Decarbonization in a downturn

The hurdles to decarbonization

Companies today face geopolitical upheavals, supply chain disruption, inflation and the threat of recession. Despite this perfect storm, their commitment to decarbonisation hasn't fundamentally wavered. The number of companies embracing science-based targets is continuing to grow at a rapid pace.

However, as they make pledges to reduce their carbon footprint, executives need to acknowledge the ways in which the environment for decarbonisation and climate have changed.

Setting ambitions has proven to be the easy part, but meeting those goals is difficult, with 33% of companies missing their absolute Scope 1 (direct) and Scope 2 (indirect) emissions targets that expired in 2021.

Companies now find themselves needing to look beyond setting ambitions to tackling the real challenges of decarbonising and finding ways to monetise it with customers.

Rising geopolitical tensions

Global policy has become more complex. Some governments are acting more boldly to make the carbon transition a source of competitive advantage rather than risk losing the green business to another country.

However, many governments also have had to make difficult near-term energy policy decisions, in some cases choosing between a looming climate disaster, keeping their people fed and keeping energy costs from breaking the backs of their people.

As the effects of climate change become more evident, so does the need to not only mitigate by reducing emissions, but also adapt by adjusting to a changing climate. Leading companies have stepped up their physical risk analytics and adapted their strategy, operations and supply chain.

And as developing economies and underserved communities struggle with rising energy and food prices, companies face the reality that the carbon transition needs to be addressed in a way that is fair to all -- a just transition. This means ensuring that energy is as low-carbon and affordable as possible.

Tackling organizational issues with climate strategy

These changes come at a time when companies are embarking on downturn strategies and require difficult new choices. They need to address costs in an inflationary environment, reset supply chains for resilience and scrutinise strategic investment in the face of uncertainty.

Each of these can be tackled with carbon and climate in mind. In cost reduction, for example, the best companies will deal with cost and carbon simultaneously to emerge from the downturn with a more competitive cost and carbon base. Ultimately, less material, less energy and less waste all equal less cost -- and less carbon.

It will take a combination of vision and pragmatism for companies to reach their decarbonisation goals and create value in the process. Here are the five areas that companies must get right to succeed.

1. Strategic adaptation

Companies don't need more climate scenarios but, rather, clarity on the relevant ones. Most important, they need to identify the signposts that will indicate what's coming next. This is especially vital given the recently accelerated pace of policy changes and advances in technology. Historically, scenarios and signposts were focused on climate transition risks, such as changes in economics and market demand. Now, that is extending to climate physical scenarios -- changes to weather patterns and business resilience.

Winners will adopt a living strategy, taking steps to deliver results today, such as improving energy efficiency and optimising supply chains, while investing in next-generation solutions like hydrogen.

2. Investor and lender resonance

As companies face sharpened expectations of shareholders and lenders, it will be critical for them to clearly explain how a more profitable business in the medium to long term is also a more sustainable one.

That means showing how they've started to reduce carbon in a cost-effective manner while also making the business resilient to transition and physical risks.

3. "Customer-back" decarbonisation

Companies that are the most successful start decarbonisation with the customer in mind and work backward across offerings, operations and the supply chain. It will be critical to understand the sustainability priorities of customers who are very focused on costs.

Not all customers are moving at the same pace, so targeting the right ones based on their carbon ambition, progress and internal carbon price used is the best way to achieve the right green premium.

4. Partnerships for results

Carbon transition is a problem too big to be solved by any company on its own, and companies need to engage the wider ecosystem of customers, suppliers and peers up and down the value chain.

For example, when building the hydrogen economy, many players will need to come together, everyone from renewable energy generators to electrolyser producers to offtakers.

5. Empowered green organisation

Top management may be fully convinced of the need for aggressive decarbonisation, and new recruits often have to choose an employer based on its green credentials. Yet the task of delivering on decarbonisation has solidly moved into middle management, and some companies underinvest in convincing and empowering middle management to get the job done.

Successfully navigating the downturn

It's now critical to integrate decarbonisation delivery into the current performance management system by aligning incentives to decarbonisation, by putting a price on carbon in the decisions that matter -- and providing clarity and guidance to middle management on how to resolve trade-offs.

As CEOs plot their strategy across these five areas, it will be easy to get diverted by unrealistic future predictions or by the naive illusion that moving to a greener business is an easy task.

But companies that take an approach of visionary pragmatism will be on solid footing to navigate the changes -- and outpace their less-nimble and less-prepared competitors.

This article is also published on Bangkok Post. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.