Many businesses are responding to growing stakeholder pressure by making commitments to reduce their impact on the environment and boost company sustainability. This includes committing to a net zero ambition. Meeting such targets depends on a combination of variables: consistent senior management ownership, internal buy-in, sufficient resources, and effective technologies.
This article - exploring Step 3 of the South Pole Climate Journey – guides you through the essentials to ensure you are well prepared for a net zero target, maintaining your climate actions through successful completion.
Why is this important?
Climate action is where ambition is put into practice, and the hard yards are earned by transforming the business on the ground. Committing to a sustainable business model is a necessary step and forms part of climate disclosures, such as
TCFD, DJSI and CDP. However, the highest scores and rankings are achieved through real action, and this is how progress is judged by investors, regulators, customers and employees.
Making the reductions actually happen after the goals have been set and communicated, is a challenge in its own right. Many companies end up with a patch-work of measures that turn out to be a burden rather than a boon. Getting it right is not always so straightforward.
Three pillars are essential for a continued and steady mitigation of climate impacts: governance, resources and technology. It is only with the right combination of these three elements that the full reduction potential of business can be achieved in a cost-effective and sustainable form.
Pillar 1: Introducing comprehensive governance
Every long journey needs a clear direction and a driver with a steady hand. As a relatively new agenda for some businesses, sustainability requires a strong sense of purpose, with vision, belief and enthusiasm from the top. Clear, credible and consistent ownership is critical for success. A company commitment to a climate agenda cannot be seen as simply putting lipstick on a pig - actions need to follow talk at all levels, and leaders need to demonstrate by doing.
In addition to C-Suite leadership, appropriate organisational structures must also be established to deliver on this priority agenda. The most successful businesses do not 'pigeon hole' sustainability issues within one unit, but integrate it across the business, recognising the cross-cutting nature of impacts, opportunities and solutions. Often, working groups are formed across many teams, ranging from corporate functions to supply chains to communications.
The far-sighted timeframes and growing magnitude of climate impacts need to be reflected in Enterprise Risk Management (ERM) processes and feed directly into strategic decision-making. This needs to work on multiple levels. For example, it must recognise the long-term systemic nature of some changes (such as gradual sea level rise, and expanding climate policy agenda), and also the acute extremes and tipping points of others (such as wildfires caused by heatwaves, or fast-changing public expectations due to the viral nature of the 'Greta Thunberg effect').
Pillar 2: Scaling up the resource pool
It typically takes additional resources to deliver on a net zero target and to achieve ambitious emission reductions, and such resources should be agreed on from the top.
Funds, staff and supplies must be appropriately scaled and preferably ring fenced from competing needs, especially during challenging times. Tellingly, a number of businesses have doubled down on their climate commitments during the COVID-19 crisis, including
BP, Apple, Delta, JetBlue and Unilever. This reflects the deepening connection between sustainability and corporate resilience. In a recent study on preparedness for the pandemic, HSBC found that across the 2600 businesses surveyed in 14 countries, markets and territories "those which prioritised sustainability felt better prepared for this crisis".
Highlighting its long-lasting nature, the case for sustainability must also be built to reflect its long-term investment potential, including new markets and brand enhancement. Consequently, the horizon for expected returns should be stretched to reflect this transformational potential. There is a strong case for it to transcend normal business orthodoxy, rules and processes. In fact, bringing sustainability into the core of your business strategy is bound to upend practices of more short-term, narrowly profit-driven and unsustainable decision-making, strengthening long-term competitiveness and investability as a result.
Pillar 3: Charting a technology horizon
The third pillar to reduce emissions is technology, considered in its broadest sense to include equipment, techniques and processes. Imagine a multinational manufacturer with headquarters in Europe, and factories, warehouses and offices around the world. Raw materials are globally sourced, and components are imported largely from Asia. Let's consider that our company has committed to a science-based 1.5ºC reduction trajectory, as part of a Net Zero destination. This equates roughly to a seven percent reduction in emissions year-on-year. Using this year as a baseline, by 2030 emissions would be reduced by over half, and by 2050, by about 90%.
Our manufacturer may reduce on-site (Scope 1) emissions through using less, and switching away from fossil fuel burning - for example in boilers, heavy plant and LPG powered forklifts.
Energy efficiency and equipment upgrades may also be used to tackle electricity-related (Scope 2) emissions, such as manufacturing plants, heating, ventilation and aircon (HVAC), and lighting. For example, replacing incandescents with low-energy light bulbs such as LEDs is becoming very popular as they drop in cost. Switching to renewables is also a common approach to 'neutralise' Scope 2 emissions. Once opportunities to install on-site capacity have been taken (commonly solar PV and thermal, wind and biomass), a renewable energy strategy may include the purchase of Renewable Energy Certificates (RECs), or forming longer term Power Purchase Agreements (PPAs) with suppliers. Modest reduction potential also exists in reducing the footprint of offices and business travel, while incentivising behavioural changes to the use of equipment, for example, is important for staff engagement.
Scope 3 emissions from our manufacturer's supply chain (often 80% of the total footprint) are tackled through close interaction with Tier 1 and Tier 2 suppliers to reduce their own emissions, using the actions described above. Transportation is another target area, including company owned freight vehicles and subcontracted haulage. Electric vehicles (powered by renewables) represent a growing potential for business transformation. For the manufacturer's limited use of nature-based feedstocks, including biomass and speciality chemicals, and its land use,
more specialised approaches are used to reduce climate impacts.
Finally, big picture approaches for large-scale transformation include switching to hydrogen as an energy source, closing the materials loop by thinking in a circular way, and switching to more natural materials, such as crop-derived chemicals and residues.
How to decide which activities to adopt?
To sequence activities and investment, a useful prioritisation tool is a scenario-builder for roadmaps, including costs. This allows measures to be assessed in a logical and consistent manner, and appraised against cost and practicality, and their potential to reduce emissions. This is often plotted onto a Marginal Abatement Cost (MAC) curve, showing graphically the cost per tonne of CO2eq saved, and return-on-investment timeframes. An internal carbon price may be used to 'shift the curve' to bring more technologies into play. Practical considerations such as commercial viability or replacing obsolete equipment are then considered to build the company's implementation roadmap, showing the stages and activities along a science-based greenhouse gas reduction journey.
Overcoming bumps in the road
In challenging times, our manufacturer may face bumps in the road to sustain the reduction trajectory. Embedding key performance indicators (KPIs) and incentives into management structures such as finance, risk and procurement are critical to ensure continuity.
Similarly, the HR department can support by implementing greenhouse gas reduction into the evaluation of personal plans. Monitoring and regular reporting - e.g. in a Sustainability Report - will keep the issue front of mind. Carbon pricing and external financing for big capital investments help drive the business case.
Many major companies have recognised that there is no time for delay. Net Zero carbon commitments have recently been made by big emitters including Heidelberg Cement, Thyssen Krupp steelmakers, Duke Energy, and Vale mining. Regions and countries, including the EU and the UK have also committed. My next article will consider how businesses are already achieving this goal by financing climate action using carbon credits and renewable energy instruments, in Step Four of the Climate Leadership Journey.