Delivering a Net-Zero World—on Time

Companies globally are racing to reduce their carbon emissions. But what does it really take to achieve ambitious green targets? FedEx’s recent pledge to achieve net-zero carbon operations by 2040 highlights the issues that investors should consider.

Striving to meet carbon reduction goals is crucial for our climate. For companies, a credible, sustainable climate action plan is also a sign of a well-managed business and a positive signal to both shareholders and customers.

FedEx Makes a Bold Pledge

FedEx is the world’s largest express transportation company. Few companies in the world are more reliant on fossil fuel to run their business. As a result, their decision to target carbon-neutral operations raises the bar for carbon-intensive companies across sectors.

Of course, a commitment with a 20-year time horizon extends way beyond the tenure of the current management team. That makes a well-considered plan highly important. Investors need to understand the practical obstacles that companies face on their way to net zero. And in-depth research and engagement with management is essential to identify leaders and laggards—not least because disclosure levels vary across companies.

Understanding the Path to Net Zero

Companies can employ various strategies to mitigate, reduce or negate their carbon emissions. At first, buying carbon offsets may be a legitimate approach ahead of transforming operations. That’s because large-scale changes to upgrade business assets can exact a significant up-front carbon cost and hurt earnings.

But over the long term, only real operational changes can bring about positive climate outcomes. Companies that focus on offsets rather than reductions may ultimately create problems, not solutions. Notably, purchasing offsets may simply result in more competition for forested land. There’s a big difference between companies that buy their way toward net zero through carbon offsets and those that make real commitments to decarbonizing their footprint.

FedEx is making an initial US$2 billion investment across three key areas: vehicle electrification, sustainable energy and carbon sequestration. This marks a significant first step towards the longer-term goal. And it extends across the full range of their operations from vehicles to aircraft to facilities.

Identifying Carbon Use

It’s clear to see the role of fossil fuels in a logistics business like FedEx. But other indirect greenhouse gas (GHG) emitters are not so obvious. The GHG Protocol helps identify and account for carbon use across the full spectrum of business activities (termed Scope 1, 2 and 3). Additionally, the World Resources Institute has set out a methodology for assessing avoided emissions (commonly referred to as Scope 4), which has been endorsed by the Climate Disclosure Standards Board (Display, below). Organizations in this category produce technologies focused on emissions savings and prevention. These may also help other businesses to reduce GHG emissions from their activities.

Technology companies, for example, may have minimal Scope 1 (direct) emissions. But they could use huge amounts of electricity generated by fossil fuels, and so have material Scope 2 (indirect) emissions. Business service companies may have minimal Scope 1 and Scope 2 GHG emissions, but still rely on employee business travel for generating revenue—which ranks under Scope 3.

While Scope 1 emitters tend to have the highest volumes, they may also have the most opportunity for future carbon reductions. Scope 3 emitters may have a harder time reducing emissions without disrupting their business. For many businesses and industries, supply chains are the biggest carbon driver. Frequently, those supply chains require the shipment of goods. So logistic providers are a crucial source of companies’ Scope 3 emissions. FedEx has acknowledged this by pledging to work with customers to offer end-to-end sustainability for their supply chains through carbon-neutral shipping offerings and sustainable packaging solutions.

Are Net-Zero Goals Good for Business?

Limiting global warming is critical. But does a commitment to net zero enhance the bottom line?

Effective management of emissions is a dual signal, in our view. Firstly, it indicates that the management team is focused on efficient operations, which could lead to lower operating costs. In FedEx’s case, their latest plan builds on a successful track record of improving fuel efficiency. Since 2012, the FedEx Fuel Sense and Aircraft Modernization programs have saved a combined 1.43 billion gallons of jet fuel: good for the environment and good for FedEx’s bottom line. FedEx’s profitability is driven by optimized routing which also lends itself to lower carbon emissions.

A commitment to net zero could also result in higher marginal revenues as it may represent a competitive advantage. Climate-conscious customers might prioritize FedEx in their procurement processes if they knew about FedEx’s carbon-neutral shipping offering and sustainable packaging solutions.

Finally, a sound strategy around a net-zero goal denotes good governance and forward-looking strategic thinking.

The Path to Net Zero Will Evolve

Setting goals for beyond 2030 may seem premature. But in fact, companies must start now. For one, the useful lives of assets that contribute to carbon emissions often extend far into the future.

Take FedEx’s vehicle fleet. The company has set near-term purchasing goals knowing that conversion of the entire fleet will take years. So FedEx plans that 50% of purchased vehicles will be electric by 2025, with 100% by 2030. That paves the way for all its delivery fleet to be zero-emission electric vehicles by 2040.

It’s also important for companies to develop the “muscle memory” to operate in a theoretical net-zero world. Achieving net zero requires technologies that don’t exist today. By setting ambitious climate targets, companies effectively agree to invest in those new technologies.

FedEx, for example, has pledged US$100 million toward the Yale Center for Natural Carbon Capture to support applied interdisciplinary research into carbon sequestration solutions. Center researchers will develop methods that build on natural carbon storage systems, including biological ecosystems and the geological carbon cycle. Their mission is to improve, where possible, how quickly carbon can be absorbed, how much can be contained, and how long it can be stored. Their initial focus will be to help offset GHG emissions equivalent to current airline output, but ultimately the aim is to widen the research scope for maximum global impact.

We see collaboration between a wide range of stakeholders, including scientists and academics, as a vital step to accelerate climate strategies.

Of course, technology breakthroughs are unpredictable. And while they may ultimately have huge beneficial impacts, in the meantime it’s vital for society and corporates to take all prudent steps possible to control carbon emissions. In every sector, investors need to understand the industry-specific business benefits of a decarbonizing plan, as well as the risks of inaction. FedEx’s ambitious plan provides investors with key pointers for identifying companies that have solid plans to enhance their businesses by combating climate change.