This article is sponsored by Sphera Solutions.
In April, the Intergovernmental Panel on Climate Change (IPCC) issued the third part of its Sixth Assessment Report, stating we must focus on carbon minimization and the transition from fossil fuels to renewables. The United Nations body warns that climate change is accelerating much faster, and climate impacts and their corresponding social, structural and economic implications are being realized earlier than scientists had expected.
However, the reality is that companies’ climate pledges 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 percent of global GHG emissions and revenues of $3.2 trillion in 2020. In their climate pledges, the companies’ net-zero targets commit to only a 40 percent reduction in aggregated emissions, not 100 percent, as suggested by the term “net zero.” Carbon Market Watch also cites a disappointing lack of urgency among companies that so far have failed to use available emission reduction measures.
Furthermore, a 2021 CDP report shows that significant gaps exist in the disclosures of companies’ climate strategies. Just over a third of the companies reviewed are considered to have credible emissions reduction targets. Of the more than 13,100 organizations that disclosed transition to CDP, fewer than one-third (4,002) reported developing a low-carbon plan.
So, how can companies develop a profound climate strategy to achieve deep decarbonization?
To incorporate a climate strategy by setting and achieving science-based decarbonization targets and then transforming and harmonizing the business strategy accordingly, companies can follow these steps:
1. Develop a carbon inventory
- Set up an annual, iterative, deepening emissions quantification process.
- Implement a software-based, comparable, manageable carbon accounting program.
A climate strategy starts with an in-depth, corporate-level assessment of carbon emissions, from Scope 1 to Scope 3, as well as the development of a deep understanding of the carbon footprint of major products.
This exercise is an iterative task and needs to be disclosed on the corporate level annually. The corporate carbon footprint needs to be “deepened,” detailed over time and in line with the maturity level of an organization’s activity data management.
The challenge occurs mainly in developing an understanding and a method for measuring the organization’s indirect Scope 3 emissions and linking this with product information. This means a company needs to combine corporate value chain emissions with product carbon footprint information over the entire portfolio.
2. Assess carbon reduction potentials
- Evaluate 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 of direct emission sources (Scope 1), the purchase of energy (Scope 2) and indirect upstream and downstream emissions in a company’s value chain (Scope 3). Scope 3 carbon reduction efforts include the assessment of reduction potentials at the product level — from purchased materials, products and services, to the processing and use phase of a company’s own products. Here, life-cycle assessment (LCA) expertise and a deeper understanding of those materials and products is key.
3. Develop a decarbonization roadmap and set science-based targets
- Develop climate scenarios and a decarbonization roadmap.
- Confirm the decarbonization trajectory through standards.
Once reduction potentials are assessed, companies need to develop decarbonization scenarios. This includes the construction of a business-as-usual scenario to understand the development of the carbon inventory with the business forecast and growth targets of the company.
Based on this business-as-usual scenario, quantified mitigation measures and carbon reduction potentials need to be applied on a timeline sequence. Through this application, corporate climate scenarios can be derived and discussed.
The resulting and confirmed decarbonization trajectory leads to the development of a climate pledge, consisting of short‑, medium- and long-term climate targets and the development of an overall net-zero target. This defined target then needs to be confirmed by standards, such as the science-based targets (verified by the Science Based Targets initiative, or SBTi) and the recently established net-zero target.
4. Harmonize your holistic climate strategy with your business strategy, and manage climate-related risks and opportunities
- Create a business case for climate strategy.
- Understand the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
- Prepare governance and KPIs.
A business strategy is about value creation. Climate strategy requires the reformulation of what is of 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 needed. This is then discussed with the C-suite to align the climate strategy with the general business strategy and include the “KPI climate” in every key business decision.
Furthermore, the understanding and incorporation of climate-related risks and opportunities in line with the TCFD recommendations is needed. The recommendations are structured around four thematic areas that represent core elements of how organizations operate: governance; strategy; risk management; and metrics and targets.
Finally, a robust climate strategy needs an implementation strategy built on a climate governance structure and the development of respective KPIs. This means identifying and defining clear structures, required resources, a timeline and responsibilities for achieving the climate ambitions. It should provide a framework for ensuring the integration of a climate and a business strategy. Translating the strategy into the right KPIs for each area will ensure that the implementation remains on track and ongoing.
5. Implement a climate strategy through ecodesign and a consideration of planetary boundaries
- Introduce an internal carbon price.
- Use ecodesign for sustainable product innovation.
- Consider other environmental impacts to avoid burden shifting.
The implementation paves the way for success as a true climate leader. Knowledge transfer is key to ensuring that all functions are in line with the transformed business model. Every decision and action require carbon management, and tools such as an internal carbon price mechanism can help steer this.
The Scope 3 challenge shows that the life cycle analysis of a company’s product is key. Therefore, ecodesign — the consideration of environmental aspects at all stages of the design process — plays a significant role. Ensure that you have a core ecodesign team that uses the respective LCA tools on the product level and incorporates ecodesign tools, such as ecodesign processes and KPIs, as well as software and data tools that are in coordination with your team.
Finally, the focus on reducing GHG emissions often leads to burden-shifting towards other environmental impacts that are just as important for emissions reduction progress. Make sure that the company understands all planetary boundaries around climate change, biodiversity integrity, ocean acidification, depletion of the ozone layer, atmospheric aerosol pollution, biogeochemical flows of nitrogen and phosphorus, freshwater use, land-system change and release of novel chemicals.
6. Monitor progress through a carbon management governance system
- Establish an iterative review of climate ambition and carbon reduction potential.
- Disclose progress annually.
This is not a one-time event. Companies need to constantly review and assess their climate ambitions and progress, and understand potential targets and delays for short-term goals. This is needed to make sure that the organization fully uses its carbon reduction potential and is in line with the overall decarbonization roadmap. Furthermore, organizations need to quantify and disclose their emissions and their reduction progress annually.
This can only be ensured through a corporate ESG governance system that receives all quantitative information from the inventory, the reduction potentials and decarbonization roadmap, as well as qualitative insights on risks and opportunities and reporting frameworks.