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Closing the Climate Action Gap
Faced with geopolitical uncertainty and market volatility, business leaders might feel the need to deprioritize climate commitments. But the success of their companies—and the future of the planet—rests on converting those pledges into action.
Climate change remains a threat, but the world has made great strides in the past three decades.
The average rise in global temperatures is slowing, and net zero has become the norm.
The heaviest-emitting sectors—energy, industrials, transport, and agriculture among them—have been critical leaders in the cross-industry effort to become more sustainable.
Corporations, governments, and individuals are taking action to avoid further warming. Brands are increasingly climate positive, removing more carbon from the atmosphere than they emit.
Efforts aimed at improving biodiversity and water security—and decreasing pollution and food waste—have also gained broad support and sufficient funding to make a positive impact.
While plenty of work remains, sustainability no longer feels like a distant goal —we’re well on our way to achieving it.
How did we get here?
Time Is Running Out
There’s no sugar coating it: the above scenario is becoming less likely with each passing day.
But it’s still within our grasp. To get there, tackling climate change must remain a top priority for businesses everywhere.
Ambition ≠ Action
While many companies have announced their intention to reduce emissions, achieve net zero, and deliver on other climate goals, few have made it far along the journey.
What’s standing in their way?
Stumbling Blocks
To make progress on realizing their climate commitments, leaders need a clear, aspirational vision and a detailed roadmap for execution.
The first takes courage—a willingness to look beyond short-term pressures to confront an even greater problem. The second takes resources—the knowledge and institutional backing required to make actual progress. But companies also face some practical obstacles to closing the climate action gap:
Accurate Emissions Measurement
Few companies have a comprehensive understanding of their greenhouse-gas output—or the impact of those emissions.
Few companies have a comprehensive understanding of their greenhouse-gas output—or the impact of those emissions.
Just 9% of companies measure their total emissions comprehensively; 81% omit some of their Scope 1 and 2 emissions, and 66% do not report any of their Scope 3 emissions. What’s more, companies estimate an average error rate of 30% to 40% in the measurements they do make. Without understanding the full extent and composition of their total emissions, companies won’t know where to prioritize their reduction efforts—or how to measure their progress accurately.
Climate Action as a Moving Target
The science on climate change continues to evolve. Companies must continuously adapt their responses as a result.
The science on climate change continues to evolve. Companies must continuously adapt their responses as a result.
While limiting the temperature increase to “well below 2°C” was considered a reasonable goal a few years ago, the latest research suggests that every additional fraction of a degree has a profound impact. As the rate of actual temperature increase and the pace of emission reductions change, abatement targets and pathways may need to change with them. Given these circumstances, making commitments—and setting the targets to meet them—is a significant challenge.
Unclear Roles and Responsibilities
Companies can’t deliver meaningful results without establishing clear accountability for sustainability goals and initiatives.
Companies can’t deliver meaningful results without establishing clear accountability for sustainability goals and initiatives.
Since net-zero goals often require considerable cross-functional coordination to achieve, confusion over which part of an organization is responsible for which activities can create overlapping remits and slow down progress. The result? Confused execution and duplication of resources.
Variation in Regional Laws and Regulations
Sustainability efforts vary widely across different regions, as do laws and regulations related to climate.
Sustainability efforts vary widely across different regions, as do laws and regulations related to climate.
Companies with operations and supply chains in regions that have yet to take aggressive climate action may struggle to find support for their emissions-reduction efforts from governments or citizens. Meanwhile, regions that are leading on climate efforts are finding it difficult to translate their ambitions into policies—and companies operating in these locations are uncertain whether moving quickly to slash emissions could generate a competitive disadvantage.
At-Scale Deployment of New Technologies
Deployment comes with some significant obstacles, including uncertainty about projected costs and effectiveness.
Deployment comes with some significant obstacles, including uncertainty about projected costs and effectiveness.
Reaching longer-term targets, particularly those in high-emitting sectors, will require new technologies. Moreover, current assets in these sectors have long lifespans and high capital expenditures—making it likely that companies that adopt new technologies will incur major losses if they need to decommission legacy assets earlier than planned. Without the right regulations, policies, and investments, there is a risk that abatement progress stalls in heavy-emitting sectors after the easy-to-abate emissions have been eliminated.
How to Close the Climate Action Gap
Plotting a clear and certain path to sustainability is challenging. But that shouldn’t prevent leaders from turning their climate commitments into climate action. Here are five critical steps.
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The companies finding the most success on their climate journeys aren’t interested in basic compliance or achieving incremental improvements. They’ve embraced sustainability as a powerful business opportunity, embedding it into the core of their strategy. Leaders should:
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Get uncomfortable.
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Ask the big questions.
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Identify new opportunities and create options for the future.
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Collaborate, sometimes in unexpected ways.
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Get uncomfortable.
Reducing the negative impact of existing business activity is an important first step toward climate action.
But the real value lies in making bold, organization-wide changes. Leaders need to embrace the discomfort that comes with rethinking their assumptions and tackling intractable issues. They must be ready to communicate to shareholders the short- and long-term implications of becoming more sustainable.
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Ask the big questions.
Boards, CEOs, and other senior leaders should ask themselves:
How can we evolve our portfolios to align with changing demands and new regulatory pressures? How can we grow revenues from sustainable segments, and how can we restructure value chains to capture unique sustainability advantages? Are we enabling a sustainable transformation for all stakeholders? Finally, how can we make our value chains more resilient in anticipation of future climate-related disruptions?
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Identify new opportunities and create options for the future.
The most forward-looking companies are generating high returns from sustainability.
They’re creating new revenue streams, entering new markets, and developing offerings around climate action. They’re diversifying their supply chains and investing in emerging technologies, sometimes on a regional basis—directing investments where they think the fastest progress for a given technology will occur. They’re using scale and market position to create network effects and lower costs, and they’re reinventing the most critical parts of the value chain—reducing their exposure to increasing costs, logistical disruptions, and regulatory constraints.
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Collaborate, sometimes in unexpected ways.
No company can close the climate action gap by itself.
Instead, businesses will have to collaborate along value chains, across industries, with governments—and even with the competition. That means making the case for stronger policy support, promoting a message of green growth and jobs, participating in corporate-led sustainability alliances, and working in ecosystems that make it easier to access capabilities, scale fast, and achieve flexibility and resilience.
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To organize for climate action, leaders must inject sustainability into an organization’s DNA—ensuring that employees and external partners alike remain focused on climate goals over the long term. Leaders should:
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Embrace the fundamentals of transformation.
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Take a structured approach to change.
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Create a governance and operating model to drive sustainability.
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Evolve your culture.
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Embed climate as a core KPI.
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Embrace the fundamentals of transformation.
Sustainability is a relatively new objective, but the basics of transformation still apply.
Top executives need to make certain that their leadership teams are aligned, that their people are engaged, and that their organizations are ready to execute. Large-scale transformations of any type are complex efforts that require major investments and structured implementation efforts—but with proper leadership, they can succeed.
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Take a structured approach to change.
Businesses need to be methodical in their transformation efforts.
Attempting too many actions at once may cause individual climate initiatives to receive fragmented attention and insufficient resources. A portfolio approach can help leaders identify, test, challenge, and unify their pipeline of initiatives to determine which are already making an impact, where more effort is needed, and which new initiatives may be possible in the future.
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Create a governance and operating model to drive sustainability.
To close the climate action gap, companies must have the right mechanisms in place.
Boards, in addition to senior executives, have a critical role to play here. They should establish a governance and operating model to track and understand rapidly evolving climate trends, facilitate innovation, capture new opportunities, adapt role reporting and executive sponsorship, and create new processes.
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Evolve your culture.
Businesses won’t be successful at closing the climate action gap unless all employees share in the vision.
The organizational culture should therefore be designed to promote climate action—supported by appropriate behaviors, learning and development programs, incentives, recognition, workforce planning, and talent recruitment. This culture can be fostered by engaging leaders in the climate agenda, setting expectations for achieving targets, and incentivizing changes in behavior, acknowledging that many climate initiatives may not reach fruition for five to ten years.
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Embed climate as a core KPI.
Reducing greenhouse-gas emissions should be just as important as driving growth and minimizing costs—and metrics should reflect that.
Leaders need to optimize every aspect of their business—strategy, R&D, operations, supply chain, and sales—for emissions reduction. And they should tie performance on key emissions-reduction indicators to compensation; otherwise, long-term sustainability goals frequently lose out in favor of near-term financial performance. Taking these steps will help organizations achieve their climate goals and prepare for coming regulations that put a price on carbon in various markets.
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Companies should take tangible, practical steps to assess their starting position and chart a clear course for closing the climate action gap. But it’s equally critical to align stakeholders around the opportunity that lies ahead.
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Start with purpose.
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Establish a de-averaged emissions baseline.
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Tell a compelling story.
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Engage the supply chain.
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Start with purpose.
Purpose motivates a company’s stakeholders, drives its strategy, and elevates its branding.
It acts as rocket fuel, accelerating the adoption of net-zero efforts as well as ESG transformation. Harness this energy to drive innovative and value-creating changes across the business. Purpose is a critical filter for developing a strategy that is authentic—focused, credible, distinctive, visionary, and inspiring.
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Establish a de-averaged emissions baseline.
Calculating your current emissions is a precursor to taking climate action.
This includes the emissions being produced by business units and functions as well as across the value chain. A baseline is fundamental to setting goals and validating them with science-based target-setting organizations and to tracking progress over time; it’s also critical for producing external communications, such as sustainability reports and climate-transition action plans.
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Tell a compelling story.
Companies need a compelling and distinctive sustainability story.
That story should fit the organization’s broader ESG narrative, and it should be supported by far-reaching ambitions, tangible actions, and transparent progress. It should be relevant to the concerns of key stakeholders, emphasizing that taking climate action will create new opportunities and drive business performance. And it should be communicated with courageous honesty, a bold vision, and commitment.
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Engage the supply chain.
For most companies, the bulk of emissions stem from the supply chain.
It is therefore essential to work with suppliers—collaborating more closely than purely optimizing for unit costs—to achieve reductions and ensure greener supply inputs. From the supplier’s perspective, getting earlier clarity on demand enables greener investment and production decisions. Suppliers may also find that adapting to the needs of their customers will result in a more sustainable business model.
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Taking climate action doesn’t have to hurt the bottom line. Many emissions can be reduced at little to no net cost, and the price of green tech and renewable energy is falling. Climate leaders view sustainability as a strategic investment, not an operating expense, and they’re making budget adjustments that will generate significant future value. Here’s how:
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Implement quick wins to fund the journey.
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Deploy flexible capital-allocation strategies to improve decision making.
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Think beyond the usual boundaries.
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Innovate alongside others.
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Implement quick wins to fund the journey.
A significant reduction of emissions can be achieved through mature, low-cost technologies and methods.
While the specific amount varies by sector, joint research by BCG and the World Economic Forum suggests that, across major industries, an average of 50% of emissions reductions can be achieved this way. Implementing circular processes and recycling, becoming more energy efficient, and deploying renewable power sources can help companies reduce both emissions and expenses—which can allow the financing of more expensive emissions-reduction measures.
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Deploy flexible capital-allocation strategies to improve decision making.
Investment decisions are becoming increasingly complicated.
This is especially true for large capital projects, which require long payback periods. Climate leaders allocate capital and resources flexibly and adjust their budgeting process accordingly. Rather than making one-off decisions for projects that may take decades to deliver, they remain agile, using a test-and-validate approach. They leave their options open, ensuring that the economics of green investments continue to hold despite changing market environments.
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Think beyond the usual boundaries.
There’s a major opportunity for companies to access new funding sources and government subsidies.
They can do this by striking innovative partnerships and new deal structures that bring the right stakeholders together to drive climate action. Institutional investors, for example, are linking up with social investors and governments to derisk investments in new technologies. Corporations, industry associations, and governments are seeding climate innovation funds that will invest in and support the next generation of climate-focused companies.
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Innovate alongside others.
Companies that pursue costly solutions risk not getting very far by themselves.
Ecosystems—made up of corporations, governments and public institutions, investors, venture capital, companies, universities, and others—unlock new possibilities, accelerate the speed of change, and ultimately lower prices through scale. Universities can generate research solutions and cultivate talent, for example, while investors can provide the capital to fund new technologies. Companies add tremendous value to this collaborative model, given their ability to broadly integrate technologies and implement solutions.
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Making sustainability a competitive advantage requires integrating technology and data from the start—particularly artificial intelligence. With AI, companies can optimize processes, identify efficiencies, and take a data-driven approach to closing the climate action gap. Leaders should:
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Strive for a “technology ecoadvantage.”
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Use AI to measure emissions.
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Deploy digital twins.
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Become more informed.
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Strive for a “technology ecoadvantage.”
Advanced technologies can enable profitable solutions that have a positive impact on climate initiatives.
The key is rethinking traditional approaches to technology to drive more sustainable operations, processes, tracking capabilities, and beyond.
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Use AI to measure emissions.
By deploying AI, businesses can automatically ingest and report emissions data.
They can calculate a carbon footprint, run simulations, set targets, manage a global portfolio of abatement initiatives, and more.
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Deploy digital twins.
Companies can leverage advanced analytics and AI to create virtual models of their supply chains.
This includes the measuring of carbon emissions. Armed with digital twins, businesses can optimize processes, track progress, scenario plan, and better embed ESG considerations into their decision making.
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Become more informed.
AI makes it easier to conduct climate research and modeling.
It can be used to forecast carbon prices or to generate recommendations for sustainable-behavior nudges. Businesses can also use AI to anticipate their vulnerability and exposure to the long-term effects of climate change (such as sea-level rise) as well as to near-term weather events or other crises.
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Unlocking Opportunity
The past few years have presented leaders with acute, unprecedented challenges.
Ongoing supply chain pressures, geopolitical tensions, market volatility, talent shortages, and other issues are making it exceedingly difficult to look beyond the immediate demands of shareholders and the necessities of short-term survival.
But the greatest disruption to business won’t be encountered tomorrow.
But the greatest disruption to business won’t be encountered tomorrow.
It’s already happening today.
Continued lack of action will only increase the scale of emissions reductions required down the road and raise the risks of extreme weather events and other climate-related catastrophes.
CEOs are right to be alarmed—but they have every reason to be excited.
The Sustainable Advantage: Insights on Creating Competitive Advantage Through Sustainability
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