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Winning the race to Net Zero

Marko Lackovic and Daniel Oehling
Marko Lackovic and Daniel Oehling6/14/2022 02:48 PM GMT+08  • 6 min read
Winning the race to Net Zero
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There has been a significant shift in net-zero ambitions over the last year, with more than 2,200 companies joining the Science-Based Target Initiative by the end of 2021, echoing a far wider global trend.

While these bold ambitions are to be celebrated, most companies still struggle to implement their climate goals. Recent research by Boston Consulting Group (BCG) suggests more than 75% of companies with 2030 interim carbon reduction targets are expected to fall short of reaching these targets under their current trajectory.

These targets matter to our planet, and they ultimately matter to corporates striving to stay competitive in a rapidly changing world. BCG’s research shows that corporates that are leading climate action in their industry can attract and retain better talent, realise higher growth, save costs, avoid regulatory risks, access cheaper capital and ultimately achieve higher shareholder returns.

Learning to thrive in a net-zero world

Implementing climate goals is no easy undertaking, and there’s no single company we can look to as a template of success. While there is no single best-in-class example, BCG’s research has found six common building blocks in corporates that drive successful implementation of climate goals:

See also: Work towards Asian tailored solutions in climate investing, experts urge

• Build ecosystems, platforms and collaborations across value chains • Advocate and shape policies and regulations

• Set up the organisation to deliver impact

•Help facilitate a just and orderly transition

• Build and enable the talent and skills needed for the future

See also: MAS to cut exposure to coal and oil miners; issues guidelines on ESG retail funds

• Structure yourself for access to funding and financing.

The first building block is to develop ecosystems, platforms and collaborations across value chains. These provide demand signals, bringing together collective purchasing power to jumpstart global demand for new solutions, mobilise investment and draw down costs. They help create trust and transparency to empower a truly sustainable transition. Ecosystems also trigger the development of missing market preconditions such as regulatory frameworks and low-carbon infrastructure. Finally, they catalyse innovation that is fundamental to delivering breakthrough technologies.

The First Movers Coalition, for example, is an ecosystem established to decarbonise seven hard-to-abate industrial sectors which together account for 30% of global emissions. It now incorporates more than 50 companies across five continents to drive market demand and technological advancements. Its latest announcement saw members Microsoft and Salesforce commit US$500 million ($696 million) to purchase carbon capture and removal offsets, in order to drive demand signals in this important market.

Secondly, successful companies advocate and shape policies and regulations. Harmonised reporting standards, carbon pricing and border adjustment mechanisms provide a transparent policy landscape that is crucial for corporates. Transparent policies enable speedy deployment of existing technologies, help de-risk investments in new technologies and promote decarbonisation in public procurement. This helps create the context and incentives for other early movers to successfully lead the way.

Companies are relying on current expectations of changes in a decarbonising world, often combined with poor clarity on how and where that might progress. One example is the impact of proactive and managed domestic carbon pricing against carbon border adjustments imposed on a domestic market by trading partners. Reliance on policy projections also creates business risk, as slow-acting policy suddenly leaps forward to deal with an escalating crisis.

It is in the interest of corporates to proactively engage and support the public-sector decision-making to shape the required policies and regulations to enable and empower the transition. That means pushing and organising for collective action, driving crossborder opportunities, advocating for the role of state-owned enterprises, and speaking up early and consistently.

In Malaysia, BCG collaborated with the World Wildlife Fund to develop a joint independent study to assess Malaysia’s net-zero potential. The study established the Net Zero 2050 case for change and rationale assessing both economic and socioeconomic impact of a net-zero transition, highlighting 10 priorities and key enablers required for a just transition that regulators should account for.

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Third, corporate leaders should set up their organisations to deliver impact. That must include line of sight from company leadership in climate ambitions and goal-setting, as well as multidisciplinary collaboration to ensure alignment. A dedicated unit for monitoring the execution of the climate strategy is also important, with the strategy including clear delineation of roles across corporate functions, and clear segregation between corporate steer and business units.

Fourth, corporates have a responsibility, and a clear motivation, to help facilitate a just and orderly transition. Net-zero transitions will have a disruptive impact on broader society, both in a positive sense with the creation of new jobs and GDP through investment opportunities, as well as potential risks such as increasing energy tariff costs and job losses from fossil-fuel industries.

The most vulnerable communities must be supported to benefit from this journey. Corporates need to consider their own contribution to this just transition, and potentially integrate it into their broader ESG (environmental, social and corporate governance) agenda.

Take the case of Danish power company Orsted, which worked with Poland’s largest privately owned energy producer, ZE PAK, to launch a joint venture in 2021 to bid for offshore wind in Poland, creating thousands of local jobs while reskilling and upskilling the workforce from coal to renewables.

Finally, companies should work to structure themselves for access to funding and financing. Investors are increasingly looking at the carbon profile of a company as a key investment incentive. Analysis shows the top-quartile environmental performers in their respective industry enjoy on average a 100-basis-point advantage on weighted average cost of capital.

Companies and conglomerates with business units that encounter strong tailwinds from the energy transition may want to consider carving them out from the rest of the business to gain more traction with investors or debtors as standalone businesses. It is hard for investors who want to put money behind the energy transition theme to invest in a large conglomerate, if the real attraction is a particular business unit that derives a significant share of its revenue from strong energy transition performance.

In Indonesia, for example, state-owned energy company Pertamina is preparing for an IPO of its geothermal energy business. This IPO is aimed at access to green capital with a business fully focused on renewables, as well as increasing the transparency of its business to the public, with funds raised designed to build partnerships and develop geothermal projects, as well as expand into green adjacencies such as green hydrogen and ammonia.

The net-zero transition for corporates is complex, but focusing on the six building blocks can help corporates achieve their climate goals. Those companies that achieve this are setting themselves up for success, and creating the framework for a sustainable future with enhanced efficiency, optimised operations and improved access to capital that could put them at the forefront of future net-zero business opportunities.

Dr Marko Lackovic is a partner with the Boston Consulting Group; Daniel Oehling is a partner with the Boston Consulting Group

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