Economic activity and carbon emissions have gone hand in hand since the dawn of the industrial age. So what happens to business when it is forced to decarbonize?

In terms of energy use, the world is going through its third major transition. We moved from coal in the 19th century to oil in the 20^th. In the 21^st, we must now enter the low-carbon age. History abounds with business models that failed to keep up with the pace of change — whether technological or societal — and fell into oblivion. The same is true of our current situation: as former Bank of England governor Mark Carney put it, those that fail to respond will quite simply “go bankrupt”.

But if the imperative for companies is clear, the shorter-term gains from pursuing the net zero agenda are less obvious, especially as they grapple with the impact of a global pandemic. The business community will play a critical role in shaping the transition — and ultimately, if it fails, we all fail. To succeed, we need to find a way of making net zero not only a viable strategy, but a market-leading one.

The COVID-19 crisis has demonstrated that taking a "business-as-usual" approach to planning is no longer valid, says Karol Gobczynski, head of climate & energy at Ingka Group, which owns 381 Ikea stores. “We know that the world is changing now, and it will change even quicker in the future. So companies need to find a way to make business relevant for a net zero economy.”

Perhaps the most immediately pressing reason to decarbonize will be to maintain access to capital. This is essential to the survival of all businesses, and it is becoming dependent on their low-carbon credentials.

“ESG [environmental, social and governance] is increasingly important to investors,” says Kieran Power, national lead for resilience and climate change at WSP in Australia. “Fewer and fewer investors want to take a chance on controversial projects when there are so many opportunities out there that stack up from a climate change perspective.”

It’s not surprising that the risk-averse banking and financial community recognized the threat from climate change early — there is little appetite to invest in an asset that may be washed away within a decade. BlackRock, the world's largest asset manager, has made sustainability its “new standard for investing”, and in 2020 started to single out high-emission companies for their inaction towards climate and transition risk.

This is a trend that’s likely to accelerate, says Power. “The inclusion of climate change considerations in investment decision-making, driven by initiatives like the Taskforce on Climate-related Financial Disclosures [set up by international monitoring body the Financial Services Board], is going to be hugely important in what our money is spent on.”

For investors, it is not simply a question of the physical risk to assets, but also the less tangible risk to reputation. As the impacts of climate change become more prevalent, so too will the hazards of being associated with activities deemed to exacerbate it. As billionaire investor Warren Buffett said: “It takes 20 years to build a reputation and five minutes to ruin it.”

Reputational considerations have notably gained weight in Sweden, says Linda Flink Wredh, WSP’s Future Ready leader in Sweden. Sweden has for a long time been a front-runner in climate ambitions, but now we also see increased expectations and demands from the young generation and the environmental activism inspired by schoolgirl Greta Thunberg. Every firm will need a clear position on sustainability and net zero issues, Wredh says, not only to help position them in their market, but also to strengthen their brand as an employer. “Establishing your strategy now will resonate with your current employees, and crucially help you to attract and retain younger professionals in the future,” she adds.

But for many businesses, particularly in the COVID-19 era, any extra expense associated with decarbonization is a stumbling block.

Rachel Skinner, WSP’s executive director for transport, points out that this becomes even more unpalatable when the benefits of carbon reduction are widespread and don't necessarily flow back to the place they started. If you can pinpoint the commercial returns, she says, businesses are much more likely to engage: “People assume that, because it involves a change to what they currently do, it will probably cost more. The challenge is to find ways that are equivalent in cost, or even lower, in terms of the whole lifecycle, because then you win not only on the carbon but also from an economic and wider social perspective.”

Skinner is also chair of London First’s Net Zero London Working Group, which advises the London mayor and boroughs on delivering a decarbonized capital. To identify the potential for change, she says, every business should first examine its carbon impact to the same degree that it scrutinizes its financial performance. “We need everybody to start acting in a certain way and to engage to a point where it becomes normal to be on that path. Even if you haven't quite got to the end of the journey, you have to understand the difference that you are making because that becomes the platform on which you build the next step.”

Signify, the lighting company formerly known as Philips, has seen a huge transformation in its industry to LED and controllable lighting technologies in recent years. As a firm selling efficiency and sustainability to its customers, it realized early on that it had to be efficient and sustainable itself. But it has chosen to recast these costs as an investment. Six years ago, it set itself a target of becoming carbon neutral across its global operations by 2020 - a target it has now successfully reached. Achieving this included a pledge to shift to energy exclusively from renewable sources, which at the time were more expensive than conventional sources. This has already served to incentivize cost-saving and energy consumption in other areas, according to João Pola, chief executive for the UK and Ireland. “It’s challenging because of course we're a for-profit company — we have to declare results to investors, and investments must have a return. But we consider this an investment and we're tracking it in the same way as if we were investing in a new product or a new factory.”

But it will not be possible to justify every step in the net zero journey in this way. Leaving it to individual enterprises to make the sums stack up is neither fair nor likely to get us where we need to be. So at some point, governments need to be prepared to step in and make carbon reduction a necessary condition of doing business.

Duncan Austin, a sustainability veteran formerly of Generation Investment Management, believes that the last two decades of corporate social responsibility and ESG have fundamentally failed to solve the problem. “While part of our sustainability challenge can be conveniently met with ‘win-win’ business opportunities that are good for ‘profit and planet’, win-win does not scale to solve the global sustainability challenge. Instead, we will also need to make investments and behavioural changes for which there is no business case, but which are ‘win-lose’ insofar as environmental protection will cost something.” 

Skinner suggests that some companies take sufficient action to appear low carbon, but avoid the tougher decisions. “We know where the biggest carbon-related impacts are sitting. We also know that we don't have a consistent way of measuring them. If we’re honest, some firms are cutting the data to suit themselves as opposed to genuinely wanting to make a dent in the problem. Every firm has to ask itself: ‘Are we really doing enough or is it only just enough?’”

In Austin’s opinion, the only solution that can work at a macro scale is government-led regulation. For that to happen, credible individuals within the business community are going to need to “relegitimize policy”. In his own words, “it’s an uncomfortable and inconvenient story”.

Skinner agrees that public policy is needed to change the direction of travel. But, she adds, “businesses must be allowed to tune in to find a way to make it work and to respond in a meaningful way. It’s obvious that no one organisation, or sector, or group of businesses is going to be able to solve the net zero challenge by itself. This has to be a collaborative effort, involving governments, business and academia to find the best solution, to make the biggest difference, as quickly as possible.”

Denmark’s government, which aims to cut greenhouse gas emissions by 70% by 2030 on a 1990 baseline, offers a glimpse of how such collaborations might work. At the end of last year, it presented 13 “climate partnerships” representing all branches of Danish business, from transport and IT to agriculture and waste. Each public-private partnership has formulated a set of recommendations to reduce emissions in its industry. For example, the energy and utilities partnership, chaired by the chief executive of Ørsted, Denmark’s largest power company, has compiled the “Powering Denmark’s Green Transition” roadmap, detailing how the sector can reduce its emissions by 95% before the 2030 deadline.

The interplay between policy and business can create its own momentum, suggests Dr Rowan Dixon, WSP’s principal specialist in sustainability and resilience for New Zealand. Governments are going to need to “read the market winds very carefully” and work closely with business to co-develop policy and rules that hasten change. By way of example, he points to the market shift towards electric vehicles led by Elon Musk; it’s a trend that governments can support with subsidies and tightened emission standards, making internal combustion vehicles less appealing and more expensive.

“It’s more nuanced than the proverbial carrot or stick approach, but more a jostle and shuffle,” says Dixon. “You have to understand what the constraints are. Is an alternative available? How quickly can supply chains transition? That understanding dictates legislation and transparent low-carbon pathways that business can plan for and adopt.”

This is not really a free-market “moment”, he adds. “If anything, we’re emboldening ourselves that we do have control and we can push in one (low-carbon) direction, using free markets to roll out these big changes at scale. In essence, we’re using capitalism and markets to our collective advantage.”

For businesses, the net zero transition will involve a mix of intense collaboration, swift adaptation and long-term planning. As the Powering Denmark Green Transition roadmap describes its own carbon-reduction goal, it will be “the result of many decisions made by many parties in a very short time”. In particular, business leaders, having until now danced to economic cycles of three to five years, must rapidly recalibrate to a different timescale if they are to see their companies thrive, or simply survive.

David Symons, WSP’s director of sustainability in the UK, uses COVID-19 as a reference point: “While tragic, COVID-19 is a short-term event. Business leaders have a short-term responsibility to keep the show on the road, but they must also plot a course for the medium and long-term or they’re neglecting their duty. You must have decent plans today, and be confident that they work and that they are backed by strong investment. The reality is that climate change will be a much bigger challenge to the world economy than this pandemic. The business world must play its part to reduce it.”

Later in this series, we will look at why net zero isn’t just the prerogative of the business world’s biggest names. The need for SMEs — 90% of all businesses — to successfully navigate the transition is just as urgent.

With thanks to the contributors to this piece: