Spotlight blog by members of SDSN USA
By Professor Rajat Panwar and Professor Thomas Roulet
The corporate world has shown tremendous enthusiasm in pledging to achieve net-zero emissions. With a new major company joining the list almost daily, net-zero has become a new benchmark for corporate climate leadership. Can companies perform according to this benchmark though? A recent survey of 250 senior corporate executives, in a report called Zeronomics, casts doubt. About two-third of senior corporate executives categorically deny an alignment between net-zero commitments and corporate financial interests.[1]
The survey results are indeed uninspiring, and could easily be dismissed as voicing the opinion of a regressive group of executives resisting change. However, these results are telling because they actually reflect the corporate track-record on the environmental front. According to one estimate, only a small fraction – two percent – of companies succeed in achieving even modest environmental goals; the rest fail. [2] With this as a backdrop, the likelihood of companies achieving net-zero emissions is very slim. The Zeronomics survey cautions us against an impending failure of corporate pledges to achieve net-zero emissions. Indeed, firms such as Berskhire Hathaway, PetroChina, and Saic Motor are already off the path that could lead them to keep net-zero pledges. [3] The lack of accountability and monitoring on a short-term basis are important barriers – corporate commitments span a relatively long-time horizon with no provisions for intermittent monitoring. However, the most critical barrier to achieving net-zero emissions would be to presume that simply scaling up corporate sustainability practices of the past will result in successful decarbonization. It will not!
Corporations cannot keep net-zero emissions pledges unless they make appropriate organizational and strategic changes. In particular, they should pursue three strategies: relocating production sites and reconfiguring value chains, developing net-zero business models and giving those models a central role in corporate strategy, and initiating political and governance changes to support their efforts.
Relocation and reconfiguration of value chains
An essential element of a net-zero corporate strategy is reduction in total emissions (known as Scope 3 emissions). However, this pursuit is not simple given that most corporations are part of global production and supply networks, many of which operate in such an opaque environment that even the identification of suppliers can be a tedious task, let alone forging supply-chain collaborations. [4] Even if suppliers could be traced and their cooperation secured, suppliers would often be unable to reduce their emissions simply because of their locations: many prominent offshore production areas, e.g., China, India, Taiwan, and countless others continue to rely heavily on energy produced from fossil fuel rather than renewable sources. The transition toward the latter is happening, but not fast enough to allow companies to keep their net-zero commitments unless they move to a renewable-rich production area. Relocation must happen even within the boundaries of the same country - relocating production sites to areas where companies can access cleaner energy more easily will be necessary for companies to meet net-zero emissions targets.
Net-zero business models
Innovations will be key for companies to improve their emissions: CEMEX, one of the largest cement producers, is leveraging new technologies to change some of its production processes and components. [5] However, companies cannot achieve net-zero targets by simply adopting new processes. It won’t just be a matter of achieving greater eco-efficiency because environmental gains from eco-efficient processes are short-lived and are quickly counterbalanced by increased production and sales.
Sincere efforts to achieve net-zero emissions targets would therefore require new business models that generate revenue without increasing new production. Thus, these business models must be based on product leasing, sharing, swapping, repurposing, and servicing. Technological innovations will be critical for developing such business models but fundamental shifts in consumer culture will also be required to sustain them. Most previous corporate sustainability efforts have been consumer-driven but net-zero emissions targets entail that companies adopt a consumer-driving approach to proactively shift consumer culture. Companies must deliberately cultivate net-zero consumers and expand this consumer base. The automobile industry for example is working to increase the longevity of products. Some other firms have bet entirely on making their products repairable such as garment producer Patagonia or mobile device producer Fairphone.[6]
Political and governance changes
Obviously, companies cannot achieve net-zero emissions targets on their own. Systemic changes are required. Of critical importance is engaging small business partners and consumers in value-chains. Ninety-nine percent of all firms in the world are small firms; without fully bringing these small firms on board, corporate net-zero emissions will remain hollow promises. Incentives and investments are thus critically important for developing new and affordable technologies. In the American context, for example, the Small Business Administration (SBA) must be endowed with resources to help small businesses finance enhanced net-zero capabilities so they can play their due part in value-chains. The same applies to consumers. Despite the hoopla around expansion in consumer base for eco-products, it remains a very small niche that must be expanded. Through progressive lobbying, companies must mobilize governments to provide for net-zero public financing for systems level transformations. Unilever, for example, explicitly called for ambitious government plans to accompany corporate efforts. [7]
Internally, companies must also pursue governance reforms through measures such as adopting new legal structures, e.g., B-corporations, that could give them greater degrees of freedom to address environmental concerns. We call for this because, despite the increase in investors’ environmental activism, sustainable investments are not evolving as rapidly as needed.
Corporate pledges to achieve net-zero emissions are laudable. However, they cannot be achieved by simply scaling up corporate sustainability initiatives of the past. Rather, companies need to take steps toward making fundamental transformations in their value-chains, business models, and political engagement and governance structures. Unless accompanied with such deep strategic transformations, net-zero pledges will remain smokescreens.
This piece was written as a contribution from SDSN USA member Rajat Panwar, an Associate Professor at Walker College of Business, Appalachian State University (panwarr@appstate.edu), in collaboration with Thomas Roulet, a Senior Lecturer at the Judge Business School, University of Cambridge.
[1] https://www.sc.com/en/insights/zeronomics/
[2] MacCarthy, L. Why 98% of Companies Do Not Achieve Their Sustainability Goals. Sustainable Brands, January 31, 2017.
[3] https://www.ft.com/content/12fd1c09-61fb-444e-a9cc-0b50fe0ea411
[4] Murcia, M. J., Panwar, R., & Tarzijan, J. (2020). Socially responsible firms outsource less. Business & Society, 0007650319898490.
[5] https://www.cemexusa.com/-/cemex-announces-ambitious-strategy-to-address-climate-change
[6] https://www.theguardian.com/technology/2019/sep/18/fairphone-3-review-ethical-phone
[7] https://www.unilever.com/planet-and-society/climate-action/using-our-voice-for-a-zero-carbon-future/