For Climate Week NYC this year, Oliver Wyman and international non-profit the Climate Group spoke with dozens of corporate climate professionals worldwide to learn about the obstacles holding them back from greater progress. How were they able at times to break through the barriers? The stories we heard ranged in mood from exhilaration to frustration, and the pattern was clear.
In the stories of exhilaration, climate professionals and their companies have clear strategies for the role they want to play in the climate transition. They see Scope 3 not as a measurement challenge, but as an opportunity to have an impact beyond themselves. Of course, they have metrics and targets, but these are means to pursuing the strategy — not ends in themselves. They measure progress toward strategic goals, and not only in terms of emissions.
In the stories of frustration, the task of reporting often overwhelms the task of transition. In theory, the metrics should provide the impetus for change. In practice, without an agreed-upon strategy, the changes needed can be too fundamental for this incentive mechanism to work and shift the organization’s focus to near-term, incremental efforts that won’t achieve what is required.
Leading with how the company will contribute to the transition, rather than with emissions outcomes, is essential for orchestrating the big shifts required and directing the actions needed. This is no different from the business's commercial agenda. You can achieve incremental growth by setting individual departments financial targets and budgets. But true business transformations require strategic direction — and 40% of the 100 climate professionals we surveyed said they thought the climate transition would be transformative for their business. In climate, we sometimes expect incremental management tools to yield transformational outcomes.
Conventionally, you might set a performance indicator for the outcome you want to achieve and let the business find the actions to achieve it. But in climate, basing results on emissions reduction alone can turn out to be a recipe for perverse incentives.
For example, for a telecom or tech company, the biggest impact is often from the emissions that its customers can avoid by using the company’s services, for instance through using Zoom rather than traveling. But these avoided emissions are not attributed to the company — even within its Scope 3. One tech company found that the growth of these services actually stopped it from paying out the climate incentives in its senior leadership compensation plan, because its own measured emissions had increased — even though the climate impact of this growth was beneficial.
Ingka, the largest IKEA retailer, addresses this problem by reversing the process and aligning its metrics with the impact of its corporate actions. The insight here is that companies should focus on actions first rather than emissions metrics, which are likely to be off the mark initially anyway. For similar reasons, renewable energy provider Ørsted introduced management incentives on climate only after it had made the cultural shift that shaped what the business was trying to do thus allowing the incentives to reinforce the strategic direction.
In climate, basing results on emissions reduction alone can turn out to be a recipe for perverse incentives
Now is the time to resolve this tension, because now is the time when many organizations are making a shift. Instead of the climate agenda being the responsibility of specialist sustainability teams, it is being embedded throughout organizations as part of business as usual. This is a smart move to unite climate and business agendas — a common theme in the companies we talked to — and achieve change at scale. But it creates an urgent need to make sure that what is embedded in the organization is a strong, purposeful drive that can deliver transformation, not just a culture of technocratic compliance. Such a drive is not only suited to the scale of the task but also can be expected to energize the business. A narrative of relentless reduction and squeeze will inspire people across the organization less than a positive, inspirational vision for their business.
The importance of strategy may seem obvious. But in many organizations, climate action has been a response to pressure from investors. This pressure, and where it is dealt with organizationally, has sometimes favored a focus on emissions metrics and disclosure ahead of a strategy to tackle the transition.
The 2020s are supposed to be our "decade of delivery", when we need to halve global emissions to stay on track to limit the Earth’s temperature rise to 1.5 degrees Celsius. We can’t afford for the "decade of delivery" to be merely the "decade of disclosure".