Two climate narratives have captured my interest as we transition into 2024. The initial report highlights that 2023 emerged as the warmest year on record, attributed to the impacts of climate change coupled with the El Niño weather pattern. Temperatures soared to 1.48 degrees Celsius above the pre-industrial era, narrowly missing the critical 1.5 degrees Celsius benchmark established in the Paris Climate Agreement. Although temperatures are expected to decrease slightly once El Niño subsides, the alarm signals are undeniable.

As indicated by Accenture’s study, the second narrative reveals that a mere 18% of corporations are on pace to achieve their carbon emissions goals. This trend differs across sectors (refer to the accompanying chart), with industries most vulnerable to climate hazards and regulatory pressures (such as insurance and utilities) advancing more rapidly. Nevertheless, the overall scenario is alarming.

Why is the sluggish progress of companies towards their climate objectives significant? According to statistics from the CDP, cited by Time Magazine, the world’s 100 largest corporations have been accountable for 71% of global greenhouse gas (GHG) emissions over the past three decades. Although the dialogue on GHG emissions often centers around nations, the reality is that corporations, through the products and services they offer that enhance our lives, bear the responsibility for implementing emission reductions. Hence, the global community will fall short if corporations meet their emission targets.

So, what can be done to accelerate corporate efforts in reducing emissions? Addressing this question necessitates understanding how companies generate emissions throughout their value chain.

What’s Included?

Calculating carbon emissions for businesses is intricate, especially for those with global operations. International climate accords have introduced a framework to classify emissions into three categories or scopes to streamline this process.

Scope 1 encompasses emissions from activities an organization controls, such as those from its facilities or fleet. Scope 2 accounts for indirect emissions from the consumption of electricity or other energy forms at a company’s premises, like the expenses associated with lighting and heating an office.

Scope 3, however, includes all other indirect emissions from assets not owned or directly managed by the firm. This spans upstream activities, like emissions from the production of raw materials (e.g., extracted lithium) and the commute and travel of employees, to downstream processes, including the distribution and utilization of products. Scope 3 emissions, representing Scope 1 and 2 for others, often constitute the bulk of a company’s emissions, posing a challenge for businesses to mitigate as they are outside their immediate control.

The diagram below, from the United States Environmental Protection Agency, outlines the emission types categorized under Scope 1, 2, and 3 (inclusive of the 15 types of indirect emissions for Scope 3).

Increasingly, entities are mandated to disclose their emissions across each scope (especially those publicly listed) and to formulate targets and strategies for reducing their emissions in alignment with national Net Zero objectives. This is facilitated through entities like The Science Based Targets Initiative (SBTi), a collaboration among the United Nations Global Compact, WWF, CDP, and other bodies. The SBTi disseminates emissions reduction methodologies and evaluates the goals of private entities to ensure they are in harmony with international accords.

An illustration of emissions accounting comes from the consultancy giant Deloitte, which outlines its objectives and emissions per category within each scope annually. Fundamental to these disclosures is the need for precise emissions quantification, especially for Scope 3, to establish viable goals and track progress.

These documents are immensely beneficial for comprehending a business’s environmental footprint. But, once established, how can companies minimize their emissions across all three scopes?

The Somewhat Simpler Aspect: Minimizing Scope 1 and 2 Emissions

The logical starting point is emissions that fall directly under an organization’s influence. Since these emissions stem from assets owned by the company, organizations possess significantly more flexibility to modify their operations and practices to lessen these emissions. Addressing the two categories within Scope 1 individually, businesses can undertake several strategies:

• Company Vehicles — decrease the fleet size and transition from fossil fuel-driven vehicles to those powered by electricity or other sustainable energy sources (for instance, food delivery services employing bicycles).
• Company Facilities — shift away from fossil fuel-based onsite combustion (like furnaces), enhance company buildings’ air conditioning and heating systems to reduce hydrofluorocarbon emissions, and bolster overall insulation. Nonetheless, specific emissions in this category, such as those from chemical production processes, might currently be fundamental (such as in steel, cement, and ammonia manufacturing), a topic I explore further in a different blog post.

Scope 2 emissions, which solely encompass the ‘purchased electricity, steam, heating, and cooling for own use,’ include the energy costs for manufacturing (which might be challenging to eliminate with present-day technology) and office use. Often, straightforward actions can significantly reduce electricity usage, particularly in office settings, or switch to renewable energy sources to eradicate Scope 2 emissions.

Indeed, this area has witnessed some of the most rapid advancements and notable public declarations from corporations. Once again, Deloitte made news in December 2022 by declaring its intention to reduce office temperatures by 2 degrees Celsius to conserve energy, cut emissions, and lower costs.

The Influence Factor — Reducing Scope 3 Emissions

While these announcements and advancements in Scope 1 and 2 emissions are encouraging and essential, the carbon audit from Deloitte reveals that Scope 3 emissions represent the bulk of their environmental impact, accounting for over 95% of Deloitte’s total emissions. Even for firms with significant manufacturing or chemical emissions in Scopes 1 and 2, Scope 3 usually comprises the most crucial portion of their emissions footprint.

Given the indirect nature of Scope 3 emissions, how can companies strive to diminish them? Across the 15 categories, numerous strategies exist to reduce emissions, yet here we’ll focus on three:

1. Transportation and Distribution (both upstream and downstream) — transportation accounts for 14% of global emissions, with the conveyance of raw materials (such as cotton, rare earth elements, etc.) to company-owned production sites being a critical component. Key considerations in supplier selection include the travel distance of materials, the transportation mode employed, and the sustainability of the materials sourced. Addressing these questions directly influences a company’s procurement choices, possibly favoring closer suppliers. This also enables companies to demand their suppliers demonstrate emission reduction efforts, fostering an accountability network. Salesforce exemplifies this approach by annually assessing and ranking its suppliers based on their emissions and climate impact, among other criteria. The same principles apply to downstream transportation: How can companies deliver their products and services to consumers most emission-efficiently? From packaging to low-carbon delivery options, every element matters, and consumers can apply similar pressure through their buying choices as companies do with their suppliers.

Deloitte, a consultancy firm, illustrates emissions accounting, annually delineating its objectives and emissions per category within each scope. Fundamental to these disclosures is the precision in measuring emissions, especially for Scope 3, to establish fitting targets and to gauge advancements towards these goals.

These reports are exceedingly beneficial for grasping the environmental footprint of a corporation. Yet, once established, how can corporations diminish their emissions across the three scopes?

The Relatively Simpler Aspect: Curtailing Scope 1 and 2 Emissions

Commencing with emissions directly under a company’s purview offers the most straightforward approach. Since these originate from assets owned by the company, there is greater flexibility to modify operational processes and practices to lower these emissions. Addressing the categories within Scope 1, a corporation can undertake several measures:

• Company Vehicles — diminish the fleet size and transition from fossil fuel-powered vehicles to those operated by electricity or other renewable energy sources (e.g., food delivery services utilizing bicycles).
• Company Facilities — switch from fossil fuel-powered onsite combustion (like furnaces), enhance company buildings’ air conditioning and heating efficiency to minimize hydrofluorocarbon emissions, and bolster overall insulation. Nonetheless, specific emissions in this domain, such as those from chemical production processes, may currently be fundamental (e.g., in the production of steel, cement, and ammonia), as elaborated in a separate blog post.

Scope 2 emissions, which solely encompass ‘purchased electricity, steam, heating, and cooling for own use,’ include energy costs for manufacturing (often challenging to eliminate with present technology) and office operations. Frequently, straightforward actions can be employed to reduce electricity usage, particularly in office settings, or to procure renewable energy, thereby eradicating Scope 2 emissions.

Indeed, in this arena, rapid progress and notable public declarations by companies are observed. Utilizing Deloitte as an example once more, they garnered media attention in December 2022 by announcing a reduction in their office temperatures by 2 degrees Celsius to conserve energy, reduce emissions, and cut costs.

The Influence Factor: Mitigating Scope 3 Emissions

While announcements and strides in reducing Scope 1 and 2 emissions are commendable and necessary, Deloitte’s carbon audit underscores that Scope 3 emissions represent the bulk of their environmental impact, accounting for over 95% of their total emissions. For enterprises with substantial manufacturing or chemical emissions from Scope 1 and 2, Scope 3 typically constitutes most of their emission profile.

Given that Scope 3 emissions are indirect, how can companies endeavor to reduce them? Across the 15 categories, strategies exist to mitigate emissions. Here, the focus will be on three key areas:

1. Transportation and Distribution (both Upstream and Downstream) — Transportation accounts for 14% of global emissions, with the conveyance of raw materials (e.g., cotton, rare earth elements, etc.) to company-operated production sites being a significant contributor. Critical considerations when selecting suppliers include the travel distance of materials, the transportation mode utilized, and the sustainability of the materials. These considerations directly influence a company’s procurement decisions, potentially favoring closer suppliers. This also enables companies to demand emissions reductions from their suppliers, fostering an accountability network. Salesforce exemplifies this approach by annually evaluating and prioritizing its suppliers based on their emissions and environmental impact, among other factors. Similar principles apply to downstream transportation, aiming to deliver products and services to customers in the most emission-efficient manner possible.
2. Business Travel and Employee Commuting (Upstream) — This segment can represent a significant portion of Scope 3 emissions for non-manufacturing firms, particularly those with extensive business air travel. The COVID-19 pandemic demonstrated that many face-to-face meetings could be substituted with video conferencing, leading numerous companies to halve their business travel — a reduction necessary for aligning with Net Zero goals. Business travel policies should be revised to reserve air travel for essential meetings that cannot occur remotely, combining as many client engagements as possible into single trips and opting for train travel or virtual meetings otherwise. Regarding employee commuting, the emerging hybrid work model, typically involving 2 or 3 days of home-based work per week, lowers commuting emissions. For onsite personnel, encouraging the use of public transportation, electric vehicles, and carpooling is vital in emission reduction. Appropriate policies and incentives can significantly decrease emissions in this category.
3. End-of-Life Treatment of Sold Products (Downstream) — Disposing of products at the end of their lifespan often leads to landfill accumulation. However, some corporations are promoting product recycling. For instance, Apple’s Trade-In program offers discounts on new devices in exchange for older ones to be recycled. This strategy significantly influences customer behavior, with half of iPhone users participating in the program. Such policies are mutually beneficial as they allow for the reuse of components, reduce manufacturing costs for new items, save customers money, and decrease waste generation.

The Bottom Line

Reflecting on the report that a scant 18% of companies are on course to achieve their emissions goals, the question arises: why should these organizations intensify their efforts to fulfill these objectives? Beyond the increasing legal mandates and ethical obligations, given the significant role businesses play in emissions, the core issue revolves around profitability. An expanding body of research indicates that implementing comprehensive environmental strategies across the enterprise can enhance profits by mitigating ecological risks and reducing operational costs. The delay in taking decisive steps toward emissions reduction escalates the expenses associated with integrating resilience and adaptation strategies into business models, such as maintaining more extensive inventories to mitigate the risks posed by climate-related transportation disruptions.

Moreover, today’s consumers are more environmentally aware and consider sustainability in their purchasing choices, though price remains critical amidst the cost-of-living crisis. Robust climate initiatives can improve a brand’s image and also aid in attracting and retaining talent, particularly among younger generations who are increasingly drawn to companies that demonstrate social responsibility and sustainability.

Globally, governments are pledging to achieve Net Zero emissions starting from the 2040s. Companies proactively aligning their operations with these regulatory expectations will gain a competitive edge in the long term.

The business sector needs help. The transition to sustainability necessitates initial investments that affect short-term profitability and shareholder value, potentially determining a company’s survival in challenging economic conditions. Adopting a long-term perspective reveals that early investments can generate substantial value over time. So, how do business leaders navigate this trade-off?

Innately, humans prioritize immediate concerns, but the resolution to this dilemma recognizes that companies are not isolated entities. They bear obligations beyond the daily competition for market share and the generation of shareholder returns, extending to broader societal and environmental stakeholders. Adopting a comprehensive perspective clarifies that decisive climate action is imperative to foster more resilient and sustainable businesses capable of enduring through time, even at the cost of short-term profit.

The methodologies and instruments for measuring and reducing corporate emissions to meet Net Zero ambitions are available. The onus is now on leadership. Businesses worldwide must take the lead and act in their long-term interests and those of the global community.