ORGANIZATIONS around the world have invested half a trillion dollars in decarbonization, and more than a thousand large companies have committed to setting science-based emissions targets to limit warming to 1.5°C, the goal established by the Paris Agreement at the Conference of the Parties, COP 21, in December 2015.
While these commitments represent progress, tangible results remain elusive. For example, only 110 of the world’s 2,000 largest companies meet the United Nations’ “starting line” criteria to “pledge, plan, proceed and publish” and only 25 percent of those that have made commitments to ESG goals are on track to reach Paris Agreement goals.
Treating net-zero targets merely as aspirations, or worse, as part of branding or marketing, can pose serious risks. Not living up to commitments can have a reputational impact and can provoke a backlash from investors, lenders, customers, employees, and local communities. And, of course, failure to act means falling short in meeting the climate challenge.
To reach goals of any kind, organizations need roadmaps, including near-term milestones and actions to drive a sense of urgency. In this short report, we explain how organizations of all kinds can develop the strategies and roadmaps they need to start their journeys to decarbonization.
Devising a meaningful decarbonization strategy
NET-zero targets resemble New Year’s resolutions in that they’re easy to set but require changes in specific behaviors and practices, consistent effort over time, and a clear plan. In any organization, the actions required to decarbonize are numerous and demand changes in all sorts of processes and business units.
Decarbonization therefore cannot succeed as a stand-alone effort—it must be woven into an organization’s operations and align with and enable the enterprise strategy. A tailored decarbonization strategy can be developed in just a few months.
Our approach includes five main steps to developing a decarbonization strategy and roadmap.
The first step is building a detailed picture of the organization’s carbon footprint at the individual asset level (e.g., buildings, vehicles, equipment), assessing the impact of climate risk on these assets, and identifying gaps between the current state and a future decarbonization vision.
Based on these analyses, leaders can set realistic targets and draft a defensible roadmap to reach net-zero goals using an array of decarbonization levers.
Using our decarbonization pathways methodology, we help clients establish emission baselines, model scenarios, and develop a roadmap that aligns with the organization’s capital program strategy. Based on the roadmap, the company defines a target operating model that specifies the changes needed to adjust processes, policies, and behaviors to reach net-zero goals.
Step 1: Baseline and GHG inventory assessment
- Current state
- Carbon baseline and footprint
- Asset inventory
- Diagnostic to link vision to strategy
- Identify quick wins and existing initiatives
- Stakeholder analysis
- Climate risk identification
Step 2: Scenario planning.
- Identify decarbonization initiatives
- Analyze options
- Define decarbonization pathways
- Analyze financial impact
- Refine and set decarbonization targets
Step 3: Operationalize.
- Launch projects
- Operationalize targets, track progress, and maintain a regular reporting cycle
- Provide climate risk disclosures to SEC, etc.
- Communicate with investors and other stakeholders
Step 4: Define future state.
- Define decarbonization and net-zero vision and targets
- Define scope 1, 2, and 3 areas to be considered
- Analyze gaps in decarbonization vision and current state
- Identify material issues
- Develop carbon pricing model
Step 5: Roadmap and implementation plan.
- Develop roadmap
- Explore financing and delivery options
- Define metrics and incentives
- Refine and detail strategic priorities and operating model needs (challenges to roles, processes, etc.)
An execution plan requires insights across functions
WHILE many organizations can measure their carbon footprints and set emission targets, we find that they often run into difficulties in defining needed operational changes and determining the size and timing of required investments.
To translate targets into a roadmap, an organization should gather and analyze critical issues:
How decarbonization fits into strategy and financial decision-making Success requires leadership buy-in; changes in governance, processes, and controls; and an understanding of how ESG reports will inform business decisions.
1. Investment levels and funding sources. The organization needs to consider how it can fund critical decarbonization efforts, accounting for tax credits and incentives, and explore the issuance of green bonds to lower the cost of capital
2. Priorities and phased investments in decarbonization projects. The roadmap should include short- and long-term goals based on feasibility, trade-offs, and cost-benefit analyses
3. Operational levers required to execute on the roadmap. Pathways can include levers as simple as energy-efficient LED lighting to more complex electric fleet transitions.
4. Guidance and guardrails for entering commercial deals and structures. Many companies on the forefront of decarbonization are entering into power purchase agreements, for example.
This report is part of a series on climate change published by KPMG. This paper focuses on pathways to net-zero and features key insights for organizations beginning their decarbonization journeys. Companies should consider the other challenges and opportunities created by the transition to a low-carbon economy discussed in this climate change series.
For governments and the private sector to accelerate ESG adoption, these and other far-reaching innovations are necessary. Join KPMG in the Philippines on October 18, 2022, for an ESG and Green Finance discussion at the “Digital Pilipinas: Philippine Fintech Festival.”