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Six action areas for speeding up your emission reduction plans Accelerating decarbonizationTHE BIG is the emission reduction by 2030 targeted by the biggest public companies → P. 6 20 % reduction in greenhouse gas emissions compared to 2019 is needed by 2030 to meet the Paris target → P. 4 43 % is the share of large public companies targeting a 50% emission reduction by 2030 → P. 6 15%Cover illustration: Mathis Burmeister/2agenten 1 – PAGE 4 The corporate world has begun taking action on climate change. But current targets for reducing emissions show a lack of ambition. 2 – PAGE 7 What is slowing companies down? Hurdles and challenges for corporate emission reduction plans. 3 – PAGE 15 A wide range of tools and solutions are available for companies. Six action areas for accelerating emission reduction plans. PAGE 26 Conclusion Contents 3 Accelerating decarbonization | Think:ActTHE WORLD IS FACING A STARK REALITY . If we continue along our current trajectory, we will singularly fail to meet the goal set by the Paris Agreement of limiting global warming to 1.5°C compared to pre-industrial levels. Continuing with business as usual will lead to an increase of 2.6°C by the end of the century. Even implementing the strategies that governments have already announced will only help slightly, cutting the level of increase to between 1.8°C and 2.4°C. Clearly, current government targets and the existing level of regulation are insufficient. According to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), meeting the Paris target requires a 43 percent reduction in greenhouse gas emissions by 2030 and an 84 percent reduction by 2040 compared to 2019 levels. What we actually see is that global greenhouse gas emissions recovered quickly from the COVID-19 pandemic and now already exceed their 2019 levels. With the number of extreme weather events increasing, sea levels rising and wildfires becoming increasingly commonplace, politicians will likely impose stricter regulation – which will have a major impact on companies and their supply chains. The role of companies in mitigating climate change is indisputable. The CO 2 emissions of large industrial conglomerates are in some cases comparable to those of entire countries. For example, one of the world s largest chemicals companies generated 17 million tons of CO 2 in 2020, equivalent to the carbon footprint of Croatia. Similarly, the world s leading steel producers emitted almost 150 million tons of CO 2 in 2020 – more than the Philippines 136 million tons, for a population of more than 100 million people. How are governments reacting? The European Union has already adopted a Corporate Sustainability Reporting Directive (CSRD), details of which it will finalize by the end of 2022. The United States Securities Exchange Commission (SEC) has also published a proposed rulemaking package at federal level detailing climate-related disclosures. At a state level, California is discussing the adoption of the Climate Corporate Accountability Act, which would require certain companies to report their direct and indirect greenhouse gas emissions annually. Adding to the pressure on companies will be increases in the price of CO 2 over the coming decades. The price is expected to rise from below USD 100/t CO 2 e today to up to USD 200/t CO 2 e in developed economies and some developing countries. Moreover, the European Union s Carbon Border Adjustment Mechanism, expected to be enforced by 2026, will impose a carbon tariff on carbon-intensive products imported by the European Union, forcing producers from 1 – The corporate world has begun taking action on climate change. But current targets for reducing emissions show a lack of ambition. 4 Think:Act | Accelerating decarbonization other regions to align with EU standards or incur higher costs. Two similar initiatives in the United States are the California Cap-and-Trade Program and the Regional Greenhouse Gas Initiative (RGGI), covering 11 northern states. Companies face further pressure from stakeholders, such as employees and customers, to reduce harmful emissions. Climate action increasingly plays a role in recruiting and retaining staff. Customers, too, are more and more aware of the impact that businesses have on the environment – and expect them to do something about it. On top of all of this, the recent political turmoil sparked by the Russian invasion of Ukraine is putting energy security high on corporate leaders agendas. Achieving energy security and changing current supply arrangements is clearly a priority – however, it could represent a threat to decarbonization plans. Instead, we believe that the two can go hand in hand: The desire to become more energy independent could speed up the shift to new technologies, low-carbon electricity and gases, thereby driving decarbonization. The limited availability of fossil fuels and high volatility of their prices may further drive this shift to zero-emission energy sources by both governments and companies. COMPANIES ARE BEGINNING TO TAKE ACTION, BUT THERE IS STILL A WAY TO GO As pressure on companies grows, many businesses have taken initial steps on climate action, setting themselves emission reduction targets. Around 58 percent of the 4,700 largest listed companies in major economies reporting their greenhouse gas emissions have already done so – although a slightly smaller percentage have set themselves both a quantified emission reduction target and a target horizon for achieving it. The trend is positive, however, with the share of the biggest CO 2 emitters setting climate targets growing by around 19 percent between January and December 2021. Companies setting themselves climate targets are also doing so in an increasingly professional manner. Some 3,250 companies have signed up to the Science Based Targets initiative (SBTi), of which 46 percent have had their targets validated by the organization, thereby avoiding accusations of greenwashing. Many businesses are also engaged in dialogue with industry peers and policymakers over climate action. Their presence in the Green and Blue Zones at 26th Conference of the Parties (COP) was noticeable, for instance. Increasing numbers of companies are also joining the Race To Zero campaign led by the United Nations Framework Convention on Climate Change (UNFCCC), under which they pledge to halve their CO 2 emissions by 2030 and reach net zero by 2050 at the latest. A Despite these actions, the targets currently set by corporates are insufficient to meet the short-term emission reduction needed. Based on figures from Net Zero Tracker, Thomson Reuters and The Climate Action 100+ Net Zero Company Benchmark, only around ten to 15 percent of large corporates have set themselves a target of reducing emissions by 50 percent by 2030. What is more, the sum of the targets set by the biggest public companies in major economies will lead to an estimated decrease in these corporates emissions of just 20 percent by 2030, according to Thomson Reuters. Given that global greenhouse gas emissions need to fall by 43 percent by 2030 in order to reach the Paris target, it is evident that companies have not yet grasped the order of magnitude of the problem. Even if companies were to universally set themselves sufficiently ambitious targets for reducing harmful emissions, a number of challenges would remain in the area of implementation. In the following chapter we turn our attention to these hurdles and try to figure out why, for many, the race to net zero is only just beginning. The targets currently set by corporates are insufficient to meet the short-term emission reduction needed. 5 Accelerating decarbonization | Think:ActNote: Based on the 4,700 listed companies with the biggest market capitalization in the major economies (Thomson Reuters), the 166 largest CO 2 emitters (Climate Action 100+), and the 2,000 largest publicly traded companies in the world by revenue (Net Zero tracker); all figures approximate Source: Thomson Reuters; Climate Action 100+, Net Zero Company Benchmark; Net Zero tracker; Roland Berger A Companies current targets fall short SHARE OF COMPANIES SETTING EMISSION REDUCTION TARGETS 50% of the largest companies have already set decarbonization targets 80% of those companies set targets for 2030 Companies targets Paris Agreement target 15% set a target of 50% emission reduction by 2030 2030 2020 Sum of the targets set by companies will lead to a decrease in emissions of just 20% by 2030 – whereas the Paris Agreement target requires a reduction of 43% by 2030 6 Think:Act | Accelerating decarbonization TO MEET THE PARIS TARGET , companies need to urgently speed up their carbon reduction plans. What they do in the next five years will be critical. The technological challenges that they face vary from industry to industry. However, some hurdles are common to all stakeholders, from dealing with limited availability of low-carbon energy to ensuring a corporate culture focused on sustainability. We discuss some of these universal challenges below. LIMITED AVAILABILITY OF LOW-CARBON ENERGY Companies rely on energy to run their operations, whether it is to power engines, generate heat or transform materials. Most of the energy they use today is of fossil origin with a high carbon footprint. Companies can access low-carbon energy either through electrification with low-carbon electricity (wind, solar, hydro-electric or nuclear power) or by switching to low-carbon gases (such as biofuels or hydrogen). However, availability of low-carbon energy is limited and differs across geographies. According to the International Energy Agency (IEA), only 17 percent of the world s total energy was low-carbon in 2020. Moreover, global demand for low-carbon energy is expected to increase, putting even greater pressure on low- carbon sources. Thus, demand for electricity is forecast to grow by 27 percent between 2020 and 2030 in a net-zero scenario, driven by the electrification of industrial processes, heating systems and mobility/transportation. This would require an unprecedented mobilization of industry stakeholders and massive investment: Installed capacity for renewable energy would need to quadruple in order to stick to the 1.5°C trajectory (IRENA). In total, annual investment in electricity generation, transmission and distribution would need to be two to five times higher than pre-COVID-19 levels, according to the IPCC WG 3 report Climate Change 2022: Mitigation of Climate Change. The potential for generating renewable energy is unevenly distributed around the world. Put simply, some countries have more sun and wind than others. Where generating renewable energy is possible, it also requires a significant amount of land. For example, assuming the complete electrification of current energy consumption in Germany, nearly 15,000 km 2 of land would be needed for generation purely by solar farms, or almost 26,000 km 2 for wind farms – more than the entire landmass of countries such as Slovenia, for example. Building zero-emission energy facilities can also take time, especially in the case of nuclear and large hydroelectric plants. In a net-zero scenario, demand for biofuels and hydrogen would increase sixfold in the decade from 2020. Great uncertainty exists regarding the potential ramp-up of production capacities, however. Some 90 percent of the biofuels consumed in 2050 are expected to be advanced biofuels produced from non-food-based feedstock (residues of agricultural production), compared with just one percent today. Today, this brings with it the risk of competition with food production. For its part, hydrogen is expected to see demand of around 210 million tons by 2030, up from 2 – What is slowing companies down? Hurdles and challenges for corporate emission reduction plans. 7 Accelerating decarbonization | Think:Act90 million tons in 2020. The current share of green hydrogen is below one percent. MANY CLEAN TECHNOLOGIES ARE AVAILABLE BUT HAVE NOT ACHIEVED SCALE The latest IPCC report highlights the importance of “clean tech“ in reducing greenhouse gas emissions. However, many of the technologies that will be needed between 2030 and 2070 are not yet commercially available. Data from the IEA suggests that over one-third of cumulative CO 2 emission reductions by 2070 will come from technologies that are currently still at the prototype or demonstration phase, which will not become available at scale without massive further investment in research and development. 1 B Until these clean technologies reach sufficient scale, the corporate world will perceive them as risky. This situation will continue as long as companies are unsure which technology will be implemented in the future by their suppliers, clients and competitors – and until they see that customers are prepared to pay a premium for them. In the context of limited regulation and an absence of targeted subsidies, companies tend to wait for the business case to be proven positive before initiating a switch, preferring to wait for a single, ready-to-use solution to emerge. Green hydrogen is a good example. The necessary technology needs to be scaled up in order to reach commercial viability. The ramp-up of the hydrogen value chain, from production to end use, including transportation and distribution infrastructure, will require major investment. Thus, global CAPEX on hydrogen is expected to reach a cumulative total of EUR 10 trillion by 2050, of which EUR 2.2 trillion will be in Europe. Increasing the total installed capacity of electrolyzers will be key for commercial readiness: For specific components of electrolyzers, technological gains translate into five to 18 percent cost 1 FIEA, Energy Technology Perspectives 2020 [https://www.iea.org/reports/ energy-technology-perspectives-2020/clean-energy-innovation#abstract] 26% Mature 39% Early adoption 18% Demonstration 18% Large prototype Source: IEA Sustainable Development Scenario (2070); Roland Berger B Many technologies are not yet commercially available CO 2 EMISSION REDUCTIONS IN 2070 BY CURRENT LEVEL OF MATURITY OF TECHNOLOGY Note: Percentages relate to share of all CO2 emission reductions expected from clean technologies 8 Think:Act | Accelerating decarbonization reductions for every doubling of installed capacity. This means that the cost for electrolyzers would need to come down considerably to enable the widespread build out of hydrogen production capacities. Notably, green hydrogen production capacity is expected to grow exponentially in this decade. Still, it will take a few more years until more and larger-scale projects reach a final investment decision, get built and start operations. For now, developers still struggle to successfully de-risk their projects (among others due to regulatory uncertainty), secure firm off-take agreements and mitigate remaining technology risks. As first-of their-kind-projects