The global business community has reached a new era: climate action is now an economic imperative rather than a philanthropic activity. Expectations from customers, investors, and regulators have made it clear that multinational corporations and their partners need to make progress on decarbonization.
Like the previous megatrends of technology, cybersecurity, and globalization, the decarbonization of global organizations is rapidly becoming a core business function. But while the imperative to act is clear, many companies face internal and external barriers. Some of these barriers fall outside the realm of their direct control and require specialized technical expertise to navigate. The most critical challenges include:
- Leveraging data to understand emissions, where they are, and when progress is made.
- Reducing emissions in the supply chain, where most emissions are located, and where incentives and control are more complex.
- Obtaining financing within the tidal wave of environmental, social, and governance (ESG) investment and financial structuring to minimize the balance sheet burden and maximize the benefits of decarbonization.
Exploring the Challenges
Good data is critical, both for those new to decarbonization and those at the forefront. For those new to corporate decarbonization, gathering data and measuring greenhouse gas (GHG) emissions is a key first step to decarbonization. It serves to illuminate a firm’s responsibilities and helps to identify the decarbonization actions needed. Information on GHG emissions is a new data type for many organizations, but measurement adheres to established, durable protocols. Organizations that are more advanced in their decarbonization journeys are working to use data to illuminate more complex challenges required to achieve Net Zero and beyond. Some of these data include the financed emissions of financial institutions, real time granular emissions data, and indirect (Scope 3) impacts including supply chains, avoided emissions, and more. Data management systems, including cloud-based platforms, can help streamline this process for both new and advanced firms.
For most firms, up to 80 percent of their emissions come from their supply chains. These emissions are no longer considered “someone else’s problem,” and understanding and managing supply chain decarbonization is increasingly required. In fact, the U.S. Securities and Exchange Commission is currently considering whether firms need to measure and report Scope 3 emissions. The emerging Net Zero standards require detailed Scope 3 engagement and reduction efforts. Recognizing just how critical the issue is, some leaders are convening their supply chains to drive action through initiatives like the Supplier Leadership on Climate Transition. This consortium of eight of the world’s largest food and beverage brands, including Mars, McCormick, and PepsiCo, is working to consolidate its power and train suppliers to launch collective decarbonization actions.
Under the voluntary, beyond-compliance framework for carbon reduction that currently governs most global corporations, the cost associated with decarbonization is a key consideration. Cash constraints from the COVID-19 pandemic can make large-scale decarbonization feel even more overwhelming. For instance, leaders might wonder how to justify upgrading a power generation system when the capital cost is high and the payback is outside of the current hurdle rate. Or, how can they drive decarbonization in the supply chain when the energy savings accrue to the supplier and not to their firm? Sophisticated organizations are finding financial structuring solutions that take decarbonization off the balance sheet, making decarbonization a win-win. Some of these strategies include identifying partners interested in environmental commodities, navigating the complex standards to ensure your firm gains the relevant reduction credits, and collaborating with financial partners on special purpose vehicles. For firms looking to do simple cost-saving or energy efficiency, and for those looking to tackle the most complex challenges, managing green finance is a new and powerful tool.
While the specific actions and strategies to decarbonize may be different across industries, common themes, needs, and approaches allow organizations to follow leading practices to increase the efficiency of their progress. Whether a firm is new to decarbonization or has been active for a decade or more, the tools and approaches to help them move forward on their journey exist. We know where we need to go on decarbonization, and it’s time to start making real progress.