Partner, ERM; former climate change and sustainability specialist, BCG
Companies are increasingly under pressure to decarbonise. Even where regulatory pressure is lacking, investors and employees are pushing companies to act; a credible and public plan to get to net zero has become essential to attracting both capital and talent. Demand-side pressure is likely to be the next accelerant for companies to decarbonise, as companies reduce their supply chain emissions and end-users demand greater action on climate.
There is significant uncertainty in how technology, economics and politics will evolve over the coming decades. For most companies in hard-to-abate sectors, this means plotting a clear and certain path to net zero isn’t possible as they rely on technology that has not yet been proven commercially. Leaders of these companies are understandably reluctant to commit to a target without a clear roadmap.
However, a lack of a clear roadmap shouldn’t prevent companies from acting now—such as by setting clear net zero targets, setting interim targets, and planning near-term actions. There is nothing disingenuous about committing to a destination without knowing the precise route—provided the company is taking credible first steps and there are multiple paths to the end point. The important part is to set a target and get started. For example, Eneco committed to carbon neutrality by 2035 without knowing exactly what they would do with their gas-fired power stations, but they knew they had credible options to make them sustainable or close them down.
The journey for hard-to-abate industries cannot wait for certainty. Companies are making investment decisions for growth and refurbishments that effectively commit them to decades of production—and the associated emissions. With many potential lower carbon alternatives for companies requiring a fundamental shift in core operations, companies need to fully consider these today and as part of their broader roadmap. Investors are reacting accordingly, applying pressure to companies that move too slowly and rewarding top performers with higher valuations and lower cost of capital. Employees are also growing reluctant to work for heavy emitters that are seen to be dragging their feet; an ambitious climate strategy and tangible action is becoming key to attracting talent.
Executives need to become more comfortable with uncertainty because much of it won’t be resolved by the time bold action is required. It’s valuable to clarify where exactly there is uncertainty, how to reduce it, and where actions are clearer than they might seem.
For many companies, there is often a high degree of certainty over the levers that can significantly reduce emissions in the short term. These abatement levers are typically surfaced by front-line staff who are close enough to the details to be able to assess the financial and operational implications. If aggregated, these abatement levers often add up to greater short-term emissions reductions than executives expect.
Common examples include purchasing renewable electricity, applying energy efficiency measures, recovering waste heat, managing fugitive emissions and installing alternative catalysts—all of which can typically be implemented with little risk and modest abatement costs. As Exhibit 2 shows, some emissions in hard-to-abate sectors can be reduced while saving money, which can then be invested into low-cost abatement levers.
Progressing from short-term emission reductions to long-term net zero is the toughest part of the decarbonisation journey for hard-to-abate sectors, and the pathway is often uncertain.
For example, ammonia producers—for which hydrogen is a key feedstock—need to decide whether they will take a bet on green hydrogen or carbon capture and storage (CCS) (which effectively turns their existing carbon intensive hydrogen production to blue hydrogen). Choosing green hydrogen involves betting that costs of the enabling technology will continue to dramatically decrease. Betting on CCS relies on the company continuing to attract investors despite CCS’s constrained success to date, and maintaining social license while operating emissions-intensive infrastructure and storing carbon. Both green hydrogen and CCS involve considerable upfront costs—potentially locking the business in to the technology.
To gain confidence to set long-term targets without knowing how to abate the last 20-70% of emissions, it’s valuable for companies to plot multiple abatement pathways, as shown in Exhibit 3. This could include different technologies or different portfolio approaches such as divesting a business unit or transitioning to selling a low-carbon alternative.
Once these pathways have been developed, companies should work to reduce the uncertainty so that when they hit a crossroad, executives can make a more informed decision on the best route to net zero. In the case of hydrogen, this might involve conducting trials with small electrolysers. In areas with other emitters and potential carbon storage locations, it may be prudent to engage with other companies to gauge the appetite for sharing the costs of CCS infrastructure. At the same time, companies should collect customer and investor input to form a complete picture. They should also undertake engineering studies to further reduce uncertainty—but these studies must be framed and scoped appropriately, and fully incorporate the subsequent economic comparisons (particularly against the downside risk of inaction). Refer here for more on changing investment frameworks to support a net zero strategy.
Ultimately, transitioning to net zero will require companies in hard-to-abate sectors to fundamentally transform. The initiatives required to decarbonise hard-to-abate sectors are generally of a scale and nature that cannot be run as ‘side projects’—they need to be closely integrated with core operations, and owned and implemented by the business.
Like any organisation-wide transformation, a climate transformation requires considering a wide range of factors. In our experience, successful sustainability transformations involve following six key steps:
Getting started on a net zero journey in hard-to-abate sectors can be daunting. It represents a fundamental shift in approach to operations, with significant uncertainty, and significant cost. But rather than allowing ‘hard-to-abate’ to remain in the ‘too hard bucket’, companies in these sectors can and must act now. Once the journey begins, many organisations are pleasantly surprised at how much can be meaningfully abated at a reasonable cost over the next five years. As shown in Exhibit 2 earlier, even in the hardest-to-abate sectors like steel, cement, aviation and shipping, emissions can be reduced by about a third at no net cost.
Starting this journey also breaks down the uncertainty into a series of specific, technical, and operational questions that can be studied and resolved—just like any other business problem. Done right, companies can draw on their existing skills, capabilities, and assets to unlock sustainable advantage—but getting this right requires bold leadership and conscious framing. If companies get this wrong, they could find themselves left behind the competition, struggling to attract talent and capital.
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