The Climate Actions Companies Should Take

Related Expertise: Climate Change and Sustainability, Social Impact

The Climate Actions Companies Should Take Today

By Jens BurchardtVeronica ChauHubertus MeineckeCornelius Pieper, and Paulina Ponce de León Baridó

Turning climate plans into concrete action is at the top of the agenda this week as business and global leaders gather at the World Economic Forum’s annual conference in Davos. We asked several BCG climate experts what CEOs need to accomplish on climate before the end of 2022. Among their recommendations:
  • Companies need to get a handle on their Scope 3 (value chain) emissions as investors and regulators increasingly demand transparency on the full emissions footprint.
  • While corporate leaders traditionally have managed their businesses to drive growth and minimize costs, CO2 emissions must be given equal weight as those financial performance metrics.
  • There is currently a ramp-up in the deployment of climate capital – and this creates a major opportunity for companies to access new funding sources, including by striking innovative partnerships.
Companies that accelerate their net zero progress can carve out a lasting competitive advantage. Read about the 2022 CEO climate agenda here.

Commitments to decarbonize the global economy—now frequently led by companies as much as governments—have reached critical mass. But even as CEOs understand the imperative to act, many find it difficult to know exactly what actions to prioritize—or how to identify and seize new opportunities created by the global net-zero push.

Turning climate plans into concrete action was at the top of the agenda recently when business and global leaders gathered at the World Economic Forum’s Annual Meeting in Davos. Here, five of BCG’s climate experts offer their take on what CEOs urgently need to accomplish before the end of 2022.

2022 Is the Year to Rip Up Your Climate Plan

By Jens Burchardt

The list of companies making climate commitments is growing longer every day. This is good news. But targets that may have seemed ambitious yesterday are no longer enough. In 2022, companies face new urgency to rethink their climate initiatives and raise their ambitions. There are three reasons to do this.

We are in an energy crisis. In the wake of Russia’s devastating invasion of Ukraine, companies are waking up to new threats. Russia’s war has sent energy prices soaring and raised the specter of energy shortages in western Europe. In this context, companies should accelerate investments in efficiency and non-fossil energy as a mere matter of risk management. At the same time, the push for independence from Russian energy imports has created an environment in which governments are more willing than ever to provide regulatory support for new energy technologies such as renewables, heat pumps, hydrogen, or alternative fuels. Companies should seize the moment.

Climate-related stranded-asset risk is now becoming real. As of the beginning of 2022, almost 80% of global emissions were subject to national net-zero targets. And most developed economies are now committed to a net-zero date of 2050 or earlier. If society is to deliver on those commitments, the time for fossil-based solutions will quickly run out. Within the next few years (in some cases today) almost all further investments into fossil assets in Western countries will be at risk of not seeing the end of their economic lifetime. So far, many companies fail to recognize this.  

We are entering a decade of sustainability scarcity. Political, corporate, and private net-zero ambitions are accelerating. This will drive demand for green technologies and resources significantly faster than most companies currently expect. Demand for everything from renewables to electric vehicles to hydrogen to recycled and non-fossil materials will soar, as will demand for the underlying commodities to scale them up. Markets such as sustainable aviation fuels, in which producers were struggling to attract investors only three to four years ago, are suddenly undersupplied. It is good to be in a scarce market. Companies that can build sustainable products and services should scale them yesterday.

This is the year to think bigger. We have seen companies set seemingly outsized ambitions—and unleash the creativity and ingenuity of their people to get there. Such action may seem bold. But now it’s simply prudent.

Back to the top

The Race to Secure Climate Financing Begins

By Veronica Chau

Banks, insurers, and investors representing a total of $130 trillion in assets have already committed to combatting climate change. In 2022 we are seeing a ramp-up in deployment of that capital toward the decarbonization of the global economy—including in heavy-emitting, hard-to-abate industries—and the development and scale-up of new climate technologies.

This creates a major opportunity for companies to access new funding sources, including by striking innovative partnerships that bring the right stakeholders together to drive climate action.

That opportunity, however, will be available only to companies that craft credible decarbonization plans. Those lacking a solid roadmap to net zero will find it more difficult to access capital in general.

For many companies, collaboration with players across their ecosystem will be a key factor in success. Consider the example of a food manufacturer that wants to reduce not only direct carbon emissions (Scopes 1 and 2) but also emissions across its entire value chain (Scope 3). Reducing Scope 3 emissions will require changes in agricultural activities, including the adoption of regenerative farming practices. If the company’s efforts face initial resistance from farmers, the food maker may need to provide assurances about who will buy sustainably farmed products and offer some assistance in financing the transition. As a result, success will hinge on the participation of numerous players, including not just the food maker and farmer but also distributors, retailers, and bankers.

For their part, banks and institutional investors will need to ensure they have the necessary talent and capabilities to put climate capital to work. Among other things, this means training and activating bankers who will work with corporate clients on decarbonization efforts, including through the scaling of new technologies such as hydrogen or carbon capture and storage.

At the same time, these players will need to strike partnerships and create new deal structures. Institutional investors, for example, are linking up with social investors and governments to derisk investments in new technologies.

This sort of creativity and collaboration will be critical to putting trillions of dollars to work to address the planet’s greatest challenge. Fortunately, that money is finally flowing—for companies that are ready to go after it.

Back to the top

The Window Is Closing on First-Mover Advantage

By Hubertus Meinecke

Midway through 2022, company leaders are facing a host of new challenges. The war in Ukraine has wrought tremendous suffering and created significant geopolitical uncertainty. Supply chains, already strained by the pandemic, have been further disrupted. Meanwhile, inflation has surged. Such events may lead CEOs to deem climate action a lower priority for now.

But that would have far-reaching—and costly—consequences. Despite the wave of net-zero commitments from countries and companies around the globe, the pace of decarbonization progress to date is far short of what is required to limit warming to the 1.5 degrees Celsius set out in the Paris Agreement. Continued lack of action will only increase the scale of emissions reductions required down the road—and raise the risk that some of the most dire impacts of a warming planet become reality.

For companies, this makes 2022 a pivotal year. Given the time required to decarbonize end-to-end operations and supply chains, those that are not pushing aggressively this year are likely to fall dangerously behind. Those that do accelerate their climate action will enjoy a flywheel effect, with benefits such as an enhanced brand, strong customer demand, and healthy market valuations. The bottom line: 2022 is likely the last year most companies will be able to seize the climate first-mover advantage.

To capitalize on this opportunity, companies must make a fundamental shift to embed climate as a core KPI. Traditionally, corporate leaders have managed their businesses to drive growth and minimize costs. But now they must add CO2 emissions as a metric of equal importance. They need to optimize every aspect of their business—strategy, R&D, operations, supply chain, and sales—not only for growth and costs but also for carbon-emissions reduction.

Leading companies are already doing this. They start by putting an internal price on carbon—whether or not they are operating in markets with regulations that require it. And they embed climate into every aspect of their business. Some, for example, have developed a digital twin of their supply chain that includes measures of carbon emissions, allowing them to optimize along all three dimensions—growth, costs, and carbon footprint.

As company leaders intensify their climate activities, it is critical that directors at those companies bring the right support and oversight to move from commitments to action. There are signs, however, that boards have work to do in this regard. According to a recent survey of 122 directors at large companies by BCG and the INSEAD Corporate Governance Centre, climate was cited as a top—if not the top—ESG priority by most board members. Yet among directors serving on boards of companies that had made a net-zero commitment, just 55% reported that their company had prepared and published a plan for hitting the target.

There is a major opportunity for those companies that move beyond commitments and create an integrated plan for their business, from strategy through operations. Those that do will be able to build a new and lasting source of competitive advantage.

Back to the top

Decarbonization Gets Real for Industrial Goods Companies

By Cornelius Pieper

A long—and expanding—list of consumer-facing companies have made ambitious net-zero commitments, including Scope 3, over the last several years. What happens next?

The decarbonization wave is now traveling up the value chain, increasingly impacting companies in industries such as machinery manufacturing, steel, cement, and chemicals. Consumer products manufacturers, electronics players, and the like are starting to act on their commitments and will demand transparency on carbon emissions from their suppliers. Once they have that, they will move their business toward those suppliers that can offer low-carbon inputs so that they can meet their own targets. The ramp-up in demand for green inputs from consumer companies will be swift.

Unfortunately, too many industrial companies today are underestimating the speed with which this change is likely to occur. Many compare the business case for green products with the business case for their existing base business under current market conditions and determine that green markets are not yet attractive enough to warrant big investments. But the logic inherent in such an assessment is flawed: companies are assuming the base case is here to stay, when in fact it may soon start to erode. And they insufficiently anticipate the sudden shift in demand likely to happen in the next few years.

This assessment comes with significant risk. For one thing, it will take time for companies to develop green products and decarbonize their assets and suppliers—and these efforts will require major investments, including to scale new technologies. Industrial companies that are not investing aggressively enough now will fall behind, leaving room for others to carve out a lead and build competitive advantage in the market for low-carbon products.

In addition, companies that wait will likely struggle to find people with the right skills and capabilities to lead the charge on new green products and business models. A machinery company that wants to move from internal combustion engines to battery-powered products, for example, will need a team of engineers with expertise in batteries. Such talent is already in short supply and likely to become more so over the next few years.

To understand the opportunity in green products—and the downside of moving too slowly—consider the market for green steel. Traditional primary steel production is a heavy-emitting operation, with approximately two tons of CO2 emissions (Scopes 1 and 2) per ton of crude steel. Green steel, which uses hydrogen as the reducing agent with iron ore and releases H2O instead of CO2, is roughly 50% to 70% more expensive to make. That cost differential has dissuaded some big steel players from investing aggressively in green steel. However, HYBRIT—a joint venture between SSAB, mining company LKAB, and Swedish power firm Vattenfall—took the leap of faith and has invested in a (small) green steel production facility. At this point, they are oversubscribed. Rather than waiting for the market to magically appear, leading players are going ahead and creating it.

The success of such ventures does not in any way mitigate the challenge facing industrial companies. Certainly, many have major issues aside from decarbonization with which to contend, including ongoing disruptions in global supply chains. But they can’t let that distract them from the long-term decarbonization imperative. Industrial companies that wait for a “green premium” to be firmly established in the market before investing to decarbonize their products run the risk of being left with a “gray discount” in the form of a stagnating market for products with a high greenhouse-gas footprint.

The risks of moving are declining by the hour. And the risks of waiting are increasing just as quickly. There is a tipping point. Most companies are close to—or even beyond—that tipping point without recognizing it.

Back to the top

The Game Changes on Emissions Measurement

By Paulina Ponce de León Baridó

Companies are beginning to tackle one of the most critical—but challenging—tasks in their net-zero journeys this year: addressing Scope 3 emissions.

Many companies have made progress in tracking and managing emissions from their own operations (Scope 1 and Scope 2 emissions). But they face increasing pressure on all fronts to measure and slash their Scope 3 emissions—the carbon released along the value chain, including by suppliers and customers. This focus on Scope 3 means companies can’t merely transfer their emissions challenge to suppliers by outsourcing or divesting operations. Now is the time for companies to gain a clear picture of their entire emissions footprint, create a plan to reduce those emissions, and rapidly turn that plan into action.

The impetus to track and reduce Scope 3 emissions—which often account for as much as 80% of a company’s total greenhouse gas footprint—is driven by three factors:

  • Investors are increasingly pressing companies for details on their value chain emissions and reduction targets. For example, more than 700 investors with $68 trillion in assets under management have committed through Climate Action 100+ to engage high-emission companies, encourage them to enhance their climate-related reporting, and align their targets—including for relevant Scope 3 emissions—with the goal of keeping the global temperature increase below 2 degrees Celsius, ideally 1.5 degrees.  
  • There is a powerful trickle-down effect at work. As companies make net-zero commitments, they ask their suppliers to provide transparency on emissions. And those suppliers in turn press players in their supply chains to do the same. This domino effect will catalyze improvements in how companies design products, source materials, and manage their supply chains.
  • Regulators are pushing for improved climate disclosures. Earlier this year, for example, the US Securities and Exchange Commission proposed new rules that, among other things, would require public companies to report Scope 1, Scope 2, and (if material) Scope 3 emissions in their financial statements. This is in line with recommendations from the Task Force on Climate-Related Financial Disclosures, which have been embraced by hundreds of investors worldwide.

Regardless of where regulations ultimately land, accurate emissions measurement—including Scope 3—will increasingly become table stakes globally. This will require a major shift. According to a BCG survey of nearly 1,300 large companies, just 9% measure their total emissions comprehensively—and 66% do not report any of their Scope 3 emissions. And those that do report Scope 3 emissions face a host of challenges. A lack of sector-specific guidance, for example, results in inconsistent reporting of material Scope 3 emissions even within sectors. And emissions tracking overall is still error prone, with respondents to the BCG survey reporting average error rates of 30% to 40%. New AI-based tools that can enable companies to gather accurate emissions data, including Scope 3 measurements, are coming to market and can help address that issue.

But measurement is only the beginning. Once companies get a clear picture of their entire emissions footprint, they must create a plan for reducing those emissions—and then deliver on that ambition. This will include setting science-based targets, engaging suppliers, and driving accountability through metrics such as the carbon intensity of a company’s activities, products, and services. Plans must also account for the impact of company growth—and the potential resulting increase in emissions from business expansion.

Certainly, no company can do this alone. Leaders are already working with suppliers and their peers to tackle these challenges. Such efforts clearly come with uncertainty—and that can be uncomfortable for companies that have well-honed operational and strategic planning processes. But those that embrace the difficult, often transformational, journey to net zero will emerge as winners in a decarbonized world.

Back to the top

Subscribe to our Climate Change and Sustainability E-Alert.

Subscribe to our Climate Change and Sustainability E-Alert.