The guiding principles in leading the carbon transition

Torsten Lichtenau - Bain & Company’s Carbon Transition Impact Area

Governments and international organisations are increasing their ambitions, with China committing to carbon neutrality by 2060 and the European Union proposing to raise its target from 40 to a 55-per-cent reduction by 2030. Meanwhile, the United States has pledged to cut emissions at least in half by 2030.

Investors and capital are also turning towards green investments. The Transition Pathway Initiative benchmark, which assesses companies’ preparedness for the low-carbon transition as well as their targets against the Paris Agreement, is supported by 104 investors globally, representing more than $26 trillion in combined assets under management and advice. Private equity firms are actively setting carbon reduction targets. And consumers are becoming aware and demanding action – with companies responding.

In October, Petronas became the first energy company in Asia to set net-zero targets when it declared it would be carbon neutral by 2050. The companies leading the carbon transition follow two main principles. They simultaneously play defence and offence, and they view decarbonisation as a way to accelerate a full-potential transformation.

Many companies begin their carbon efforts as a way of defending themselves, often by preparing for reporting requirements or anticipating shareholder expectations. They also consider how they will mitigate potential physical risks. Mining companies, for instance, need to anticipate how water scarcity, flooding, and rising temperatures linked to climate change will hurt productivity. Playing defensive also means preparing for stranded assets.

However, the carbon transition represents as much upside opportunity as downside risk. Companies are playing offensive by taking proactive steps to create new value. Take Bosch, for example. Beyond achieving carbon neutrality itself, the company is developing new products and services to help other companies decarbonise.

Embracing the need for a full strategy overhaul is the second guiding principle. When Bain & Company surveyed 80 business leaders in oil and gas, utilities, new energy, chemicals, agribusiness, mining and minerals services, and financial markets, 60 per cent said that an energy or resource transition was central to the future of their sector, and another 35 per cent are starting to change their priorities and create opportunities. Those leaders acknowledge that the climate imperative requires a full-potential transformation that touches every part of the organisation.

Companies pursue three types of transformations. Some, like Unilever, have evolved their core business towards sustainability. Others have added a second core. Consider how Finland’s Neste has gone from a traditional oil-driven company to the world’s biggest producer of renewable diesel, dropping the word oil from its name in the process. And others have changed their core entirely. Denmark’s Ørsted used the carbon challenge as an opportunity to develop a market for offshore wind.

Regardless of how far along they are in the carbon transition journey, companies typically answer the following four questions.

How bold and fast should our ambition be?

Leading companies are clear about their decision when it comes to the basic trade-off between speed and boldness. Blackstone opted for speed by aiming to reduce emissions by 15 per cent within three years of ownership at all new portfolio companies where it can control energy usage. Shell chose boldness by setting a target of becoming a net-zero-emissions business by 2050.

What are the available levers?

In pursuing a carbon transition, companies have three sets of levers to deploy: strategic, operational, and offsets. Ørsted used its strategic lever by shifting away from fossil fuels. A significant portion of such moves can actually be positive for returns on investments, even without a price on carbon. Microsoft has led the way in developing the voluntary carbon market and associated offsets, pledging to remove all carbon it has emitted since its founding in 1975 by 2050.

How can we adjust the company?

The price of carbon is a major consideration in capital allocation, with carbon reduction an important factor in operational improvements, manufacturing decisions, and research and development, among other areas. Companies integrate decarbonisation into procurement choices and incentives and then communicate these efforts to customers as part of the new value proposition. To be truly serious about decarbonisation, it cannot just be a function. It needs to permeate every single process, in every single employee.

How do we engage stakeholders?

More than any other transformation, decarbonisation draws on a company’s ability to assemble and collaborate with an ecosystem of investors, suppliers, governments, non-governmental organisations, peers, and also other stakeholders. Companies need to learn how to create dialogues with organisations beyond their own walls and seek productive partnerships. For example, Wind Denmark and Hydrogen Denmark, broad-based organisations that support those power alternatives, have formed an alliance to promote the use of renewable energy–powered electrolysis.

Achieving net zero requires companies to identify opportunities to create value through cost reduction or growth, in addition to risk protection. That means prioritising areas for deployment based on return of investment and external requirements, while linking the sustainability agenda to business metrics.

For any queries, contact: Dale Hardcastle, partner and co-director of Bain & Company’s Global Sustainability Innovation Center based in Singapore, at dale.hardcastle@bain.com.