Private companies are falling behind on net zero, to their peril

With COP27 starting next month, eyes are turning to both public and private businesses’ efforts to meet net zero by 2050 – and private businesses are falling behind, to their potential peril.

According to a major new analysis from Net Zero Tracker, 69% of the 100 largest publicly-listed companies have announced net zero goals, but only 32% of the largest private companies have, despite accounting for almost 5% of the global economy. Of those, the majority of the public companies also have a plan to reach net zero, but only 13% of private companies do. Where private companies do have a plan, they are less likely to include Scope 3 (supply chain) emissions or have interim targets, and are less clear on their planned use of offsets, meaning the plans are overall less robust. The picture is even more stark for carbon-intensive sectors, with some commentators suggesting these businesses are using their private status to deliberately minimise scrutiny.

The lag is perhaps not surprising given some of the pressures driving public companies to do more affect private companies directly significantly less. These include more stringent reporting obligations, tightening climate regulation and increasing shareholder activism relating to climate. But beyond the fact that overlooking being sustainable is likely to undermine the survival of the business longer term, private companies are set to start feeling more and more indirect pressure to do more.

This will come from hardening customer expectations and businesses with robust net zero plans needing to account for their Scope 3 emissions and therefore needing to ask their private partners to do the same. It will also come from legislation, some of which is already en train.

The EU’s draft Corporate Sustainability Due Diligence Directive, for example, will require large in-scope EU and non-EU companies to assess and address their own adverse impacts on the environment and human rights. They will also be required to address them across their value chains – meaning out-of-scope private (and pubic) companies will be affected indirectly, as has happened already with the equivalent French due diligence law. Given the draft Directive’s proposed enforcement mechanism, which includes liability in damages, the incentive to ensure compliance is likely to be strong. Governments who are serious about meeting national net zero targets will also need to make sure all businesses – regardless of legal structure – are part of the transition, so more legislation and policy measures should be expected.

The draft Directive also imposes a requirement on in-scope public and private companies to adopt a Paris-aligned business model and strategy that is compatible with the transition to a sustainable economy. In the UK, the Transition Planning Taskforce, which is developing a “gold standard” for climate transition plans and is expected to publish its draft framework in November, might also seek to address private companies efforts in some way.

Private business themselves may look to do more as a way to differentiate themselves from their competitors and make sure they are well placed to take advantage of the changes the transition will reap. It’s supremely unlikely that many business will go as far as, say, Patagonia, but in the developing area of transition planning, the field is wide open.

Despite being subject to less direct scrutiny, private businesses are not in a vacuum. Those who are slow to adopt solid transition plans will need to consider whether this is in their best long term interests given the risks it can create, and whether they could be using the greater freedom they have over public rivals to lead the transition - rather than be forced to follow.