Global Managing Partner, Roland Berger
This article is part of: Centre for Nature and Climate
Sustainability and climate actions have become economic necessities.
Amid the ongoing global crises, companies will not remain competitive without innovation and action for climate change.
A circular economy in Europe alone would reduce pollution by 72% by 2040 and remove 70% of CO2 emissions by 2050.
The ongoing economic crisis poses a potential gridlock for global decarbonization efforts. Why should business leaders give head space to sustainability targets when they are struggling to keep their businesses above water?
We are currently facing what can best be described as a “polycrisis” – a situation in which numerous harmful events simultaneously occur. The geopolitical situation is turbulent, Europe is living under the shadow of an energy crisis, and global supply chain problems in the wake of the pandemic continue to frustrate manufacturers. Inflation rates have subsequently reached unprecedented heights, and President Putin’s war in Ukraine is causing further massive destabilization. As one might expect, it might not be the best time to think about climate action.
And yet, the current crisis demonstrates that sustainability and climate action are strategic imperatives for companies. Not due to the intrinsic motivation of their leadership or a specific moral purpose but because sustainability and climate action have become an economic necessity.
From a business perspective, switching to sustainable business models and renewable energy sources would be more sensible. Every company investing in renewable energy sources will tell you the same, particularly amidst the current power price hike. Some companies may become reliant on short-term government instruments to support them through the crisis, but in the mid-to-long term, only radical transformation and comprehensive innovation will keep companies competitive.
How can we decarbonize the global economy and tackle climate change
I’ve identified five key levers that can facilitate our efforts to decarbonize the global economy amidst the increasing uncertainty:
1) Smart de-risking
Many of the cutting-edge technologies necessary to achieve ambitious decarbonization targets are already technically available; however, scaling them up will require massive investments in research and development. According to current estimates, clean technologies and infrastructure investments will have to rise to around $3 trillion USD a year in the 2030s.
An investment increase of that size won’t occur without the help of various support mechanisms. “Smart de-risking” can improve the feasibility of lighthouse projects in cleantech by supporting private investment with contributions from the public sector – at least until the technology reaches commercial feasibility. This can range from subsidies to guaranteed purchases or investment alliances – anything that mitigates the investment risk for companies and provides them with a solid basis for investment.
2) Value chain decarbonization
When companies buy intermediate products, they essentially “import” a large share of their emissions. Analogously, companies “export” emissions when consumers use their products. These Scope 3 emissions account for an estimated 85% of total CO2 emissions. In industries like real estate, the figure can be as high as 97%, while in others like utilities, it is around 57%. Nevertheless, most companies fail to disclose the exact level of their Scope 3 emissions or set reduction targets.
Part of the reason is that Scope 3 emissions are markedly the hardest to measure and tackle. For example, multinational automotive manufacturers may have up to 60,000 suppliers, each with its reporting regimes. Identifying and engaging critical suppliers is, therefore, crucial in the attempt to reduce emissions overall. One strategy is for a company to take a collaborative approach, providing top suppliers with a toolbox for decarbonization in return for their commitment to reducing emissions.
Scope 3 emissions are markedly the hardest to measure, presenting a key challenge for tackling climate change. Image: Roland Berger
3) Innovative product design and circularity
The traditional linear economy is based on a “take, make and dispose of” model. The model is both resource- and emission-intensive and simultaneously creates enormous amounts of waste. According to an analysis from our sustainability experts, circularity in Europe alone would reduce pollution by 72% by 2040 and remove 70% of CO2 emissions by 2050. In addition, it would save $1 trillion USD by 2050 and preserve material that would be lost otherwise.
Companies need to rethink their products’ material mix, replacing polluting materials with similar but less carbon-intensive features. They can also adjust products’ dimensions or extend their lifecycle through reuse and recycling. Other opportunities include product-sharing across communities and “product-as-a-service” offerings. Bold moves are needed – not least for the good of the environment but also for the multibillion-dollar opportunity the circular economy represents.
4) A new corporate culture
Climate action requires a new corporate culture that balances sustainability with performance. The firm’s purpose, vision and mission, should be translated into a clear roadmap for its day-to-day activities. Integrating sustainability indicators into performance assessments and decision-making processes can be very helpful. Employees at all levels should be willing to tackle climate change. Nevertheless, the impetus should come from the top down: a culture that promotes employees’ creativity regarding sustainability and openly encourages new ideas gives companies a competitive edge and boosts their potential in the climate action field.
5) Private-public dialogue
Finally, it should be clear that companies cannot do all this on their own. They need to engage in dialogue with governments and policymakers to encourage collective action towards decarbonization. Governments should establish legal frameworks that effectively harness market forces to drive sustainability and decarbonization. This can include carbon contracts for difference (CCfDs), whereby governments subsidize the additional costs associated with green tech to boost investment in these technologies. Such policy instruments should be accompanied by multilateral efforts that protect climate-friendly companies against unfair competition from economies with less ambitious climate targets.
The polycrisis demonstrates that sustainability is a matter of economic prudence: companies will not remain competitive without innovation and climate action. However much pressure we now find ourselves under today, we must not deviate from the sustainable strategies and goals we have set ourselves. Rapid action on decarbonization is no longer a moral choice – it determines whether your company survives and the economy thrives.
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The views expressed in this article are those of the author alone and not the World Economic Forum.