Solving the Decarbonization Puzzle

It is companies who are responsible for a majority of global greenhouse gas emissions; it is therefore companies who will play a crucial role in achieving the Paris Agreement goal of limiting global warming to 1.5°C.¹ The business community has to do its part to meet this goal, but it can also profit from opportunities arising from decarbonization. However, due to the complexity of emissions targets, a lack of transparency regarding emissions data, as well as the cost pressures placed on companies, businesses often regard decarbonization as a burden.

A complex target landscape and obscure economics due to a lack of transparency 

The climate target landscape is complex and features a multitude of emissions reduction targets. Some of them are global, some of them apply only to specific countries or industrial sectors. In addition, there is a wide variety of scopes, boundaries, and initiatives that companies can commit to.^2;3 Overall, this has led companies to react in one of two vastly different manners: either setting absolutely no initial emissions targets at all – as many global companies feel overwhelmed and choose to remain “under the climate radar” – or making ambitious climate pledges because they know regulators or the public are expecting them to do so. And while there has been a huge uptick in the past few years of companies taking the latter approach, these more ambitious goals usually come with a distant deadline.⁴

In either scenario, the targets companies finally settle on are generally characterized by deep uncertainty. The insecurity that companies feel is a direct result of their need to determine climate goals without the benefit, in most cases, of any sort of transparency in the emissions most closely linked to their business – be it the raw materials that go into their products or the emissions those products will ultimately create during use. Especially when it comes to emissions in the supply chain – known as “Scope 3” or upstream emissions – companies are in need of good primary data from suppliers. Otherwise, their only recourse is to use lower quality data or to make assumptions. This leads to a high level of uncertainty in emissions calculations: The longer the supply chain is and the greater the number of suppliers it has, the more difficult it becomes to achieve transparency.⁵ What is needed is a transparent baseline for emissions – one which allows companies to set both ambitious and achievable climate goals, to prioritize and implement measures that will have the highest impact and contribute the most to their goals, and to actually fulfill their pledges.

Since many companies still have limited transparency regarding their emissions, the economics of decarbonization are, as the WEF terms it, “obscured.”⁶ Initiating decarbonization measures normally requires meeting a certain front-loaded capex and re-allocating financial resources for this purpose. Additionally, decarbonization investments are often compared one-to-one with other investments that are expected to deliver short-term ROI (e.g., within 24 months) – with other aspects such as the price of carbon not considered part of the business case for decarbonization investments. This places companies under additional pressures in their efforts to decarbonize and often leads them to reject necessary measures since the business cases are, according to established criteria, less profitable.⁷ Therefore, the assumption is often that optimizing for decarbonization may interfere with a company’s stated goals of producing economic growth and making the cost reductions necessary to defend its position in competitive markets.

However, decarbonization also offers opportunities, allowing companies to explicitly position themselves on the market as serious climate players while boosting their businesses and providing advantages within the organizations themselves. So, although there are many challenges associated with decarbonization, a narrow focus only on obstacles and a dogmatic adherence to outdated decision criteria (e.g., short-term ROI) can lead to great opportunities being squandered.

Appealing to stakeholders while generating additional revenue streams

A clear opportunity in the market arises when companies generate transparent and easily comparable data on decarbonization progress. When a company demonstrates that it has managed to define credible climate goals and is taking action to achieve those goals, it can attract a wide variety of stakeholders – among them, financial investors. It also opens up additional financial opportunities and decreases any pressure a company may feel to find supplemental investments for decarbonization measures. Additionally, it secures a company’s image as a player on the markets and in a world in which carbon footprints become increasingly relevant with each year of unmet global climate targets.^{8; 9}

Moreover, both talent and customers are much more likely to be attracted by a company with strong positioning on climate issues. For them, decarbonization is becoming non-negotiable, both in their careers and in their purchasing decisions.^{10; 11} Internally, a top to bottom involvement of all employees in the company’s decarbonization effort helps to unite various process knowledge streams and further reduce emissions. Furthermore, actively engaging in a goal bigger than the company engenders a sense of purpose among employees and encourages a company culture predicated on continuous improvement.

Companies themselves can profit by fostering innovation and creating further synergies through decarbonization. A good example in which decarbonization has opened new business opportunities is Direct Air Capturing (DAC).^{12; 13; 14} DAC uses innovative technology (e.g., chemical reaction involving sorbents) to remove carbon dioxide directly from point sources in factories (or from the air). This creates a new revenue stream for businesses. They can sell carbon collected from point sources, allowing it to be used in products that require carbon but not necessarily from fossil resources (e.g., fertilizers, or synthetic fuels). Especially for companies who are already financially constrained, this can be an innovative opportunity. In some industries, this is also one of the only measures available to them to make meaningful emissions reductions in the short-term (e.g., cement production), so first movers here will profit from a reduction in carbon taxes. 

Collaboration with suppliers holds the key to emissions reductions

Another market opportunity arises from tackling the challenge of supply chain emissions as it is a huge lever in reducing emissions. Scope 3 emissions are eleven times higher than direct emissions on average and represent more than 70% of total emissions.¹⁵ What is potentially even more important, however, is that a more cooperative approach toward similar challenges and common climate goals is encouraged by actively engaging key suppliers in decarbonization efforts.¹⁶ This generates synergies among industries by, for example, creating alliances for finding alternatives in material sourcing, while advancing decarbonization efforts.⁶ Furthermore, when several companies shoulder the load together, it reduces the financial burden on any one of them. For instance, emissions reduction initiatives could conceivably be co-financed within a single supply chain that is common to several companies in the same industry. 

So, what do companies need to do to take advantage of these opportunities? In order to really address decarbonization effectively – and piece together the scattered decarbonization puzzle – companies need to take a holistic approach. This means including climate action as a non-negotiable aspect of their company strategy and targets as well as demonstrating their commitment by clearly defining decarbonization measures and then delivering results. To succeed, companies need to rethink and adjust governance, define suitable steering tools and KPIs, and deeply embed the idea in their organization from qualification to communication and change management.

Only realistic targets are good targets

A first step is to define an overall strategy and decarbonization targets based on the following question: What level of CO₂-reduction can we realistically reach? This can only be answered with an accurate assessment of the company’s emissions baseline through transparent carbon accounting practices. In the case of Scope 3 emissions this means that companies must set up an effective key supplier engagement program, starting with suppliers who have the greatest emissions impact. 

Platforms like CDP’s supply chain program, which facilitates Scope 3 emissions data collection and assessment of supplier’s emissions performance, are already in place to help companies within certain industries.^{17; 18} If the emissions impact is not known, the suppliers who make up a significant portion of the company’s spend is a good starting point. The company can commit those suppliers to engagement targets.¹⁹

Committing to both near and long-term reduction targets aligned with scientific benchmarks sets a roadmap for meaningful progress. Another building block on the way forward concerns a company’s governance: How to ensure successful implementation of these targets? Introducing effective climate governance mechanisms is vital for embedding carbon reduction ambitions throughout the organization. This involves introducing structures to integrate decarbonization goals into the business strategy, incentivizing implementation by introducing internal carbon pricing, for example, and linking executive compensation to sustainability performance. 

After ensuring that decarbonization is well embedded within the internal governance structure, the following question arises: How to identify, evaluate and implement the most impactful measures and technologies so as to generate both rapid and long-lasting results, while taking a company’s abilities and resources into account? The first step is to analyze, emissions hotspots. The second is to introduce measures and technologies and assess them according to defined KPIs (e.g., a decarbonization index). Doing so ensures that the most efficient emissions reduction and avoidance measures are prioritized. In addition, embracing the latest low-carbon innovations and sustainable procurement practices can yield substantial environmental benefits and operational improvements.

Do good and talk about it – the change story says it all

Finally, communication and clear change management including employee empowerment and qualification are key to getting the most out of these opportunities. Starting with the “why” of decarbonization gives the efforts a purpose, creating a feeling of trust and support among both internal and external stakeholders. A well-designed change story, which shares progress and milestones as well as challenges in a transparent manner can foster engagement and drive behavioral change. Internally, in combination with the empowerment and qualification of employees, the story ensures that a company’s key stakeholders and team members are on board. Externally, positioning the company’s brand in this way attracts eco-conscious consumers, investors, and partners, thus enhancing the company’s reputation and competitiveness.

While it is true that there are burdens and challenges related to decarbonization, focusing only on these aspects can lead the business community down a dangerous path toward failing to fulfill their part of the Paris Agreement. It also risks leaving great business opportunities related to decarbonization on the table. What is required of companies to limit global warming is bold, achievable, and immediate action, but this action does not have to be deleterious to the bottom line. A holistic decarbonization approach as described above not only reduces a company’s environmental impact, it can also result in a real competitive advantage.