To deliver on the ESG agenda, companies need ruthless pragmatism and strategic adaptability
By Torsten Lichtenau and Parijat Jain
The number of companies that established science-based targets for decarbonisation rose dramatically from 2020 to 2021. But Environmental, Social, and Governance (ESG) work has proved to be easier said than done.
Nearly a third of companies missed the scope 1 and 2 targets they set for 2020, even though those emissions are the most controllable and tend to be economically attractive. Many CEOs are overwhelmed by the effects of climate change and the day-to-day work of decarbonisation—and for good reason. Executives are trying to plan an orderly carbon transition amid an unsettling geopolitical atmosphere, chronic supply chain disruptions, and rampant inflation.
To translate ambition into delivery, leaders need visionary pragmatism. Executives must bring dreamers and doers together and do five things right:
- Be strategically adaptable
Instead of collecting more climate scenarios, companies need more clarity on the most relevant ones. They need to watch for what’s coming next, especially in regulations and technology.
There’s no more five-year exercise with a yearly refresh. Instead, leading companies will embrace adaptable strategies. Winners will proactively drive a delivery agenda (what has been committed and needs to be delivered) and a development agenda (what needs to be advanced). Ongoing discussions with the executive team and the board will become part of an adaptive, living strategy.
- Proactively address investor dissonance
Investors and lenders are becoming more assertive and discerning about decarbonisation expectations yet unwilling to compromise on near-term returns. There is often dissonance between a company’s green ambitions and its growth and return aspirations, and a perception that there will be trade-offs. Many capital markets day events have become longer but not necessarily clearer.
Executives need stronger investor dialogue. Investors need strategic clarity around near-term plans to achieve ESG commitments and longer-term pathways to net zero. Executives should emphasize that decarbonisation is happening and explain how it can make the business more valuable. Companies must demonstrate progress on everything from scope 1 and 2 decarbonisation targets to customer collaborations on green products and meaningful portfolio shifts.
- Decarbonise with customers in mind
In many sectors, the bulk of emissions happen when customers use products. Customer preferences deeply influence production and supply chain decisions, too.
Successful climate transitions start decarbonisation with the customer in mind and work backward across offerings, operations, and the supply chain. What are customers’ green ambitions? How can the company support them?
Decarbonisation shapes how products are designed and used, not just produced or procured. In both B2B and B2C, visionary pragmatists innovate with customers towards a lower-carbon, circular world.
- Collaborate where it matters
To solve big problems like carbon transition, companies need to engage a wider ecosystem of customers, suppliers, peers, governments, and civil society. Executives must decide where to collaborate vs. where to compete, and pick winning partnerships across the value chain. Companies have to work with others to reach a critical mass for change.
Beware of initiatives where there’s too much talk and too little action. Aim to ruthlessly deliver results. Establish clear intentions for the partnership and look for early proof points that it’s working as expected.
- Create “net heroes” in middle management
The need for aggressive decarbonisation is clear to top managers, given their interactions with investors, the board, and key customers. New recruits often choose an employer based on its green credentials. Yet companies often lack commitment from middle management—the people who are sorely needed to get the job done.
Middle managers get bogged down by ESG requirements on top of those for revenue, cost, and safety. Sometimes they’re asked to deliver more key performance indicators without any explanation or help making trade-offs.
How can you turn middle managers into net-zero heroes? Be extremely clear about decisions that affect decarbonisation goals and how to resolve trade-offs. The organisation needs to be trained, guided, and aligned on ESG goals so managers can view them as realistic deliverables. For example, procurement is critical in scope 3 emissions. Managers who have been trained to optimise costs need clear guidance on how to factor carbon into procurement decisions, specifications, and pricing (e.g., through internal carbon pricing). They also need tools to pragmatically assess where in the supply chain to push.
The whole organisation needs to be upskilled to some degree. Start with staff who can deliver the most impact and need the most training. Then, roll out support accordingly.
The world will eventually reach net zero. The critical question is, will it happen in time? To reach net zero by 2050, emissions must be halved between 2020 and 2030.
To deliver on those targets—and realise the opportunities that come from decarbonisation—companies must combine vision and pragmatism. Significant, urgent change requires both.
Torsten Lichtenau and Parijat Jain are partners in Bain & Company’s London and New Delhi offices, respectively. Torsten leads Bain’s Carbon Transition Impact Area globally, and Parijat leads Bain’s ESG practice in India. They are both members of the firm’s Energy and Natural Resources, and Advanced Manufacturing and Services practices.
Authored by – Parijat J & Torsten L