How companies can deal with climate change

Industries want to embrace a low-carbon world, but finding the path to reductions is more complicated than they expected.

If the coronavirus pandemic has taught us anything, it has demonstrated the horrific consequences of not addressing crises before they manifest themselves. Despite predictions of global pandemics years ago and even warnings in January once the coronavirus began to spread across China, most major economies were caught unprepared in terms of quarantine and testing regiments and medical equipment to contain the spread of the disease and cope with the scale of casualties.

Will climate change be any different? Despite the current focus on COVID-19, failure to respond to the Earth’s climate challenge still is��today. Where development of a vaccine can and will eventually stop COVID-19, the only thing that can avert climate change is cutting emissions of carbon dioxide (CO2). And after decades of warnings — not too dissimilar to those about pandemics — emissions continue to rise not fall.

Today, there is rising concern about the current climate threat among the public, some governments, and the investment community. In January, Black Rock CEO Larry Fink told chief executives his firm would make investments with environmental sustainability as a core goal and would exit investments in companies that “present a high sustainability-related risk.”

Just recently, France told some companies they would have to cut emissions as a condition for receiving COVID-19 financial aid and said it would support sales of low-emission cars like electric vehicles (EVs) with the bailout money. Other European countries — and maybe even the European Union — are expected to follow. Even in the United States, probably among the economies dragging its feet most on climate change, the Congress has been considering similar conditions for financial aid. In 2019, the European Union began discussing more ambitious goals for emissions reduction as part of its Green Deal: By 2030, emissions would have to be cut by 50 to 55 percent from 1990 levels instead of the 40 percent discussed in the Paris Climate Agreement.

Reducing emissions cannot be addressed by slapping on some solar panels, planting trees, or buying carbon offsets alone

Stricter regulation and the mounting public demand for more aggressive cuts in carbon-dioxide emissions are creating an existential risk for companies that are not proactively moving to reduce their carbon footprint. This cannot be addressed by slapping on some solar panels, planting trees, or buying carbon offsets alone. It will require making investment decisions with multimillion-dollar and even multibillion-dollar implications, despite huge uncertainty about where future regulation and technological innovation will take the industry and global economy.��

Seize the moment

What this should tell companies is that we’ve reached a tipping point and failure to address emissions and pursue carbon-neutral strategies endangers your business. Immediately, the risk is from increasingly stringent but regionally different regulation that may put companies at a competitive disadvantage. Ultimately, the risk will be suffering the consequences of rising temperatures, including flooding, severe storms, droughts, and wildfires. Companies need to put the issue at the top of the agenda.

How do companies systematically approach reducing their CO2 emissions? Designing and communicating a comprehensive CO2 strategy is complex, given that carbon footprints extend along value chains and across more than one industry. For instance, a steel company needs to first consider its own Scope 1 carbon emissions — those released by production activities at its coke ovens, sinter plants, and blast furnaces. But it also must contain its carbon footprint by controlling its Scope 2 emissions, based on the source of its electricity, and Scope 3 emissions, which span a large landscape from its supply chain of iron ore producers to its customers that can be an automaker or a wind turbine manufacturer.�� For that reason, there is no “one strategy fits all” approach — even within the same industry.

WHERE COMPANIES SHOULD LOOK TO FIND CO2 EMISSIONS

For multinationals and companies with many production sites, there’s the added complexity of confronting the variation of regulatory rules across geographies affecting CO2, other greenhouse gases, and energy efficiency in general.

Effective CO2-reduction strategies therefore not only require bringing together interdisciplinary competencies from across one’s own company, but also cooperation along value chains — from both suppliers and consumers. Designs for carbon-neutrality must consider short-term actions as well as options for long-term transformation.

On the positive side, pursuing carbon-neutral strategies can open up opportunities:

A 2019 CDP-Oliver Wyman report found that European companies could anticipate €1.2 trillion of new revenue opportunities from low-carbon goods and services that would cost less than €200 billion to realize.

A 2020 ��ϳԹ�й�� Insights analysis found that the impact of a company’s environment, social, and governance (ESG) performance on workforce sentiment can be a source of competitive advantage and will become increasingly important to attracting and retaining millennial and generation Z employees as they gradually constitute the bulk of the workforce.

The ZER��approach

Oliver Wyman developed��ZEROW, a customizable approach to designing comprehensive CO2 strategies. The dimensions of��ZEROW��emerged from our work across various industries including automotive, financial services, technology, and process industries like steel. It reflects insights we gained from consulting that covered��the three scopes��of decarbonization��as well as other facets of CO2 strategy design:��

OLIVER WYMAN’S WORK IN DECARBONIZATION STRATEGY DESIGN SPANS ACROSS INDUSTRIES AND SCOPES OF EMISSIONS

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The Situation

To reduce its carbon emissions, a global automotive supplier set out to define tangible targets and results to measure its performance over time.

The Approach

These targets which were designed to serve as a comprehensive competitor benchmark for the newly-appointed Vice President of Carbon Emissions included measures for Scope One, Two, and Three emissions. and were the basis for an emissions reduction target disclosure. In order to measure progress over time, a timeline for emission targets and reduction levers was developed. This benchmark, coupled with an overall climate stakeholder analysis, led to a much better understanding of what the company needed to aim for in order to differentiate.

The Impact

To the company, it was obvious from the start that reaching these goals would not be possible on its own. Consequently, it began to consider opportunities to identify truly innovative partners to work with to generate a competitive edge for the long-term.

Steel companies face a daunting challenge to reduce carbon dioxide (CO2) emissions to comply with regulations and prepare for the low-carbon world.�� But many steel companies are ready to try.

Oliver Wyman recently helped a European steelmaker develop a comprehensive carbon-emissions reduction strategy that spans the industry’s value chain. The approach leverages an interdisciplinary team of specialists to create a timeline for change and analyze options as they are developed.

The Situation

Under the European Union Emissions Trading System, steel producers are required to buy CO2 emission allowances — a carbon offset that may need to increase in price over time as much as 10-fold for nations to achieve reduction targets. Despite governmental mechanisms to level the playing field, these costs can become a competitive disadvantage when selling against steelmakers not subject to comparable carbon emission regulations.

European steelmakers are also facing pressure from their industrial customers to cut emissions as they to try to reduce their own carbon footprint. Given these incentives to reduce emissions, steel companies need to be proactive — especially since the typical time horizon for capital investments in steel is anywhere from five to 15 years.

For a carbon-intensive industry like steel, there are no easy or inexpensive options when it comes to achieving substantial cuts in emissions, and factors related to plant location and individual plant layouts limit one-size-fits-all solutions. Reaching carbon neutrality is going to require rethinking the entire value chain — parts of which, such as the development of renewable energy and green hydrogen capacity, fall beyond the province of a single steelmaker or even the industry.��

The Approach

Oliver Wyman was brought in to help bring a degree of order to a discussion rife with technological and regulatory uncertainties This included creating a process for site-specific risk assessment and evaluating and prioritizing site-specific options for decarbonization.

To lead the project, a team of interdisciplinary specialists was created that could bring a technical and commercial mindset to the project. ��The group needed the ability to cut through the noise of details and the many “what if’s” using new and agile ways of working. Leveraging effective communication would be vital to ensure all involved parties agreed and understood what they we were putting in motion.

It was an iterative and dynamic process. New ideas were added continuously, through brainstorming sessions, competitor analyses, and discussions with existing and potential business partners. Whenever a new idea popped up, the interdisciplinary team categorized it immediately in terms of its technological feasibility, risk, CO2 savings potential, cost, return on investment, and time horizon. This classification was done rapidly, sometimes in sprint sessions or dedicated design workshops. Instead of producing highly detailed models with spurious accuracy, knowns and unknowns were translated into outcome ranges.

The near-term goal of the group was to evaluate the range of options available to the company to move toward carbon neutrality, create a critical timeline, and establish checkpoints where decisions would need to be made or targets met.

The Impact

��Out of this process, potential transformational paths toward lower CO2 steel production were identified, with key performance indicators and financial impacts for each. This provided senior management with the metrics and rationale for choosing one path over another, which would prove helpful in conversations with external stakeholders.

Even so, steel’s solution will require developing new value chains centered around sustainable technologies and energy, and partnerships across industry sectors. To justify large capital expenditures on projects with potentially longer term horizons, some predictability about regulation will be required. Without these, the industry — though willing to transform — may find itself paralyzed by uncertainties.

The Situation

Real estate offers great opportunities for clean energy solutions and carbon reduction measures to off-set the 30 to 40 percent of global carbon emissions associated with the construction and operation of properties.�� A major United Kingdom-based real estate investment trust with a cross-European commercial property portfolio had an ambition to develop an energy business based on the roll out of rooftop solar photovoltaic technology across its warehouses.�� This offered the opportunity to combine carbon emissions savings and its associated impact on ESG (environmental, social and governance) assessment, with commercial return and the chance to develop closer partnerships with customers who lease the properties.

The Approach

Solar roll out is an excellent starting point for companies with expansive real estate portfolios due to the readily available supply of roof space, often with limited or no opportunity cost. This is coupled with existing relationships with tenants who act as captive customers for power supply in a win-win dynamic where they also save on the cost of energy they use.�� Furthermore, it also offers a pathway into other progressive energy management approaches such as data-driven energy efficiency, demand response, EV charging and battery storage.��

The Impact

Achieving an attractive commercial return in a world where limited subsidies are available relies on selling power behind-the-meter (BTM) to tenants, therefore avoiding many of the charges that make up the retail bill and benefiting both the generator and the buyer.�� Understanding the BTM opportunity requires estimation of potential generation profiles and site-level consumption profiles to match how much of the generation produced could be used onsite.�� This is combined with subsidy revenues and the market price from exporting excess generation to build up the case, with different hybrid combinations applying to different parts of the portfolio according to site and market dynamics.�� The operating model can be kept light by developing strategic partnerships for financing, development, installation, market access as well as operations and maintenance.

The��ZEROW��approach is roughly made up of three phases: a specific risk assessment and target setting, continuous generation of solutions and strategies, and development of an overarching transformational path to a substantially smaller carbon footprint.

One of the keys to getting a good start in any quest to develop a strategy to mitigate CO2 cost and risk is to recognize that it’s a multidimensional problem dependent upon myriad interdependent factors. There is never one best solution, but rather a range of possible answers, which makes an already complicated task that much more difficult to navigate. Besides internal complexities, companies must also keep in mind potentially shifting commitments and timetables for government regulation as well as potential technological breakthroughs.

Another important element of any effort is understanding that all experts do not speak the same language. That means there is a need upfront to set common goals and priorities.

Companies need to identify early no-regret moves with short paybacks and understand when programs must be evaluated to determine whether they are living up to expectations or being correctly administered to reach their carbon-reduction targets in a reasonable amount of time. To inspire more courageous, entrepreneurial efforts, it is essential to understand points of no return and critical junctures when decisions must be made and action taken.

We have identified nine success factors for carbon-reduction programs that are woven into the��ZEROW��approach:

Companies need to make the��case for change��and present the metrics that identify not only the magnitude of risk but also the potential for gain.
To identify the carbon-reduction effort as a priority, it must receive��full buy-in��and attention from the board of directors and become a regular agenda item for senior management.
Companies need to fully understand��and scope the carbon challenge, making it clear where to focus efforts on. It will require setting ambitious and ideally quantifiable��goals for the identified "problem areas"��and identify the drivers and metrics that will help achieve and measure progress.
Companies need to be truly��open to innovation, no matter where the source. Do so not only within your company but with suppliers, other (potential) partners as well as customers
To spur creativity, interdisciplinary thinking and cross-company innovation,��use co-creative formats��to reach break-throughs, whether it’s well defined innovation tournaments to generate numerous new ideas or highly paced design sessions to work out more complex, integrated solutions.
There will be no one solution to the challenge, but as e.g. political or technological circumstances are in a constant flux, companies succeed in “cutting through the noise” when they have a specific��framework��in place��that helps to constantly sort and prioritize ideas,��both old and new.
This also requires that companies should��from the beginning attempt to quantify��ideas – to put different potential building blocks into perspective right away
To help investors, governments and companies become partners in the transformation, it’s important to develop an overarching��compelling strategic narrative and communicate��it boldly at the right place and time
Given the high cost of transformation and regulatory uncertainty, the impending European Green Deal, COVID bailout money or already existing potential (climate and/or innovation-related) support schemes, a��systematic screening and tapping into sources of support��should flank all other efforts

The global battle against the coronavirus has taught us how being unprepared can lead to rushed decisions, inadequate supplies, and unnecessary deaths. While many thought COVID-19 would make people forget about climate change, it has had the reverse effect. Now people see climate as the next big threat, and pressure is mounting on governments and companies to move us along faster, so we can either avert tragedies or at least be better prepared to face them.

Had we recognized the threat of the coronavirus, we probably could have averted a pandemic, given our current state-of-the-art technology. We could have at least curtailed the death toll. But all that requires the most important step — recognizing a problem and being willing the act before it becomes a crisis. That’s a risk every company faces today with the carbon challenge. In this case, we’ve had decades of warnings, and only now we may be finally ready to make a move.