Our new report, Getting Real, shows that reducing carbon emissions requires companies to look across their value chains.
- When companies look to reduce their carbon emissions, they often focus on easy cuts and short-term solutions.
- In order to meet carbon reduction targets, a much more ambitious and wide-ranging approach will be necessary.
- It is possible for companies to reach net zero and remain profitable, but they need to tackle the root causes of emissions right across their value chain.
Transitioning to net zero is such a daunting task that companies often assume it is impossible to achieve while maintaining their profit margins. This leads many to focus on low-hanging fruit and short-term solutions: they offload emissions onto others by divesting high-carbon emitting businesses like mining minerals, processing meat or financing oil companies, or they create “islands of green” within their company – for example, sourcing all electricity from renewables.
It can be beneficial for businesses to start off by focusing on here-and-now emissions reductions. In the long term, however, it's not enough. Switching to renewables-sourced electricity is a good way to reduce carbon dioxide emissions. But according to calculations we have made across 12 regions and 22 industries, it will amount to less than a third of what will be required to reach net zero. Ultimately, companies will have to redesign their business models to reduce emissions.
The good news is that we found mounting evidence that it is possible for corporations to transition to net-zero business models profitably, especially when compared with a future of inaction. Companies that ignore or put off these opportunities may be caught unprepared as customers, investors and policy makers increasingly require them to reduce carbon emissions.
We spoke with representatives of 27 major corporations across a broad range of industries and regions, and found that many are already discovering ways to resolve the perpetual trade-offs between commercial and climate agendas. Our report 'Getting Real' shows that companies are making progress when they approach this issue with the more ambitious goal of reducing emissions across the full range of activities needed to create their product or service. Here are three of many practices we identified that help:
1. Reduce emissions across the whole value chain
For many businesses, most emissions – and the potential for climate action – lie in 'scope 3 assets'. These are not owned or controlled by the reporting organization, but contribute indirectly to the company's value chain. To truly reduce emissions successfully, companies have to take action on these scope 3 emissions. One food and drink processor we interviewed, for example, is investing in thousands of net-zero dairy farms. A mining company supplies steelmakers with ore blends that demand less energy in the blast furnace. One fiber optic cable manufacturer has actually invested in extending the scope of its business from cable-making to the whole value chain of electrification.
2. Tackle the root causes
The places where the big emissions happen are often not the most effective places for action. We found that companies are tracking emissions to find their root causes, either within their own business or along the value chain. One parcel delivery company, for example, reduces emissions in package delivery through fleet electrification and routing optimization – but it also provides better information and control to the people receiving packages, so that they can anticipate and redirect a delivery, reducing the number of delivery attempts. Big Tech companies measure power efficiency down to the code level in their AI and Cloud deployments and work with chip manufacturers to minimize energy consumption in the use of their products.
3. Don’t automatically defund high-carbon business
Investors are often tempted to increase their portfolio of low-carbon activities by simply rebalancing their allocation of capital. However, a more effective approach when it comes to actually incentivizing reduction is to invest in activities that currently cause high carbon emissions, while setting out a clear and urgent pathway to change. Our research found that of the more than $100 trillion investment the transition will require, 70-80 percent needs to go into some of the hardest-to-abate sectors. Some activists also now recognize this logic and are shifting from demanding divestment to demanding a managed transition of high-carbon businesses.
We found an example of this in the mortgage sector. Selling mortgages for homes that are already energy efficient improves the carbon metrics of a bank’s mortgage book, but “green mortgages” don’t reduce emissions. They are a first step that may draw consumers’ attention to energy efficiency. The next step is to finance home retrofits, which will have a much greater decarbonization impact.
Similarly, lending can be used to finance effective transition plans. Some banks are continuing to lend to fossil fuel companies with the view that they will transition with their clients, and that transition will require capital. It will of course be vital for the credibility of these initiatives that the path of change delivers the pace and scale required by the science.
The lesson is that the easiest, most-obvious ways to reduce a company’s carbon footprint will not lead all the way to net zero. Too much focus on these low-hanging fruit might distract from more fundamental measures. To get to a net-zero world, companies need to engineer emissions out of their entire business system, including their supply chain and customers’ use of their products.
Mike Peirce, Director of Corporate Partnerships, Climate Group
Simon Glynn, Partner and Climate & Sustainability Co-lead, Oliver Wyman Group (MMC)
This article has been syndicated from the World Economic Forum's website. The views expressed in this article are those of the author alone and not the World Economic Forum.