INTRODUCTION: HOW TO USE THIS BOOK

The primary purpose of Net Zero Business Models is to prepare companies, their executive teams, and their boards of directors to compete successfully and win in the net zero emissions economy. Net Zero Business Models outlines a process to conform a company's business model to a net zero emissions economy and be commercially successful.

In the context of the net zero economy and this book, a company that is commercially successful enjoys positive revenue growth, funds operations and capital expenditures internally, and produces an economic profit greater than the cost of capital over the timeframe needed to attain net zero emissions. (See Exhibit I.1.) Net Zero Business Models provides a framework for companies to use to develop their net zero transition plans to be among the winners in the transition from an economy based on fossil fuels to a zero-emission one, which we call the "Great Transformation."

Although we wrote Net Zero Business Models primarily for officers and directors of public companies, the book is useful for asset owners, asset managers, and other institutional investors who need to discern whether their portfolio companies have credible and bona fide net zero transition plans or are just greenwashing.

Net Zero Business Models provides asset owners, asset managers, and other institutional investors with useful frameworks to analyze how well their portfolio companies are progressing toward net zero and managing the related risks and opportunities so they can invest in the winners in the race to net zero. Net Zero Business Models will also assist commercial banks and other lenders in the risk and credit modeling of their lending and credit portfolios.

Net Zero Business Models is useful for regulators and policymakers trying to make sense of the conversation about net zero. The frameworks provided in the book can inform them about how to enact smart regulations, policies, and net zero disclosure standards to accelerate the transformation first to a net zero emissions economy and then to a regenerative economy.

EXHIBIT I.1 Winning business models: commercial and net zero success

Net Zero Business Models is useful for entrepreneurs and venture capitalists starting new companies in the net zero economy. New companies will have a competitive advantage in the net zero economy if they incorporate their companies with net zero, and circular, business models from the beginning. Net Zero Business Models provides entrepreneurs and venture capital investors with frameworks to design companies for success in the net zero economy and beyond.

Net Zero Business Models is useful for management consultants, accountants, lawyers, and other professional advisors counseling corporations about how to transition their business models to a net zero emissions economy. Finally, the book is useful for academics teaching courses about sustainable business in business schools and universities.

The book is organized into five parts. Part I sets the context for net zero business models. Part II lays the technical foundation for the four strategic pathways to achieve net zero described in Part III, which we call "Pathways." Part III introduces the heroes of the book, the four net zero Pathways. Part IV suggests how to put the four Pathways into action. Part V suggests how the creation of a net zero economy may be part of a larger transformation to stakeholder capitalism and a more just, inclusive, and regenerative civilization that takes care of the planet and the well-being of its citizens.

PART I: SETTING THE CONTEXT FOR NET ZERO

Part I sets the overall context of the Great Transformation and the business case for having net zero business models that achieve commercial success.

Chapter 1 identifies the key transformational forces driving the Great Transformation. These key forces include the changing expectations and demands of customers, institutional investors, and other stakeholders on the one hand and materially changing carbon policies and prices, legislation, and regulations on the other. These forces put business models under tremendous transformational pressure. This pressure will only intensify as the decade progresses to the critical 2030 milestone of reducing greenhouse gas (GHG) emissions by 50% and the effects of climate change continue to worsen.

Chapter 1 also introduces some of the key terminology relating to net zero and discusses the business opportunities inherent in the transition to a net zero economy.

PART II: THE TECHNICAL FOUNDATIONS OF NET ZERO BUSINESS MODELS

Part II provides the technical foundation to help companies critically assess business models in the context of the Great Transformation. The global conversation about GHGs and the transition to a global net zero economy is largely focused on the technical subject matter of Part II.

The material in Part II will be familiar to companies that already have inventoried their GHG emissions, determined their carbon shorts, and set near-term and long-term science-based emissions-reduction targets. Executives from these companies can use Part II as a reference and jump ahead to Part III to explore the Pathways.

The material in Part II will be particularly useful for the 71% of companies that have not inventoried their GHGs completely or have conducted only partial inventories of them.

Chapter 2 introduces the Greenhouse Gas Protocol and the GHG Corporate Accounting and Reporting Standard (GHG Protocol) and Scope 1, 2, and 3 emissions.1 Scope 1 and 2 emissions generally are easier for companies to quantify because they fall under their immediate control. Scope 3 emissions are more challenging to quantify because they are emitted in companies' value chains and are not under a company's immediate control. Scope 3 emissions have 15 categories and require companies to collaborate with their value chains to quantify them.

It is important to acknowledge that the GHG Protocol is far from perfect and has some detractors, but it has emerged as the global standard for GHG corporate accounting, performance measurement, and reporting.

Chapter 2 is the most technical chapter of the book, but its content is critical to understanding greenhouse gas emissions. This understanding will provide a base of foundational knowledge that allows companies to inventory their emissions, develop targets to reduce them, and choose a Pathway to achieve net zero. To win in the net zero economy, a company's greenhouse gas inventory must include all Scope 1, 2 and 3 emissions.

Chapter 3 will help companies determine their carbon intensity and assess their vulnerability to a carbon shock in the form of a carbon tax or fee. Some jurisdictions, such as Canada, have already adopted an escalating carbon tax on CO2 emissions. Other jurisdictions such as California and the European Union have adopted so called "cap-and-trade" regimes, which set yearly allowances on emissions that effectively create a carbon price through trading. Understanding the carbon intensity of a company's current business model and exposure to potential carbon shocks in the various jurisdiction in which it operates helps it set strategy and conduct effective scenario planning.

Companies need to understand not only their absolute GHG emissions profile but also the potential business risks that GHG emissions pose to future revenues and profits. Understanding a company's carbon intensity using the key performance indicator of metric tons of CO2 equivalent (CO2e) GHGs per $1 million of revenue provides strategic insight to compare emissions performance across products and business units and with its competitors and industry sector. A company's business model, when stress-tested for a carbon fee of $75 or $100 per metric ton, may simply no longer be viable economically in its current design and at its current level of emissions.

Chapter 4 introduces the Science Based Targets Initiative (SBTi) and science-based emissions-reduction targets. This chapter will help companies set near-term and long-term emissions-reduction targets, which may be verified by the SBTi. These targets are complemented by their eco-efficiency targets discussed in Chapter 5 and their other emissions reduction-related goals. For example, an automobile manufacturer may set targets to have 5 electric vehicle models by 2025, 20 models by 2030, and an entirely electric vehicle product line by 2035.

It is important to acknowledge that the SBTi Corporate Net Zero Standard is far from perfect and has many detractors, but it is emerging as the global standard in setting science-based emissions-reduction targets.2

PART III: THE FOUR PATHWAYS TO NET ZERO

Part III presents the four strategic Pathways to conform a company's business model to a net zero economy and takes the global conversation beyond GHGs into strategies to design net zero business models. The Pathways provide a framework to analyze a company's current business model to identify the gap between its current state and the desired future net zero business model design. This analysis determines the magnitude of...