Decarbonization: A Business Imperative for a Sustainable Future

According to the United Nations Environment Programme (UNEP) in its 2022 emissions gap report, global emissions within the last decade are higher than has ever been historically recorded. If this warming pattern further worsens, it will mean much more frequent catastrophic events than is currently being witnessed, stirring even more frightening projections in the not-so-distant future. Already, the frequency of global climate catastrophes is rising at an alarming rate. The recent Turkey-Syria earthquakes, which resulted in the loss of thousands of lives and properties, have been termed the worst disaster in a century by the Turkish President. In addition, the Sao Paolo floods, which hit Brazil in February this year, have been said to be the highest accumulation of rainfall ever recorded in the nation's history. Between January and February 2023, the U.S. has confirmed over 146 categories of tornadoes. In the Pacific, New Zealand witnessed its worst storm of the century, Cyclone Gabrielle, which hit the country barely two weeks after it witnessed 75% of its summer's worth of rainfall in just 15 hours. The disasters highlighted have all dealt a massive blow to the economies of the affected regions, displacing millions of people and resulting in the loss of lives and properties. According to the World Economic Forum Article on the October 2022 flooding event in Nigeria, the nation was said to have witnessed its worst flooding event in a decade, with over 600 deaths recorded and 1.3 million people displaced.

Despite the looming climate crisis and its evident impact globally, humanity can still avert these repercussions by limiting global average temperatures to well below 2°C above pre-industrial levels and pursuing efforts to reduce it to 1.5°C; this was the main aim of the 2015 Paris Agreement. Achieving these targets however requires collective efforts from governments and the private sector, and this has led to the development of the concept of 'decarbonization' as a strategy to meet these goals. According to the 2022 International Panel on Climate Change (IPCC) assessment report on climate change mitigation, limiting global warming to a level below 1.5°C will be impossible without rapid decarbonization across all industries.

What Does Decarbonization Mean?

Decarbonization is the process of cutting down or eliminating human-induced carbon dioxide (CO2) emissions and is extremely crucial to mitigating climate change. Decarbonizing a nation's economy often starts with targeting the most carbon-intensive sectors and requires exploring practical and innovative strategies to reduce carbon emissions. Some alternatives explored to attain a low-carbon economy include using renewable energy resources, applying carbon capture and storage technology, transiting from carbon-intensive businesses, investing in low-carbon substitutes, adopting sustainable agricultural practices, and promoting other carbon sequestration activities.

Reasons Why Businesses Need a Decarbonization Strategy

Businesses are major contributors to global emissions and play a crucial role in decarbonizing the economy. The UNEP has identified six industries that can significantly cut emissions to keep global warming below 1.5°C. They are manufacturing, agriculture, food and waste, transportation, construction, and energy. Despite several businesses setting targets to become carbon neutral by 2050, recent projections show efforts still fall short of the Paris Climate Agreement commitments. Businesses must therefore implement rapid decarbonization strategies to avoid irreversible consequences.

Some of the reasons why companies need to adopt a decarbonization strategy include the following:

• Compliance with regulatory requirements: Regulatory requirements in many countries have necessitated businesses to cut down their carbon emissions, and companies can comply by developing a Net Zero Plan with short, medium, and long-term objectives. According to the 2022 UNEP Emissions Gap Report, 88 parties have committed to achieving net-zero emissions as of September 2022, either through laws, policy papers like the Nationally Determined Contributions (NDCs), or public statements from senior government officials. In 2021, Nigeria's NDC was updated, with a pledge to reduce emissions by 47% below Business as Usual (BAU) by 2030 if international support is received. The Climate Change Act was also passed into law in 2021, following the aftermath of COP 26, and emphasizes the need for decarbonization as a crucial component of the nation's climate mitigation and adaptation strategies. In addition, Nigeria is set to introduce its carbon tax policy and budgetary system to fully enforce the Climate Change Act, which will require both public and private entities to pay a price for each tonne of GHG emitted over a specific period. The implementation of this policy will be driven through a collaboration between the National Council on Climate Change (NCCC) and the Federal Inland Revenue Service (FIRS)
• Stakeholder Satisfaction: Customers, investors, and other stakeholders want firms to be accountable for their environmental impact. A net-zero plan and decarbonization strategy will indicate a dedication to sustainability.
• Climate Risks Management: Businesses are at risk from the impact of climate change, and a decarbonization strategy can help manage these risks and maintain resilience.
• Cost-saving Opportunities: A decarbonization strategy creates opportunities for savings in energy costs and waste reduction across the value chain.

Challenges faced by Businesses in the race to Decarbonization

Poor understanding of the organization's carbon footprint: Many businesses lack the ability to track their carbon emissions, making it difficult for them to identify and reduce their carbon footprint. Merely integrating renewable energy is not enough to reduce emissions effectively. According to the 2019 Ellen MacArthur Foundation report titled 'Completing the Big Picture', switching to renewable energy will only reduce emissions by 55%; the other 45% must be addressed through changes in manufacturing and consumption patterns. To create an effective decarbonization strategy, organizations must first identify and evaluate the emission hotspots across their entire value chain.

High initial investment cost: Although decarbonization has proven profitable for businesses in the long run, the initial investment cost remains a major obstacle, especially for small and medium-scale enterprises.

Uncertainty in evolving regulations and policies: Governments globally are under pressure to urgently enact new regulations and policies to mitigate the risks of climate change. This makes it challenging for organizations to make long-term plans and prepare for any adjustments that may affect their business operations. Hence businesses that do not keep up with the evolving global regulations and policies risk the closure of their businesses. 

Supply chain management: Supply chain is oftentimes a major blind spot for businesses and accounts for the bulk of their carbon emissions. When implementing decarbonization strategies, businesses must consider their supply chain network and collaborate with suppliers to ensure sustainable business practices are followed.

Difficulty in accessing clean energy: Businesses may face challenges in obtaining clean energy sources like wind or solar energy due to geographical constraints or other factors. Additionally, due to existing infrastructure, businesses may have difficulty transitioning away from fossil fuel-based energy sources.

Decarbonization as an opportunity for Businesses

An opportunity for wealth creation: Businesses need to see decarbonization as an opportunity for wealth creation, as investments channelled into funding innovative solutions and reimagining how businesses operate will ultimately be profitable in the long run. In addition, carbon credits have also presented new business opportunities for businesses. In 2020 alone, Tesla generated approximately $1.4 billion through the sales of carbon credits.

Investor attraction: Investors are now scrutinizing companies' efforts to achieve net-zero emissions and their plans for addressing climate concerns. Companies with unsustainable business practices may be denied access to loans or investments.

Talent attraction and retention: The younger generation of workers (Gen Zs) prioritize sustainability and want to know how much their organization prioritizes it. Companies that are not prioritizing sustainability may struggle to attract and retain young talent.

Corporate reputation:  Consumers and business stakeholders are interested in understanding businesses' decarbonization initiatives. Organizations that sit on the fence are fast being replaced by competitors committed to net zero targets.

Cost savings: According to the World Economic Forum's 2023 article titled '3 reasons why businesses should invest now in decarbonization', the deployment of energy-efficient methods, adoption of renewable energy, and re-design of the lifecycle of products through green technology could result in huge savings for businesses.

Future-proofing businesses: A decarbonization strategy will enable an organization not only to attract investors and increase market share but will also enable them to remain relevant in the light of new climate-related policies and regulations.

Risks posed to Businesses that do not integrate Decarbonization into their Business Strategy

Heavy divestments: Businesses without a concrete decarbonization strategy are already witnessing heavy divestments from their businesses, as investors are mindful of being exposed to liability, reputational and financial risks. According to the United Nations Principle for Responsible Investment (UNPRI) April 2022 article on 'Discussing Divestment', Institutional investors are now facing pressure from their stakeholders to divest from businesses linked to various problems, including high carbon assets.

Reputational harm: In today's world, business stakeholders are very concerned about sustainability and are committed to ensuring that businesses they are affiliated with conduct their activities ethically and responsibly. Businesses that fail to show commitment towards a defined decarbonization pathway may risk reputational harm and customer boycotts.

Market share loss: Businesses that fail to integrate sustainable practices including developing a net zero plan and decarbonization strategy risk losing their market share and will struggle to stay competitive as more consumers place a premium on environmentally conscious organizations.

Supply chain risks: According to the 2019/2020 CDP ‘Global Supply Chain Report’, a company's supply chain produces 5.5 times more emissions than its own operations, making it essential for businesses to collaborate with their suppliers to reduce their carbon footprint. Failure to do so could limit a company’s effort to meet its decarbonization targets and increase its exposure to both physical risks caused by severe weather events, and transitional risks related to reputation and policy compliance.

Legal penalties: To cut carbon emissions and fight climate change, governments worldwide are enacting new regulations. Businesses that disregard these laws will face fines, litigations, and other penalties.

Key Action Points for Businesses to develop their Decarbonization Strategy

• Conduct a Carbon Footprint Assessment: Businesses must conduct a carbon footprint analysis to understand their emissions profile and identify carbon reduction hotspots.
• Establish targets: Companies must set net-zero targets consistent with the Paris Agreement and significant enough to affect real change.
• Develop a Decarbonization strategy: Companies must develop a decarbonization strategy that details specific steps to reduce emissions based on their carbon footprint assessment and set net-zero targets. The strategy should include short-term, medium and long-term goals and metrics to measure success.
• Implement Decarbonization strategies across the entire value chain: Businesses must promote accountability by incorporating carbon removal across their entire value chain.
• Measure, Monitor, and Report Progress: Businesses must track and report their performance to determine if they are on the right path to net zero or require a re-evaluation of their decarbonization strategy.
• Partnerships and Collaboration: Becoming carbon neutral or achieving net zero is an audacious target, and it requires collaboration between businesses, regulators, and other stakeholders to accelerate transformation.

Conclusion

In the wake of global climate shocks, decarbonization is no longer an option but a necessary component to future-proof businesses in a rapidly changing world. Businesses must set clear and detailed short, medium, and long-term net zero targets and decarbonization strategies for each transition target. These targets must be monitored and constantly re-evaluated for the best possible carbon reduction outcomes. With the establishment of the 2021 Climate Change Act and the upcoming Carbon Tax policy in Nigeria, it is highly imperative that forward-thinking organizations future-proof their businesses by integrating a decarbonization strategy to not only avoid legal, reputational, and financial risks but most importantly, play their role as corporate environmental stewards.

At Mazars, we are committed to supporting businesses to achieve their decarbonization targets through our bespoke sustainability services, including carbon footprint assessment, decarbonization strategy development, and net-zero transition plan among others.