Covid-19 has intensified the race to battle climate change, renewing focus on critical efforts to drastically cutt greenhouse gas emissions to reach a 50% reduction by 2030 and net zero by 2050.
Governments and international organisations are increasing their ambitions, with China committing to carbon neutrality by 2060 and the United States has pledged to cut emissions at least in half by 2030.
Investors and capital are turning toward green investments. The Transition Pathway Initiative benchmark, which assesses companies' preparedness for the low-carbon transition as well as their target against the Paris Agreement, is supported by 104 investors globally, representing more than US$26 trillion (about 870 trillion baht) in combined assets under management and advice. Private equity firms are actively setting carbon reduction targets. And consumers are demanding action -- and companies are responding.
The companies leading the carbon transition follow two guiding principles. They simultaneously play defence and offence, and they view decarbonisation as a way to accelerate a full-potential transformation.
Many companies begin their efforts as a way of defending themselves, often by preparing for reporting requirements or anticipating shareholder expectations. Mining companies, for instance, need to anticipate how water scarcity, flooding, and rising temperatures linked to climate change will hurt productivity. Playing defence also means preparing for the issue of stranded assets.
However, carbon transition represents as much upside opportunity as downside risk. Companies are playing offence by taking proactive steps to create new value. Take Bosch, for example. Beyond achieving carbon neutrality itself, the company is developing new products and services to help other companies decarbonise.
Embracing the need for a full strategy overhaul is the second guiding principle. When Bain & Company surveyed 80 business leaders across various sectors, 60% of whom said that an energy or resource transition was central to the future of their sector, and 35% are starting to change their priorities and create opportunities.
Companies pursue three types of transformations. Some, like Unilever, have evolved their core business toward sustainability. Others have added a second core. Consider how Finland's Neste has gone from a traditional oil-driven company to the world's biggest producer of renewable diesel. Denmark's Ørsted used the carbon challenge as an opportunity to develop a market for offshore wind.
Regardless of how far along they are in the carbon transition journey, companies typically answer four big questions.
How bold and fast should our ambition be? Leading companies are clear about their decision when it comes to the basic trade-off between speed and boldness. Blackstone opted for speed by aiming to reduce emissions by 15%, within three years of ownership, at all new portfolio companies where it can control energy usage. Shell chose boldness by aiming to be a net-zero-emissions energy business by 2050.
What are the available levers? In pursuing a carbon transition, companies have three sets of levers to deploy: strategic, operational, and offsets. Ørsted used its strategic lever by shifting away from fossil fuels. (A significant portion of such moves can actually be ROI positive, even without a price on carbon.) Microsoft has led the way in developing the voluntary carbon market and associated offsets, pledging to remove all of the carbon it has emitted since its founding in 1975 by 2050.
How should we adjust the organisation? The price of carbon is a major consideration in capital allocation, with carbon reduction an important factor in operational improvements, manufacturing decisions, and R&D, among other areas. To be truly serious about decarbonisation, it needs to permeate every single process, in every single employee.
How do we engage stakeholders? More than any other transformation, decarbonisation draws on a company's ability to assemble and collaborate with an ecosystem of various stakeholders. Companies need to learn how to create dialogues with organisations beyond their own walls and seek productive partnerships.
Achieving net zero requires companies to identify opportunities to create value through cost reduction or growth, in addition to risk protection. That means prioritising areas for deployment and linking the sustainability agenda to business metrics. It is a multiyear journey, and the best companies boost their odds of success by building change muscles in the organisation for the long and important ride.
Sharad Apte is a partner in Bain & Company, based in Bangkok. Dale Hardcastle is a partner and Co-director of Bain & Company's Global Sustainability Innovation Center (GSIC) in Singapore. Torsten Lichtenau leads Bain & Company's Carbon Transition Impact Area globally.
