The latest warning about climate change was stark: our chances of preventing temperatures from rising more than 1.5°C/34.7°F and meeting international goals of reducing greenhouse gases are quickly fading. Greenhouse gas emissions need to reach their peak before 2025 and then be cut by 43% by 2030 to limit the impact of global warming, according to the latest analysis from the United Nations Intergovernmental Panel on Climate Change. But as U.N. Secretary-General Antonio Guterres noted during the report’s release, even if current climate control pledges are met, emissions would increase by 14%.
“It’s now or never, if we want to limit global warming to 1.5°C (2.7°F),” said IPCC Working Group III Co-Chair Priyadarshi Shukla. “Without immediate and deep emissions reductions across all sectors, it will be impossible.”
While companies have known for years that action is needed, few have fully embedded commitments to reduce CO2 emissions across the entire enterprise. And now companies face an accelerated timetable to act by 2030 when most have promised to become carbon negative or, at least, carbon neutral. An estimated 28% of the US pharmaceutical sector by revenue has pledged to become net-zero carbon emitters. With the clock ticking, it is more critical than ever that leaders create a holistic approach to controlling carbon emissions.
TIME TO INITIATE REAL TRANSITION TO ACHIEVE CLIMATE ACTION
These changes do not only come at a cost, but policy incentives and a substantially higher sustainability awareness of broad parts of the population have also created new business opportunities for low-carbon products and services. Further, capital markets are continuing to reward companies that are ahead in transition with better access to capital and higher stock performance.
However, the transition is not easy. Jointly with the Climate Group, Oliver Wyman has identified four domains that businesses need to manage for their transition to be both commercially successful and to have an impact:
Climate action begins at the top. It is important to make meaningful commitments beyond today’s capabilities to influence and accelerate future solutions. Leaders can create the conditions for innovation by signaling priorities, demonstrating commitment, showing a long-term perspective, empowering colleagues, enabling investments, influencing other players in the system, supporting risk-taking, and protecting against failure.
Companies in all sectors are engaging their customers on climate action. Leaders can capture value by decommoditizing the proposition and by collaborating with customers to solve the end-to-end value-chain problem, sharing risks, roles, and rewards.
Climate action financing is currently abundant for ventures that can demonstrate the right combination of financial and climate returns in the context of a planned transition. Leaders access funds that value climate goals whether as part of the financial system or to complement it. As a result, new metrics, disclosures, ratings, carbon budgeting, and carbon pricing need to be implemented and mastered — both at a company level with external funders and at a project level within organizations.
Organizations should invest in decarbonization with a mindset of transition rather than cleansing or engineering out emissions in all scopes and building islands of green. It takes rethinking the business design by embracing opportunities for a new scope in adjacent spaces and strategic control.
ACHIEVING REAL DECARBONIZATION
Corporations are deploying a host of tactics to hit carbon neutral goals. Our review of 2022 published corporate objectives in CO2 reduction show that most companies are largely publishing offsetting, followed by changing energy supplies to renewable sources as their key actions. Currently, offsetting using energy certificates seems to be the major focus, but this is only a short-term solution, especially due to limited carbon sinks — anything that absorbs more carbon than it releases, like plants and soil.
Real emission reduction – the core lever for change – in most cases cover less than 20% of the published objectives and those moderate targets can today mostly be filled with “low-hanging fruit” actions.
This is the short-term perspective. To achieve net-zero, actions will soon be needed that will multiply real CO2 reductions. And less than eight years until 2030 is a tight timeline since many levers will require fundamental changes and long-lead time investment decisions taken today to create long-term effects. This is creating significant headaches for the C-suite of many of our clients, now realizing the real impact on business stemming from their net zero pledges.
Achieving net-zero emissions requires deeply rooting carbon reduction in corporate strategy and corporate steering and controlling now – thus tackling the changes needed to the business system. We’ve identified four overarching areas — and 20 specific functions — for companies need to master to succeed:
Carbon strategy & steering: A clearly defined carbon strategy that is consistent with the company's competitive strategy is essential as a guiding principle for action. It provides a strong framework for management decisions regarding CO2 measures. In addition, the goals and objectives of the strategy must be broken down and implemented throughout the entire organization with clearly defined roles, objectives, and incentives.
Carbon controlling: Gauging the success of CO2 reduction measures requires a sophisticated approach to carbon controlling. It relies on carbon accounting, target setting and a tight integration into planning, reporting and decision-making across all management levels.
IT systems support: IT systems must be designed to support the use of data analytics across the entire enterprise, a wide use of automation for low cost of the additional complexity and deep integration with suppliers to ensure carbon neutrality in scope 3 can be achieved.
Carbon culture & mindsets: Companies need to work closely with suppliers to ensure they understand carbon neutrality goals. Internally, incentives and goals should also be aligned with a caron neutral or a carbon negative mindset.
IMPLEMENTING THE RIGHT APPROACH TO CARBON PRCING TO SUPPORT THE CHANGE
A key element is the monetization of CO2 using internal carbon pricing to ensure that key trade-offs decisions, e.g. for investments, take the impact on CO2 into account on the financial evaluation level and importance of CO2 can be tightened over time by raising internal prices.
Used by the gas, oil, and energy sectors since the 1990s, it is an area that continues to pique the interest of investors, regulators, and corporate boards. In fact, the number of companies using IPC climbed an estimated 80% over the past five years. Essentially, companies put a price tag on their own emissions, allowing them to assess how those could affect profitability.
A key challenge is understanding how to set prices. There's no single roadmap or set of standards. Even governments are taking different approaches. As Oliver Wyman pointed out in this 2021 paper, 40 countries and 20 cities and regions charge companies a tax or fee for each ton of carbon emitted. But the prices vary widely.
Additionally, companies can take multiple approaches based on the maturity of their overall carbon reduction strategy. This ranges from internal pricing, where companies determine how much it costs to implement reduction efforts, to creating an internal tax or fee. Implemented by companies with more mature capabilities, under this formula, companies charge business units a fee per ton of carbon emitted. These internal fees are intended to drive units to be more efficient, but the money raised can also be used to fund long-term emission reduction projects.
TIME TO GET REAL
As we noted at the beginning of this article, the clock is ticking for companies to hit their ambitious goals by 2030 and beyond. It will be incumbent on leaders to make decarbonization an integral part of their corporate culture and start to act now. Companies that fail to act do so at the risk of being left behind by customers, investors, and policymakers.
Dr. Oliver Eitelwein Partner, Health and Life Sciences
Vishal Sanduja Associate, Health and Life Sciences, Oliver Wyman