By Tom De Waele, Managing Partner, Bain & Company Middle East and Torsten Lichtenau, Partner, Bain & Company London
Dubai, UAE, 21 November 2021: Managing climate change is the greatest challenge of our time, and the 26th UN Conference of the Parties in Glasgow, Scotland, better known as COP26, represents a milestone in the world’s efforts to take concerted action.
Six years after the landmark Paris Agreement, nations are taking stock of the progress they have made on previous commitments, including their promises to reduce emissions and adapt to climate change.
Ahead of COP26 this year, the UAE pledged to reduce its carbon emissions by 23.5 per cent compared to business as usual for the year 2030, effectively translating into absolute emission reduction of about 70 million tonnes. The UAE also announced an ambitious target of reaching net zero emissions with AED 600 billion ($163 billion) invested in clean and renewable energy sources by 2050, becoming the first Middle Eastern country to commit to a net-zero emissions target. The UAE development model will take into account the net-zero goal with all institutions working as a team towards this goal.
While the policy work continues, many senior executives of UAE corporations will raise the question, “What do we do after COP26?”
The first thing they will have to do is recognize that with all the attention on climate change this year, things are speeding up in some key areas.
- Regulations. Carbon-taxation and emissions-trading schemes will expand, and the price of carbon will probably rise. Governments will also promise more subsides to spur change, such as initiatives designed to reduce the cost of green hydrogen.
- Financial disclosure. Companies will face more requirements to report on their climate risks, through a set of common reporting standards and climate-change disclosures, for example.
- Science-based targets. More companies will set ambitious decarbonization targets and sign onto initiatives to track these goals and will aim to include Scope 3 emissions in their plans.
- Scrutiny from investors. Sustainability, and climate change in particular, will become even more important for investment decisions. Fund managers are starting to respond: the Net Zero Asset Managers Initiative brings together 128 fund managers with $43 trillion under their care in a pledge to make investment decisions that support the goal of net-zero emissions by 2050 or sooner.
- Customer expectations. Pressure from customers will lead more companies to look beyond their own operations and across their supply chains and use of their products. BMW plans to reduce carbon emissions across the entire life cycle of its vehicles, from production through ownership, by at least 40% by 2030.
Most importantly, the focus is going to shift from setting targets to delivering results. Until now, executives may have been rewarded just for stating goals; from here on, they will need to show real reductions. Here are four concrete things executives in corporations in the UAE can do to start reducing.
Make carbon transition a pillar of strategy. Too often, sustainability and carbon transition come as afterthoughts, but they should be baked into the strategy practice. The risks and opportunities of climate change should shape decisions about new products and how to improve operations. For example, UK supermarket leader Sainsbury’s is making carbon reduction a cornerstone of its strategy, with pledges to reduce Scope 1 and 2 emissions to net zero by 2040, and to cut Scope 3 emissions by 30% by 2030. Among many changes, it has switched to energy-saving lithium-ion pallet trucks.
Get more bang for your net-zero buck. Companies are pushing their carbon transitions as rigorously as any other business initiatives, which means improving efficiency while reducing cost. German engineering and technology firm Bosch has been carbon neutral in Scope 1 and 2 emissions since 2020, thanks to greater energy efficiency. It is also about finding opportunities to monetize investments in sustainable technologies. Mexican cement producer Cemex sells a line of concrete that contains 70% less carbon, and it offsets the rest of the related emissions to deliver a carbon-neutral product.
Embed carbon transition into the fabric of the business. Even the best plans will fall flat without the right supporting practices. Pricing, incentives, and tracking are three practices that help carbon transitions stay on track.
- Pricing. More and more companies price carbon internally, like any other cost of doing business.
- Incentives. Linking compensation incentives to carbon-reduction efforts keeps them on the agenda. French food producer Danone, for example, ties 20% of senior executives’ annual compensation to social and environmental targets.
- Tracking. New software systems extract data from enterprise resource planning and other corporate systems, then calculate the precise carbon footprint and issue progress reports.
Avoid the hourglass effect. In many companies, including those in the UAE, top management and new employees are enthusiastic about sustainability, while middle management is left to solve the revenue, cost, and safety implications. Many have little or no experience managing carbon reduction, though support can be offered by educating everyone about carbon reduction in their industry and clarifying the rules for trade-offs.
The transition away from carbon and toward net-zero emissions is likely to be a top priority for many executives for the rest of their careers. For most companies in the UAE, the window for consideration has closed. It’s time to act and deliver meaningful carbon reductions.