The recent conclusion of COP26 Summit has clear indications that sustainability is going to emerge as key factor in the operations and growth of businesses. Businesses must prepare their strategy to move towards net zero. The threat of climate change and the zeal of key institutional investors have forced companies to revisit their business models and adopt responsible and sustainable business practices. The setting section of the current issue of 'the Hub' features a study that helps in understanding as to how decarbonization is going to scale up and business leaders must act to gain from this transition.

A. Drivers for a Low Carbon World

There are four key forces that are driving the action towards a low carbon world; technology, investor sentiment, regulation, and customer behavior. Newer green techs have come up or have become more efficient. For e.g. renewables have become cheaper for power generation, cost of lithium-ion batteries have come down sharply etc.

Investors have sensed the backlash being faced by the emitting industries, which can grow stronger in the coming years. They have started pricing climate risks while making investment decisions and rewarding businesses taking climate smart initiatives. Industries with a larger carbon footprint will find it difficult to raise capital in the near future.

Regulators have also sensed the urgency to respond to the climate change challenge and are encouraging businesses to reduce their carbon intensity through pricing carbon or better environmental disclosures. For e.g. EU has a well functioning carbon trading system, regulators around the world are demanding more stringent, standardized, verifiable and comparable non-financial disclosures to compare performance of companies on sustainability. Consumer behaviour is also changing and increasingly more consumers are now demanding green products.

B. How can businesses start their journey towards Net-Zero?

• Set net-zero target: The first step towards net-zero for the businesses would be to accept the fact that they have to achieve this goal in a given time framework. They should build different scenarios to reach this goal in the most efficient manner.


• Measure your carbon footprint: Companies should measure their carbon footprint in the most comprehensive manner using the most recent methodology. Assuming there is a set carbon price, businesses must look at how their competiveness will get affected and what will be impact on customers, investors and other stakeholders.


• Develop specific strategies: The above implications should be divided into three main categories; operational, capital and growth and plans should be formulated around each category to ensure that the company survive and thrive.


• Start early and invest in people and technology: Companies should invest on people and build capabilities and bring in right talent and skill sets. The change will also demand investing in newer technologies and also put in place processes to ensure a smooth transition. The journey for each company will differ depending on the sector in which it operates. However, an early starter will always have an advantage over its peers.

 

We duly acknowledge the authors and Boston Consulting Group for this note on their study with the same title