This article is sponsored by Sphera Solutions.
In April, the Intergovernmental Panel on Climate Change (IPCC) released Part Three of its Sixth Assessment Report, saying we need to focus on reducing carbon and switching from fossil fuels to renewable energies. The UN body warns that climate change is accelerating much faster and that climate impacts and their corresponding social, structural and economic implications are realizing sooner than predicted by scientists.
However, the reality is that corporate climate commitments are often ambiguous and emission reduction commitments are limited. Carbon Market Watch’s new report analyzed 25 of the world’s largest companies, which accounted for 5% of global GHG emissions and revenues of $3.2 trillion in 2020. In their climate commitments, companies’ net zero targets commit to only a 40% reduction in aggregate emissions, not 100%, as the term “net zero” suggests. Carbon Market Watch also cites a disappointing lack of urgency among companies that so far have not used available emissions reduction measures.
Additionally, a 2021 CDP report shows that there are significant gaps in the disclosure of corporate climate strategies. Just over a third of the companies surveyed are considered to have credible emissions reduction targets. Of the more than 13,100 organizations that provided information to CDP, less than a third (4,002) said they had developed a low-carbon transition plan.
So how can companies develop a deep climate strategy to achieve deep decarbonization?
To embed a climate strategy by setting and meeting science-based decarbonization targets, then transforming and aligning the business strategy accordingly, companies can follow these steps:
1. Develop a carbon inventory
- Implement an annual, iterative and in-depth emissions quantification process.
- Implement a comparable and manageable software-based carbon accounting program.
A climate strategy starts with an in-depth assessment of carbon emissions at the corporate level, from Scope 1 to Scope 3, as well as developing an in-depth understanding of the carbon footprint of key products.
This exercise is an iterative task and must be disclosed annually at the corporate level. The company’s carbon footprint should be ‘in-depth’, detailed over time, and aligned with an organization’s activity data management maturity level.
The challenge is primarily to develop an understanding and method to measure the organization’s indirect Scope 3 emissions and link this to product information. This means that a company must combine emissions from the company’s value chain with product carbon footprint information across the portfolio.
2. Assess carbon reduction potentials
- Assess carbon hotspots along the value chain.
- Analyze mitigation measures for direct and indirect emissions.
Deep decarbonization includes the assessment of carbon hotspots along the value chain. This includes understanding reductions in direct emission sources (Scope 1), energy purchase (Scope 2) and indirect emissions upstream and downstream in a company’s value chain (Scope 3) . Scope 3 carbon reduction efforts include assessing product-level reduction potentials – from purchased materials, products, and services to the processing and use phase of a company’s own products. Here, expertise in life cycle analysis (LCA) and a deeper understanding of these materials and products are essential.
3. Develop a decarbonization roadmap and set science-based targets
- Develop climate scenarios and a decarbonization roadmap.
- Confirm the decarbonization trajectory through standards.
Once the reduction potentials have been assessed, companies must develop decarbonization scenarios. This includes building a business as usual scenario to understand the evolution of the carbon inventory with business forecasts and company growth objectives.
Based on this business as usual scenario, quantified mitigation measures and carbon reduction potentials should be applied in a time sequence. Through this application, corporate climate scenarios can be derived and discussed.
The resulting and confirmed decarbonization trajectory leads to the elaboration of a climate commitment, composed of short, medium and long-term climate objectives and the elaboration of an overall net zero objective. This set target must then be confirmed by standards, such as science-based targets (verified by the Science Based Targets initiative, or SBTi) and the recently established net zero target.
4. Align your holistic climate strategy with your business strategy and manage climate-related risks and opportunities
- Create a business case for the climate strategy.
- Understand the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
- Prepare governance and KPIs.
A business strategy is to create value. The climate strategy involves reformulating what has value for a company and therefore requires business model innovation for a new form of value creation and ecosystem thinking. At this point, benchmarking, positioning around your own climate trajectory, and building a business case is necessary. This is then discussed with the C-suite to align the climate strategy with the overall business strategy and include the “Climate KPI” in every key business decision.
In addition, understanding and integrating climate-related risks and opportunities in line with TCFD recommendations is necessary. The recommendations are structured around four thematic areas that represent essential elements of the functioning of organizations: governance; strategy; risk management; and measures and targets.
Finally, a strong climate strategy requires an implementation strategy based on a climate governance structure and the development of respective key performance indicators. This means identifying and defining clear structures, the necessary resources, a timetable and responsibilities to achieve climate ambitions. It should provide a framework to ensure the integration of a business climate and strategy. Translating the strategy into the right KPIs for each area will ensure that the implementation stays on track and continues.
5. Implement a climate strategy through eco-design and consideration of planetary boundaries
- Introduce an internal carbon price.
- Use eco-design for sustainable product innovation.
- Consider other environmental impacts to avoid load shifting.
Implementation sets the stage for success as a true climate leader. Knowledge transfer is essential to ensure that all functions are in line with the transformed business model. Every decision and action requires carbon management, and tools such as an internal carbon pricing mechanism can help drive it.
The Scope 3 challenge shows that the analysis of a company’s product life cycle is key. Therefore, eco-design — the consideration of environmental aspects at all stages of the design process — plays an important role. Ensure that you have a central eco-design team that uses the respective LCA tools at product level and integrates eco-design tools, such as eco-design processes and KPIs, as well as software and tools of data that are in coordination with your team.
Finally, the focus on reducing GHG emissions often results in a load shift to other environmental impacts that are equally important to progress in reducing emissions. Ensure the company understands all planetary boundaries around climate change, biodiversity integrity, ocean acidification, ozone depletion, atmospheric aerosol pollution , biogeochemical fluxes of nitrogen and phosphorus, freshwater use, Earth system change, and the release of new chemicals.
6. Track progress through a carbon management governance system
- Establish an iterative review of climate ambition and carbon reduction potential.
- Disclose progress annually.
It is not a one-time event. Companies must constantly review and assess their climate ambitions and progress, and understand potential targets and time lags for short-term goals. This is necessary to ensure that the organization is fully utilizing its carbon reduction potential and is in line with the overall decarbonization roadmap. Additionally, organizations must quantify and disclose their emissions and reduction progress annually.
This can only be ensured by a corporate ESG governance system that receives all the quantitative information from the inventory, the reduction potentials and the decarbonization roadmap, as well as qualitative information on the risks and opportunities and reporting frameworks.