In today’s world, the call for global companies to reduce their greenhouse gas (GHG) emissions has never been louder. The reasons are crystal clear:
- Climate and Transition Risks: Businesses worldwide now face greater climate and transition risks. The effects of climate change are already being felt, and companies must adapt to survive.
- Consumer Demand: Consumers are increasingly seeking eco-friendly products and responsible corporate behavior. Sustainability is no longer a mere trend; it’s a customer expectation.
- Investor Preferences: Investors are embracing capital-allocation strategies that prioritize environmental, social, and governance (ESG) considerations. Companies with strong ESG profiles are seen as more attractive investments.
- Regulatory Pressure: Governments and policymakers are exploring regulations to curb carbon emissions. Companies that proactively address emissions will be better prepared for these changes.
To respond effectively to these challenges, organizations across all industries are setting GHG emission reduction targets, with some committing to “net-zero” emissions across their value chain. In 2020, over 4,500 companies worldwide reported their GHG emissions publicly, and around 40 percent of them committed to specific emissions targets as part of their strategic plans.
Setting the Right Goals
For companies that have not yet set emissions targets, it’s crucial to define clear and ambitious goals. McKinsey’s research highlights that the more ambitious the targets, the better the results. Targets should focus on these critical factors:
- Time Horizons: Consider setting short-term, medium-term, and long-term targets. Short-term targets (by 2025) demonstrate immediate commitment, while long-term goals (by 2050 or later) reflect a comprehensive sustainability vision.
- Scope of Emissions: Differentiate between Scope 1 (direct emissions), Scope 2 (indirect emissions from purchased energy), and Scope 3 (indirect emissions from the value chain) emissions. Scope 3 emissions, though challenging to track, can represent over 50 percent of total GHG emissions.
Industries vary in their ability to meet emissions targets:
- Extractive Industries: Companies in more-extractive industries, such as agriculture and fossil fuels, often face unique challenges. They must address fragmented supply chains, heavy machinery, high carbon usage, and limited alternatives for decarbonization.
2. Less Extractive Industries: Industries like apparel, infrastructure, manufacturing, power generation, and services tend to perform better in meeting targets. However, even within these sectors, some companies lag behind and must remain vigilant in their decarbonization efforts.
3. Technology’s Role: In industries like transportation, fossil fuels, hospitality, healthcare, and biopharmaceuticals, long-term decarbonization requires significant technological breakthroughs. Commitment to execution and technology adoption is key.
The Power of Aggressive Targets
Companies with more aggressive emissions reduction targets often outperform on their path to achieving them. This trend holds true even for carbon-intensive industries like materials, manufacturing, and power generation. Ambitious targets can drive innovation and efficiency improvements.
For companies aiming to set GHG emissions reduction targets:
- Consider Scope 3 Emissions: Don’t overlook Scope 3 emissions, as they make up a significant part of your carbon footprint.
- Success Breeds Success: Achieving emission reduction targets today is a good indicator of future success. Consistent progress demonstrates commitment and capability.
- Bold Targets Lead to Progress: Companies that set bold, ambitious targets are more likely to make meaningful headway against them. Embrace ambitious goals to drive innovation and change.
Setting carbon-reduction targets is not just a compliance exercise; it’s an opportunity to create value from decarbonization. Companies should view it as a chance to differentiate themselves from competitors, and shorter-term targets for 2025 and 2030 are critical for mobilizing action. In conclusion, achieving carbon neutrality and addressing GHG emissions is not only a moral imperative but also a strategic advantage. By adopting comprehensive carbon accounting solutions like Sustainext’s, businesses of all sizes can navigate the path to sustainability, meet ESG goals, and thrive in a changing world. Together, we can build a sustainable future for all.