Sebastian just said, like how do we do we know, how can we make that kind of distinction? Is is that not gonna be very difficult? And that's also what the next paper will be about, like operationalizing conditional targets, like how could you actually look at it? Agency, if you control emissions, is one axis and another axis is economic feasibility. And you're gonna be kind of on that pathway.

Another concern that some have is that it can be used as a smokescreen. Like companies can just say that, well, most of our emissions are are conditional, so we don't really need to care about it. But I think a really important answer to that is that if you declare uh emissions conditional. Your responsibility to try to enact those large scale systemic changes that are needed.

for your targets to be able to be fulfilled actually increases. And that means lobbying for the type of change that your target needs. funding that type of organizations that are working towards it, like NGOs and so on, funding R and D efforts, funding the type of of climate interventions that that are needed to for your target ultimately to to be fulfilled, even if you can't account for it.

So I think a big problem with today's net zero paradigm is that it sort maybe inadvertently pushes companies to only do things they can account for, but those are not necessarily the most important things that should be done.

So that that's really a key thing that I I want to push for. Yeah, so so these types of of things are what comes up in in the discussions uh around the concept. On that conditional net zero though, and on this kind of idea of advocating for specific policy changes, for example, and funding them. It just sounds very fuzzy, right? It sounds like something that companies could easily do very, very little and still get away with it.

And historically like that doesn't sound like something that you could make a case to the UCFO, right? Like whereas with net zero it's like, Okay, here's an equation. This is what we need, this is how much budget I need. So how do you see that working out for this conditional net zero?

for companies to actually put skin in the game on it. Yeah, I mean it I'm not proposing an oversight uh committee that's gonna tell say which companies are doing uh what. It's more a way for for companies and it could be built into standards. So the S B T I could have something like that. ISO I think we'll have probably more o of those kind of things when that comes out. But I think the alternative

just to pretend that it it it's not there and just wait for companies to fail their net zero targets, which most of them will because it's not within their control. It's not better. So what I'm proposing is not perfect, but I think it Better than the alternative. And I mean we're coming back to this uh like one thing is the conditionality of this whole but then

the control, right? Where the companies have control and where they don't, which basically defines, you know, what should be conditional, what and what shouldn't So you've been d doing plenty of thinking around this and I'm just wondering if you already have some examples, like as you mentioned, you know, it's it's uh it's a grayscale when it comes to control all the way from one end to the other.

Have you seen that there are areas where companies think that they have more control than they actually have? And are there areas where they are underestimating how much control they actually have in practice? Yeah, I think one of the kind of thoughts that would pop up in into your head when you think about this is that while all it's matching to scope.

So well scope one and two, especially scope one is in your control, and then scope three is outside your control. But I don't think this neatly matches onto good greenhouse gas accounting scope. Where for some companies scope one is definitely something that they can get all the way down to zero. But as in the example with the cement company, it may not be economically feasible, even though it's under scope one.

And in in scope three, a lot of the things are outside of the the agency of companies because they're so far down the line. the like if you're talking the fifth order, fourth order, tenth order supplier, like your supplier, supplier, supplier, supplier, then you don't know who that is. And there's no way for you directly to to control it. So in in some examples it's relatively

VC. In others I think it's pretty clear that you don't have control. Especially are if you're using spend based accounting and you don't really know what emissions are, you probably don't have that much control over it as a kind of rule rule of thumb.

And on this vertical you mentioned IKEA as an example earlier, right? I'm just wondering is there a case to be made that the companies that have Done a better job at integrating vertically and understanding also their emissions more are almost going to be punished in this framework, whereas the ones that have Kept at arm's length, their suppliers are gonna get away with it. I would say that if your business model is to be more virtually integrated, like designing your own products.

Then you do have more control, and yeah, you you have then you could say a great responsibility to do something about it. If you are a company that outsources everything. Let's say a food store, for example. Like they have almost zero control of their scope free emissions because it's like thousands of different products from thousands of brands across the world that sell to m a lot of different food stores. So

Of course they they can do some things on scope free, they can change uh what people buy a little bit with how they front products and so on. So it's not like entirely outside of of their control. But yeah, for them it it is much harder. So um it's an interesting framing that you you you you f you phrase here that certain business because of how they're they're organized would be punished in the way that they have more responsibility to to do things.

But uh I would have to think more about it, but it may just be inherent to reality, basically. And I'm thinking more thinking ahead, like if I'm a business and I'm still I still have a choice of which direction to go. and let's say the easier choice that costs me less and I can still do net zero is one where I keep suppliers at arm's length, then it might create kind of perverse incentives in a certain way.

That's kind of what I'm thinking. No, sure. Like one a net zero target is not a net zero target. For s some companies, their net zero targets are much more believable and achievable as well. I think now it's completely hidden because like My local food store has a net zero target and IKEA. And for consumers it looks like, well, they're both a net zero target. Whereas one of them are absolutely not going to reach it.

And the other one is doing a lot. So I don't think that this framework actually makes this worse. Mm. It doesn't make it worse. So hopefully it the idea is that it makes it better, right? Yeah. Yeah. Now the clarity increases. I think the unfairness may may remain to some extent. But it forces companies to st at least spell out. What are the things to do? That would need to happen for my net zero target to be to be achievable. And then also to say, what am I doing then to help achieve this?

I'm wondering as you're working a lot on removals and you're working a lot on different uh corporate net zero approaches Is there a peculiar impact this approach would have on helping to scale removals or you don't really see that big of a difference? It affects removals for sure in two different ways, I would say, that maybe contradict each other a little bit. Because on the one hand, it points out that for most companies, if they actually want to reach net zero

Not just say that a lot of it is conditional and it's outside of our if they want to make the the target actually happen, they're probably gonna have to use a lot more removals than ten percent. It's relatively few companies that I think removals that would only be ten percent because it shows how

how large share of your emissions are outside of your direct control. And for those that don't have financial ability, yeah, they probably won't have financial ability to buy loads of removals either. But for the companies that do have, like the financial muscles, they would see that well, it's a pretty big chunk that we really can't control. So why don't we just buy carbon removal and make a net zero claim?

And here operational material comes in, which is an a practice that we see companies like Schneider Electric, Siemens, Searish uh Insurance and so on that buy carbon mobile to meet the twenty thirty target for their scope one and two and often business travel as well. Which is kind of a micro net zero, so to say. So this is included in this uh lens on net zero that for the emissions that you do control, you could have operational net zero for part of them. And that's uh I think that's where most

near term demand from CDR actually is coming right now and and will continue to come. But it needs a bit more validation for like SPTI and ISO to really mainstream it, I think. But then the thing that would be maybe negative for CDR is if People start viewing their net zero targets, uh something they don't need to achieve anyway, because it's conditional and then

They may not feel the urge to buy CDR either. But my answer to that is thus those companies probably wouldn't have bought CDR in any case. But that is a risk at least for CDR. I still get stuck on that financial ability point. Because it does I I know you you said earlier we can't really put a number on it, but it it feels like

There needs to be some sort of guidance on what that financial ability means because otherwise companies will always be able to hide behind it. Right. Yeah. So I don't know if it's a percentage of profit, whatever it is. We can set a number. It needs to be something. Yeah, we can set a number.

We can set a number, but it will be arbitrary. Of course. Like there's no way around it. We can agree on a reasonable number, but there's no physical reality behind what is the m it's too much to spend all of your profits and go bankrupt. That's like the the stuff. Right. But then it's just downwards from there, basically. What do you think is reasonable?

What do you think? Uh you've done a lot of work on kind of profitability of companies and or and carbon removals, like what is reasonable and feasible? I think for public companies It's harder because then they have the shareholders and it's the fiduciary duties and so on. It may be hard for them to spend. twenty, thirty percent of their profits on CDR. I think the as things are organized now, the the CEO that proposes that, you know, the the the shareholders will remove them.

Whereas for family owned companies or private companies, they could do a lot more. Should we then expect a private company, just plus because they can to do more than the public company? One benchmark of course is like how much does company spend on philanthropy right now? And uh it's hard to get a great number, but there's estimates of like one percent of profits across at least US companies going to philanthropy. One percent seems very reasonable.

But again, it's gonna be it's gonna be arbitrary. And some companies are just gonna do they're just gonna try to do the right thing and and actually make sure they don't have an impact on the warming of the world, like Microsoft is actually doing. and some companies are just going to do what they're forced to, either by a voluntary standard saying that it's minimum 1%, or by compliance and lawson rules.

So now that we have read some of your thinking and we're hearing here as well, and we know that there's more coming. Can you give a bit of a teaser? And I assume that's you don't only look at like what kind of guidance to put forward but also what kind of governance there should be around it. I'm really curious to understand what you have in mind here. Yeah. Well, the governance I think is there's there's one thing of describing the problem and giving tools

for companies and and others to make their own efforts clearer. It's more having a narrative where things make sense and also like a logical reason to explain like why are we doing this? Why are we funding these things that we can't account for in our in our own accounting? So that's That's like a tool that there's no need for governance for for that to happen. I think governance would happen on a probably on a standard level. were like the SBTI and and and ISO.

I'm not suggesting like a new governance institution or that Milky Wire should sit and and cannot say what like you're you as a company are are clearly doing the wrong thing or something like that. I I think it would live in

in in those existing institutions. And they don't need to change the whole thing. It's more like things that could be clarified and tweaked where where these type of things exist. Like SPTI already actually asks companies to list dependencies, but They don't d go the whole way, let's say, to to do this. Maybe one level up.

You said also in your your piece that, you know, twenty nine percent of companies have a net zero target today and that's a that's a good thing, right? Yeah. And I guess glass half full or half empty, but obviously it's an incredibly small number if we think about the overall job that needs to get done. So I was just wondering, maybe tied into the concept that you're proposing here, but do you think this will help Drive. More companies to sign up to this?

Or do you actually think it could do the opposite? I think it can drive more companies because like if I had a hard to bait company with today's rules, I would never set the net zero target. Yeah. Because like there's no way I can reach it. Right? Why would I promise something I have no control over? This at least gives you a way it's saying like, Well, we want to reach net zero and this is what we can do.

These are the things that needs to change outside our company for this target to be achievable, but phrase it in a way that's clear that You can't sue me because I don't reach it, right? This was clear from the beginning. I didn't promise myself to do all of this. So I would expect more companies, especially heart read companies, to dare to set net zero if this was clearer.

But I mean, you're selling this concept as something like that would be an another layer on something that already exists, right? Like the the SPTI target. But what about companies who are looking at well, you know, the SPTI approach looks very cumbersome. Why don't I just go for this? Just a conditional targets were applicable and that's it.

Yeah, I mean they can. No one is forcing companies to to be part of standards. Like the reason they do is they because they want extra credibility behind their targets and their claims to show stakeholders, often their suppliers or investors or so on are are urging them to to set SPTI targets. So

I think if they if they want that extra validity from someone else, the the need to have a standard. But it could be ISO as well. I'm really looking forward to the new ISO standard. I think much looks like it's gonna be even more feasible or more feasible I should say. So

If you like that, you need a standard. If you want to set your own target, the company's already doing it. Microsoft don't have a validation. Their net zero target is not SPTI validated, for example. They're just doing what they want. I think the thing to watch out for is is claims then. Wha w if a c company claims that we're already at net zero and we have carbon neutral products or so on, that's where

Where there's a need to be for more scrutiny. Do we because for me at the at the end of the day, obviously we've got the buyers that already exist and they're doing it for the reasons that are well known. But when I talk about kind of to the next wave of buyers or the ones on the fringes, net zero is not really why they're considering it, right? They're considering buying because it helps them with something that has nothing to do with carbon removal with net zero. It's because it helps them

ensure that they keep getting cochra from West Africa. It helps ensure that they don't have to pay absurd insurance premiums in the future. They can continue as a business, right? It's other things. And so um what do you think can actually make a dent in the next five years in particular? Do you think that a renewed net zero framing will drive the next wave of buyers or should we actually focus our efforts

on other things that might have nothing to do with net zero. Right. So like this is the whole idea with this is not for CDR in particular, but CDR is a part of it. So I think what will drive most buyers right now is near term target. And Even though, like, I really tried for the last five years to convince companies to, well, you should fund things you don't have to account for, and so on. Like the biggest appetite.

is when there's a use case. I talked to a really big company yesterday and I said, well like have you changed your mind on CDR? And they said No, because there's no use case. And they had an SPTI target. So the but we do see plenty of companies that are using them anyway.

Even no one is is validating them and they're using them to reach twenty thirty targets or they're planning to use them to reach these twenty thirty targets. So I think that's where most near term demand will come from. And I do think we have a good chance of getting more official validation for something like that.

Scope one and two in business travel is small. Like it's not a huge like we're not talking about hundreds of millions of tons, but we're talking about millions of tons, maybe tens of millions of tons. Yeah. So it it is a huge demand signal. So that's where I put Most of my hope, like uh the vast majority of my hope for for growth in durable CDR in the next five years, it is near term targets. So operational net short term operational net zero.

Kind of scope one and two plus some business travel. Basically, yeah. Whatever you call it. Yeah. Yeah, whatever you call it, but those kind of things, yes. So what's next now immediately? What's in the plans? Are you going to continue developing this approach yourself with Milky Wire? Is there gonna be some kind of process where other people feed into it? Like where would you like it to grow?

Uh so I have discussions with some possible co authors of the next paper who are kind of of institutions and academics and and so on that are writing about the space already that are that are interested, so it's on me to send them kind of a first draft of what I'm thinking and then we'll see if it's like gonna be a co publication across several institutions. My working name is more like conditional targets in practice describing this.

agency versus economic feasibility and then hopefully actually trying to put some numbers on different sectors. What could it look like? Like with wide brackets. But like what are we talking about here? Who could this apply to and how wha what are the the big changes? and basically then take it from there, with giving more details. I wanted to put out the broader broader lens first and then go into the more kind of nitty gritty details like

If we really did this, what would it look like? What are the things that companies would need to do and how would their reporting change and and so on? So that's what I've what I'm exploring right now. Excellent. Looking forward to it. Yeah. Well keep us posted. For sure. I'm sure we're gonna have you back on. Yeah. And yeah, thank you very much for joining us today, Robert. Well thank you for having me on. That's great. Thanks Robert. Great questions.