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Shift your mindset and accelerate your decarbonization pathway

Authors

12 minute read 16 Dec. 2022
Related topics
Sustainability

Companies can accelerate their response to climate change by trying to make common problems more simple – and less likely to block progress.

In brief

  • Some of the demands and responsibilities that slow decarbonization efforts can become catalysts for change.
  • A relentless focus on what actually matters can unlock action, cut emissions faster and create more financial value.
  • There’s no “last-mover” advantage. Companies that keep waiting on the sidelines will soon find it impossible to act.

Here are three things everyone knows about decarbonization: it is hard, it has to happen, and it is not happening fast enough. There’s little point complaining about how hard it is. And we don’t need to remind business leaders about the catastrophic cost of inaction. The focus now has to be on finding the right strategies and practical actions to decarbonize faster.

The targets and timeframes most companies are working with today are not ambitious enough. The world needs a 45% reduction in carbon emissions by 2030 to achieve the Paris Agreement goal of limiting global warming to 1.5 degrees Celsius, compared to pre-industrial levels. That’s only seven years from now. The recent EY Sustainable Value Study found only 35% of companies have committed to cut emissions on or before that deadline.

Meeting carbon reduction goals
Of organizations globally have not yet committed to cutting emissions by the Paris Agreement target date of 2030.

Our study shows that financial and planetary value are not mutually exclusive. The further companies go on their climate action journey, the better their returns. Those that have taken the most action – we call them Pacesetters – are 2.4 times more likely than the least active – who we call Observers – to report significantly higher financial value than expected and to have achieved a larger reduction in emissions to date.

Pacesetters vs. Observers
Pacesetter organizations are 2.4 times more likely to report higher financial value and larger emissions reductions.

When it comes to decarbonization, how can you move from the Observer group to become a Pacesetter? And if you are out in front already, how do you accelerate? Every company is different and needs to find its own path. But one difficulty everyone will face is the overwhelming scale, urgency and complexity of the challenge. We believe that the only way to unblock action and get change happening at the speed the world needs is to make this challenge more simple. We’ve identified five ways to shift your mindset, and activate change more quickly.

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1

Chapter 1

Set goals that sound impossible

If your ambitions are too low, you won’t create the focused effort that decarbonization demands.

When we say time is running out, we don’t just mean the opportunity for the world to avoid a climate disaster is shrinking. More specifically, we mean companies that don’t start now will find that, when they do finally decide to act, they won’t be able to – it will be too late for them.

The investment, talent, opportunities, resources and so on needed to decarbonize are not limitless. They will be seized by companies that have already committed to a decarbonization roadmap. Companies that are still in the “wait and see” mode, need to act now. Action needs to start right now. There is no such thing here as “last-mover advantage.”

You’ll need to solve multiple interconnected challenges on the journey to decarbonization, none of which are easy. Your work will be delayed and made harder by factors beyond your control. However, there is one critical variable that you can control: you can set a clear and almost impossible decarbonization target. Why impossible? Because targets that look too easy have no positive impact on behavior – if anything, they sap energy and demotivate people.

To set a clear and meaningful end date on your decarbonization roadmap, you need to understand how carbon impacts your full value chain. When you know your starting levels, you can define interim targets. Any roadmap that shows a clear linear progression from milestone to milestone should be challenged. The reality will not be so smooth.

Setting targets and deadlines doesn’t make decarbonization any easier, but it does simplify the challenge for your people and clarify what’s needed from them. A difficult target takes several action-paralyzing options off the table, such as waiting for things to get easier. It directs people to action. It shows everyone inside your organization and beyond that you mean business, which helps you move faster.

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2

Chapter 2

Use compliance to accelerate action

The need to comply with regulation can be a catalyst that makes positive change happen faster.

Executives can sometimes feel that regulation and disclosure are a burden or cost to business, not a benefit. This is understandable and there is some logic to it. Societies have regulations so that organizations and individuals complete tasks they might not do otherwise. But with decarbonization, the opposite is true: regulation and compliance can be your friend, helping you move faster.

The Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, for example, are designed to help companies assess the risks and opportunities created by rising temperatures, climate-related policy, and emerging technologies. Our study shows that even among Pacesetters, today only 56% conduct a climate scenario analysis every year. This falls to just 2% for Observers. Additional EY research, the EY Global Climate Risk Barometer, finds that company disclosures are still not translating into practical strategies to accelerate decarbonization.

Pacesetter companies
Conduct annual climate scenario analyses.
Observer companies
Conduct annual climate scenario analyses.

This isn’t just about TCFD compliance. From the EU’s Corporate Sustainability Reporting Directive to coming disclosure rules from the US Securities and Exchange Commission, stakeholders and regulators around the world are challenging companies to say more about the climate risks they are exposed to and the actions they plan to take in response, such as reducing their carbon emissions. To comply, companies need to understand and report on the environmental risks they will be exposed to over the long term, and what the financial impact might be. But this is not some kind of theoretical scenario modelling exercise you begrudgingly do to keep regulators happy. It’s work that can and must be done if your business is to have a future.

Many of the stakeholders calling for or requiring better climate risk assessment and disclosure are providing helpful frameworks, model internal processes, action lists, governance structures and so on that you can use. Examples include the Global Reporting Initiative and the Science Based Targets initiative (SBTi).

There is no need to reinvent the wheel when such models are available. Instead, you can focus your effort and attention on critical climate risk assessment issues that do require new thinking, such as how to gather and manage the vast amounts of granular data that risk modelling and analysis requires.

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3

Chapter 3

Prioritize climate in your decision tools

The tools and processes companies use to make investment decisions often exclude the opportunities related to decarbonization.

The move to a decarbonized world will create significant opportunities to generate value. In the conversation around climate change, these opportunities are not always considered. That’s not surprising, given the urgency of the crisis we’re all facing. And in the business context, there’s the added decelerator that people usually think of climate and carbon as problems that create risks, not opportunities to create value.

This has to change. Our study shows that 29% of pacesetting companies have not created new products and services that have low or no emissions. And even among this leading pack, only 60% have established entirely new lines of business to capture market opportunities. Few Observers have yet to act in these areas. What’s getting in the way?

The prejudice in favor of financial value and against long-term value can be unwittingly baked into the tools and models people use to make decisions, causing perverse results.

It’s often difficult for companies to estimate the return on investment (ROI) on transition opportunities with the level of certainty that their traditional decision gates require. You can get stuck and lose time trying to provide evidence that doesn’t exist. This is understandable as the variables involved are often completely new, such as the measurable reduction in carbon emissions. Even though they are understood by environmental, social and governance (ESG) specialists, they might not be understood by finance people, or the ROI models they use.

Nevertheless, our study shows that, on average, 37% of initiatives will have a positive return over their lifetime, while only 19% will have a negative return. This should motivate companies to increase their investments in climate initiatives.

Another way to overcome this barrier is to turn the problem on its head: Justify the value of action by demonstrating the cost of inaction. Once you determine a real carbon price for your business – not a generic measure or a benchmark against your peers – low-carbon activities and assets become relatively more attractive by default.

By including the real cost of carbon in your decision-making you can also release internal funds for investment. Putting an end-date on business activities that depend on unsustainable levels of carbon, as suggested above, also forces the business to find new ways of deploying its capital.

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Chapter 4

Think like an owner

A change in the way your business thinks has to be matched by a change in the way your people behave.

How EY can help

Climate and decarbonization roadmaps necessarily run over a much longer timeframe than the typical corporate cycle. This means leaders and managers have to make difficult choices now about things that might not fully affect the organization until years into the future. Unless they are incentivized to make those decisions, there’s a risk they’ll keep finding good reasons to defer them. As a result, the pace of decarbonization slows.

 

Hearts and minds need to be aligned. When you look at great economic and social transitions from history, the organizations that thrived were often those led by inspired people who owned the business and believed the future was theirs. These leaders took focused action to drive change in the short term, in the expectation that it would create value for the long term. Can you lead your business with this mindset, even if you don't own it? And can you incentivize your people to act in this way? Or at least not incentivize them to take action that slows the pace of decarbonization?

 

In our study, 57% of Pacesetters are assigning accountability to hit carbon reduction targets and 55% are linking these targets to a meaningful proportion of executive compensation. Why are these percentages not higher? Why aren’t more companies putting decarbonization targets on management score cards?

Tying progress to compensation
Of Pacesetter organizations link carbon reduction targets to executive compensation.

Stakeholders inside and outside the company need to know that everyone understands the roadmap and is united behind it. In our study, many companies said a lack of collaboration within leadership teams was impacting the ability to take effective action. Across all companies, 62% said board members and management disagreed on which criteria are most important when evaluating initiatives and 61% said so many groups were involved in initiatives, it was difficult to make progress.

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5

Chapter 5

Report what matters – and stop there

The good intention to keep stakeholders informed can easily lead to an overwhelming dump of data that communicates nothing. Tell a story.

Some companies seem to go beyond the information that actually is needed when it comes to publishing reports. Investors and other stakeholders have made this complaint about financial reporting for years. But a number of companies keep producing the same financial reports anyway, in the same format.

How you report on your decarbonization journey can and must be different. Lay out a clear, compelling and credible plan to get carbon out of your business and create value. Detailing a forward-looking story that stakeholders can believe in and trust, with quantified targets and specific actions will help build trust in your plan for decarbonization.

The story you tell here is your pitch to become part of the future. Likewise, it would be a mistake to waste the heart and energy that goes into ESG reporting without providing the relevant and assured data that makes it really valuable to different stakeholders. For example, our study shows that only 53% of Pacesetters are establishing ongoing emissions measurement and only 55% are getting third-party assurance around their annual emission disclosures.

The gap in third-party assurance
Of Pacesetter companies don’t receive external assurance on their emission disclosures.

Climate reporting can become as complex and time-consuming as every other part of the decarbonization roadmap. Most of the data collection, internal control and reporting frameworks related to climate and decarbonization were never designed to deliver the levels of accuracy and reliability that are required with financial reporting. They are inefficient, with a new layer of process bolted on every time a new reporting need emerges. There’s little distinction between which disclosures really matter. And the reason why a disclosure has to be made at all is not always understood. The difficulty of improving these systems can get in the way of good reporting.

Can you simplify and move faster by focusing on what really matters to your stakeholders, and how that differs between stakeholders? What if you reported what matters, and only that? If you spent less time and resources reporting to stakeholders, and more time engaging with them the benefits would multifold.

It’s helpful to start with engagement in mind and work backwards from there. Identify your biggest reputational risk areas and the most promising value creation opportunities, and what you are doing about them. Then overlay an analysis of the reporting that’s non-negotiable from a regulatory and compliance perspective. This will define your “north star” – the story that is unique to your organization.

When you understand your story, you can define what facts and data you need to tell it, then get assurance around that – not around everything. Telling a clear, credible and compelling story will help you to decarbonize faster.

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    Summary

    Companies need to accelerate their response to climate change and end their unsustainable dependence on carbon much faster than the current pace. By looking at the most common progress-blockers through a new lens, most apparent challenges can actually become catalysts for change. By keeping a tight focus on what really matters, they can cut emissions faster and create more financial value.

    About this article

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    Related topics
    Sustainability

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.