Ahead of the Curve: Future-proofing your business with low-carbon strategies
Economist Intelligence Unit
Climate change is posing a fundamental risk to business models across sectors. For food processing companies, it presents a considerable risk to the supply of agricultural raw materials. In the energy sector, it is, in part, driving oil and gas companies to transform into broader energy companies encompassing renewable sources. Recent research by Accenture shows that often these risks are poorly understood and under-quantified. But as companies increasingly recognise these risks, there is a growing emphasis on implementing low-carbon strategies to future-proof their businesses.
Many companies have understood that taking action on greenhouse gases is not only in the interest of the planet – but it is also a way of shoring up their operations and supply chains against the physical effects of climate change. In addition, it helps them to get ahead of the curve as environmental regulations are tightening around the world following the Paris climate agreement. In this article, we explore examples of companies that have implemented strategies to mitigate risks arising from climate change.
As part of its low-carbon strategy, Total, a multinational oil and gas company, is ensuring a better energy balance within its portfolio. This strategy entails exiting the coal business, developing renewable sources of energy and improving energy efficiency of their processes. In addition, the company is increasing its share of gas from 50% currently to 60% in 20 years’ time. The business case for gas and solar is stronger as technological advances are reducing costs, but emissions are a concern too.
“It’s a gradual change, but to focus on gas is important because gas emits half the CO2 of coal in power generation,” says Ladislas Paszkiewicz, Total’s senior vice-president of strategy for climate.
The company’s website now boasts that they are not only an oil and gas producer, but also a large solar energy company. Diversifying its portfolio to include renewable energy can help to mitigate risk when it comes to managing relations with customers and other stakeholders.
“We are seeing increasing requests from banks, analysts, investors and the general population [for information on the company’s carbon footprint], as they become more and more sensitive to climate change concerns,” says Valérie Quiniou-Ramus, vice-president of climate at Total.
Total is also taking steps to anticipate the impact of future regulation. For more than ten years, the company has been using an internal carbon price as a factor in its investment decisions.
“This ensures our portfolio is resilient to future regulation and that we select investments today that will be robust in the next decade,” says Ms Quiniou-Ramus.
As part of this strategy, Total has been joining other companies at global gatherings such as the 2015 UN Climate Change Conference, or COP 21, to advocate for carbon pricing, whether through a carbon tax or other market mechanisms.
“We need to set the direction for our business and see how the future will look so that we can better invest,” says Ms Quiniou-Ramus.
Companies around the world are using internal carbon pricing to evaluate the future profitability of projects. An Indian-based cement manufacturer, Dalmia Cement, has started setting an internal price for carbon at US$11 a tonne.
“It allows us to better evaluate projects that otherwise might be difficult to implement from a financial point of view,” says Mahendra Singhi, group CEO for Dalmia Cement. “This is how we are taking care of future risks when investing today.”
Using an internal carbon price factors in the potential cost of future regulation, allowing them to mitigate some of the risk.
Beyond carbon pricing, companies are employing scenario analysis to assess the potential impact of climate change on their businesses. ConocoPhilips, an energy company focused on oil and gas, uses this method to assess the impact on demand and supply across scenarios that consider different rates of technology adoption, government action and shifts in demand. These are more focused on developing plausible narratives than quantitative predictions to inform strategies to prepare for a variety of outcomes.
Scenario analysis can also be useful to factor in extreme climatic conditions that can severely disrupt business operations. From Hurricane Harvey alone, insurance experts estimate that the total financial damage is likely to be tens of billions of dollars. Given the financial impact, investors are increasingly factoring climate risk in their portfolios. In November 2017 the French and Swedish governments joined forces to encourage companies to disclose climate-related risks and opportunities so that financial institutions can better assess company value.
To stay ahead of tightening regulations on emissions, companies are taking a variety of approaches to improve the energy and resource efficiency of their processes.
“We try to convert risks into opportunities,” says Mr Singhi.
Dalmia Cement uses alternative waste materials such as blast furnace slag from the steel industry and fly ash from thermal power plants, to lower the carbon emissions associated with cement production. The strategy has helped the company cut its carbon footprint by 36% from 1990 levels.
In addition to mitigating resource availability and regulatory risk, there are cost and revenue benefits of applying this strategy.
“When we use alternative raw materials like blast furnace slag and fly ash, or alternative fuel such as incinerable waste from various industries, we also save costs,” says Mr Singhi.
In this way, improving the energy efficiency of their processes and reducing emissions has a positive impact on the bottom line. In the process of using waste from other industries, they have developed a new revenue stream – a waste scavenging service.
To stay ahead of the curve in terms of sustainable technologies, Dalmia Cement is a member of groups that are working on new low-carbon technologies such as carbon capture.
“This would ensure we have the latest knowledge and, as technologies become ready, we would be in a position to implement them,” says Mr Singhi.
Sony, a Japanese electronics manufacturer, is also implementing energy efficiency measures at its factories and relying on renewable sources of energy. It has also revisited the materials it uses, developing SORPLAS, a recycled plastic that reduces CO2 emissions in its production by almost 80% compared with virgin resin.
“We need to seek a balance between how we grow as a manufacturer and how we address climate-related challenges,” says Keiko Shiga from Sony’s quality and environment department. “And if you use less energy, it saves costs and makes your operations stronger.”
As with Total, Sony recognises the need to meet growing consumer demand for products that are not only well designed and user-friendly but also have a low environmental impact. For brands to thrive in future, they need to pay attention to this, argues Ms Shiga.
“Without consideration of the environment, consumers won’t want to own your brand,” she says.
For this reason, Sony has focused on energy use in its products. In its PlayStation4 gaming console, for example, the company has reduced the power consumed by energy-intensive components such as central processing units and graphics processing unit while also improving the graphics and high-dynamic range of these components.
In doing this, the PlayStation4 also clears European Self-Regulatory Initiative rules on game consoles and energy consumption.
“We try to incorporate these changes ahead of time so we’ll be ahead of regulation-related risks and stay competitive,” says Ms Shiga.
This principle has driven the company’s Green Management 2020 voluntary goals, which include targeting a 30% reduction in the average annual energy consumption of electronics products across all stages of its product lifecycle – from production to usage by the end consumer.