5 ways companies can turn decarbonization goals into reality

It will take a combination of vision and pragmatism for companies to reach their decarbonization goals and drive value creation in the process. Translating carbon net zero into zeroes for the bottom line enables companies to step up their decarbonization investments.

Five areas will assure success: strategic adaptation, investor and lender resonance, “customer-back” decarbonization, partnerships for results and empowered green organizations. These are more critical than ever as we face a likely downturn.

Companies don’t need more climate scenarios but clarity on the relevant ones. Most importantly, they need to identify the signposts that will indicate what’s coming next. This is especially vital given the expedited pace of policy and technology advances.

Historically, scenarios and signposts were focused on climate transition risks, such as changes in end-market demand. Now, this extends to climate physical scenarios – changes to weather patterns affect business resilience. In any downturn, and with climate change intensifying, winners will adopt a living strategy. Frequent updates to the board and executive committee on strategic issues will be split between a delivery agenda (what has been agreed upon and what needs to be executed); and a development agenda (critical topics that need to mature for a decision to be made).

As part of that living strategy, companies will find themselves taking steps to deliver results today, such as improving energy efficiency and optimizing supply chains, while investing in next-generation solutions.

Shareholders are sharpening their expectations about decarbonization yet, simultaneously, aren’t willing to compromise on near-term returns. This perceived tension can create dissonance in capital markets. While much of the effort to communicate on decarbonization has been aimed at shareholders, lenders have also become increasingly discerning, with the Glasgow Financial Alliance for Net Zero firming up criteria for net-zero alignment ahead of implementation.

It will be critical for companies to recommit to proof points to show investors and lenders how a more profitable business in the medium-to-long term is also a more sustainable one. That means demonstrating how they’ve started to reduce carbon in cost-effective ways while making the business resilient to climate risks. They’ll also be required to show distinct pathways – options to get to net zero – and how they will be flexible based on evolving regulations and technology.

Companies that are most successful in their climate transitions start with the customer in mind and work decarbonization backwards across offerings, operations and suppliers. More than ever, it will be critical to understand the sustainability priorities of customers navigating a downturn and focused on costs. The increased pressure on cost requires an even more specific articulation of the benefits of low carbon as part of an integrated value proposition. A crucial prerequisite is to de-average the customer base, applying a different approach and price point to different customers. Not all customers are moving at the same pace, so targeting the right ones based on their carbon ambition, progress, and the internal carbon price is the best way to achieve the right green premium.

The carbon transition is too big to be solved by any one player, and companies need to engage the wider system of customers, suppliers and value chain peers. For example, when building the hydrogen economy, many players will need to come together, from renewable energy generators to electrolyser producers to those buying the end product or service.

Another benefit of partnering is that it can spread costs on new approaches, which is important during a downturn. Policymakers should be part of these partnerships. It is critical for companies and industry alliances to engage with governments early and often as partners in shaping policies to hasten decarbonization and create value. Corporations can offer solutions that regulators may not have considered. At the same time, the constraints and opportunities of the policy landscape are not always well-known to corporations. Credible companies will build these relationships and be consistent in their policy asks.

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

Leading companies are integrating decarbonization delivery into a company’s current performance management system – aligning KPIs and incentives to decarbonization, putting an internal price on carbon in the decisions that matter and providing guidance to middle management on how to resolve trade-offs. This only works by inspiring the organization while giving people the tools they need to navigate complex decarbonization decisions.

As CEOs plot their carbon and energy transition 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.

Climate change is becoming more evident, geopolitical risks will surface, and macroeconomic challenges will emerge. 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.