Regulations are now forcing companies to come fully clean on their emissions in very granular disclosuresBarrie Wilkinson, Partner and Head of 3D Carbon Accounting
- About The Video
- Transcript
The challenges facing companies in the industrialized goods sector as they navigate the complex landscape of decarbonization are considerable. They can include everything from developing new, low-carbon versions of technology, product lines, and supply chains to finding carbon-free sources of power to fuel operations.
The risks for companies have risen with the enactment of the Corporate Sustainability Reporting Directive (CSRD) by the European Union and similar legislation in the United Kingdom. These new laws require companies to disclose annual emissions, as well as targets they have set for reducing those emissions, beginning in the first quarter of 2025. There’s literally very little time left to procrastinate. Yet the latest Oliver Wyman data suggest only 30% of industrial equipment companies in Europe have even set targets for Scope 3 emissions with less than two years to the deadline.
With this new transparency, all corporate stakeholders — from shareholders and financial institutions to consumers and the media — will be able to evaluate in detail the carbon footprints of companies and just how aggressively they are working to reduce them.
Executives overseeing a corporate decarbonization effort for an industrialized goods company will likely know that upstream and downstream greenhouse gas emissions from supply chains and end users, may well account for 90% or more of a company’s carbon footprint. That makes the decarbonization effort all the more challenging as Scope 3 emissions do not fall directly under the reporting company’s control, which means their extent will be harder to determine. The industrialized goods company will also be limited in its ability to mandate changes to reduce them. Companies will be navigating tricky waters as they try to gauge their emissions. It’s far from a precise science at this point. Underestimating emissions one year might land a company in hot water the next if more accurate counts become available. Then it might look as if a company’s decarbonization efforts were failing if total emissions were seen to be rising.
The same is true about targets and transition plans. Companies would surely get criticized if they set targets considered too low, but they also might have a problem if they miss overly aggressive ones.
Even so, there are opportunities that accompany these extra burdens. These include the potential for new value-added product lines, discovery of more efficient energy sources, an overhaul of supply chains to make them less carbon intensive and more efficient, and a new marketing message aimed at environmentally concerned consumers. In this video, Oliver Wyman partners, Daniel Kronenwett and Barrie Wilkinson, discuss practical and necessary steps to decarbonize industrialized goods.
Eimear
Hi, and welcome to our session on how industrial goods companies are tackling the decarbonization challenge. I’m Eimear McDermott, and I’m a marketing manager at Oliver Wyman. Most companies in the industrial sector have defined their Scope 1 and Scope 2 targets, but few have taken care of Scope 3. Now we see a shift from communicating about ambitions to making them a reality. I’m here with Daniel Kronenwett from our Automotive and Industrial Goods practice and Barrie Wilkinson, founder of and head of 3D Carbon Accounting and partner at Oliver Wyman. Thank you both for joining me.
How are companies in the industrial goods sector coping with the decarbonization challenge, and what’s the difference from before?
Daniel
The way that our industrial and automotive clients think of the decarbonization challenge has significantly changed over the last years. So, two to three years ago, the clear focus was on communicating a strong narrative, doing good, and setting targets for 2030, 2050. Now, our clients have realized that they urgently need to switch gears from setting the target to crafting a robust plan to deliver on it. In addition, there’s only a fraction of our clients in the automotive and industrial space, around 30% based on our recent analysis that set targets for Scope 3. For those kinds of companies, Scope 3 reflects typically more than 90% of the total emissions, especially for automotive and industrial equipment companies. However, it’s not just an internal change of mind with regard to how we think about decarbonization. It’s also an external pressure that comes up from customers, from regulators and from financial sponsors.
Eimear
So Barrie, CSRD regulations have arrived in Europe, what are companies doing to respond?
Barrie
I’m glad they’ve arrived because it’s been quite difficult for companies to get going. There has been, for decarbonization, there’s generally a negative business case to actually do something; green steel is more expensive than traditional steel etc. So, these regulations are now forcing companies to come fully clean on their emissions in very granular disclosures, and also to put in place these targets. So, the first disclosures most of the companies will have to make will be at the beginning of 2025 for the full reporting year 2024, which means working back from the answer. So, in 2023 already, they need to get going now. The focus of where they’re asking for help is Scope 3. So, Scope 3, as Daniel said, is 90% of the emissions, and it includes everything that is happening upstream of what you do and everything that happens downstream of what you do. So upstream, you have the complexity of all these components you’re buying from suppliers. Those suppliers are buying those components from other suppliers. You got the raw materials, and then downstream, you have to understand how are people using your products. So, it could be other companies turning your products into other products, or consumers using those things. So, it’s a really complex problem. And where they’re asking for our help is really to find ways of reducing the complexity and getting them to a robust answer and a nice submission that the CFO can put their signature to and feel confident about.
Eimear
So, what does a credible transition plan look like?
Daniel
Transition readiness entails a clear target, especially on Scope 3, and a robust plan on how to achieve it. With high levels of disclosure, transparency on the plan and robustness and feasibility of the plan itself, be it technologically, or timing-wise, with regard to the involvement of stakeholders in that process. Our analysis, jointly with CDP, however, shows that only around 5% of the companies investigated, including automotive and industrial goods companies, come up with an ambitious 1.5C degree compliance target and show progress on developing the robust plan to deliver on the target.
Barrie
The banks are going to be one of the main consumers of these transition plans. The banks are there to help, right? They really are interested in helping to finance this transition. It's going to be very costly to replace some of these old designs and products. So, the companies need help financing their way through this transition. But at the same time, the banks reserve the right not to lend you the money. So, if they don't believe in your plan, and you haven't done your homework, that could create some problems. So, it's not just about compliance really, all of this stuff we're talking about building things and reporting, it's really laying the foundations for this big transformational effort that's going to feed into strategic discussions, divestments of businesses, new R&D. So, the impetus is regulatory, but the implications are very much strategic.
Eimear
So, Barrie, you mentioned earlier about upstream and downstream. Could you give us some examples of what that means in reality for industrial companies?
Barrie
We’re doing some interesting work in the aviation industry at the moment. The maintenance companies started coming to us and saying, what if I do a passenger-to-freight conversion or what if a bird hits the engine, what are the implications of all these different things? They’ve started sending us information. We recently got this bill of materials of the 8000 components that goes into this passenger-to-freight conversion we went through to map every single one of them. It’s quite detailed work, so a lot of it is how do we automate some of those tasks, but how do we do it in a very transparent way so we’re getting some good results.
Eimear
It does sound like a very big challenge for companies. Are there any tools that they can use to navigate this?
Barrie
Well, as luck would have it, 3D Carbon Accounting. I’ve got 30 years of history doing regulatory reporting, so I know what regulators will be expecting. And we understand that you can’t do this at the level of 100,000 components for every single product. So, we’re helping companies with the complex reduction. It needs to be a very transparent process, so we’ve got a lot of tools which integrate the emissions data or have ways of pulling information out of your SAP systems. They’re mapping those activities to the emissions data, and also populating all the regulatory reports. So, a lot of it can be done automatically, and a lot of our tools work across industries, but some of them also need to be adapted to specific industries. We’re also lucky to have the vertical industry expertise of many of our colleagues, which can be very helpful.
Daniel
In our experience, a comprehensive, high-quality, data model on Scope 3 emissions can open up completely new ways of strategic discussions, including discussions around corporate portfolios, product portfolios etc. And this is the kind of discussion that Barrie already alluded to before, is way beyond a pure transactional reporting-related regulatory discussion, it moves up to a real strategic level of conversations we have with our clients.
Barrie
It’s a bit of a cliché, but you can’t manage what you don’t measure, right?
Daniel
Absolutely, and there are even other use cases beyond the strategic portfolio discussions, I mentioned, leveraging that data. For instance, you can imagine using it for engaging with your suppliers and having discussions with suppliers on a net-zero pathway based on those granular data. Think of using the data for steering your sales force towards selling the more efficient products, the more carbon-neutral product in conversations with your customers.
Eimear
How else can data be used for industrial companies in their transition to net zero?
Daniel
This is one key use case I want to highlight specifically with regard to the Scope 3 upstream side. So really taking decisions on materials used within products which is then also part of an R&D and product development process. So, you can see it’s a really cross-functional exercise at some point where these kinds of discussions lead to, and we have quite a lot of clients in, getting it right, exchanging materials towards lower carbon alternatives and then lowering the overall footprint of the product and the company overall.
Barrie
How do you get this new information into the decisions of the company? And one of the things that came up there was the role of R&D versus procurement. Procurement were complaining that the research and development team were making these decisions, they’ll just use green steel for everything, but when it came down to it, the procurement gets the design, and then they have to go out and buy the steel. Green steel isn’t available in large quantities at the moment, so often, R&D are making assumptions that can’t be fulfilled. So, to some extent, we need to start joining everybody together a little bit and giving them a common data set where they can all be singing from the same hymn sheet and not making assumptions based on bad information.
Eimear
Thank you so much for that insight into the challenge facing clients and how you’re working together to help clients with this as well. So, much appreciated. Thank you for your time, and thank you very much for joining us.