Enabling the Successful Implementation of Zero Carbon Manufacturing

Article | Read Time 11 min | WBCSD NET ZERO MANUFACTURING MASTERCLASS SERIES
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Mark Chadwick Managing Director, Sustainability Solutions – EMEA
Joëlle Thomas Senior Manager, Sustainability Solutions – EMEAI
Alexander Nick Director, Climate Action, WBCSD
Decarbonization
Carbon Data
Manufacturing

Part 5 of the WBCSD Net Zero Manufacturing Masterclass Series

Leading companies are more committed than ever to reducing greenhouse gas (GHG) emissions and taking bold action on climate change and sustainability, and many are even optimistic about their ability to deliver.

But when we look closely at the effectiveness of corporate decarbonization programs, we see that only about 25% of businesses are on track to meet their targets — likely due to a lack of attention paid to organizational enablers.

What Is the Net Zero Manufacturing Masterclass Series?

Companies often lack the governance, financing, and operational tools to enable a Net Zero transformation. They can mitigate these shortcomings in four ways:

  1. Understanding the importance of stakeholder engagement
  2. Tapping into governance, incentives, and finance
  3. Leveraging data and digitalization
  4. Building a programmatic approach and overall strategy

To truly transform, companies need to cultivate high levels of ownership across the organization and design an operational infrastructure that fosters innovation and collaboration.

Stakeholder Engagement

Stakeholders apply force and influence on an organization as decisions are made. Without those forces, organizations would likely carry on with business as usual. And while stakeholders will often steer you in a certain direction, they are not particularly helpful at driving the action necessary to get you to your goal.

We have identified five common groups of stakeholders, and these groups can be instrumental either as drivers of your decarbonization strategy that enable its implementation, or as obstacles to implementation.

  1. Investors are increasingly interested in companies with an environmental, social, and governance (ESG) ambition, yet some investors are solely interested in dividends rather than creating social value, making them less willing to support ESG measures.
  2. C-Suite alignment is critical, and some may have ambitious targets they would like to achieve. Securing their alignment, however, can also be challenging.
  3. Employees are another driver pushing companies to become more socially and environmentally aware, and younger people tend to be interested in joining organizations with a decarbonization or environmental mission. Lack of employee buy-in, however, can disrupt even the best of plans.
  4. Customers have an obvious impact on a business, and the increasing expectation of sustainability as part of their purchasing decisions can lead them to be either drivers or obstacles to your decarbonization strategy.
  5. Finally, regulators are another strong driver, especially in Europe. The EU plans to reduce net emissions by at least 55% by 2030 compared to 1990 levels (the "Fit for 55" package) in line with the European Climate Law. If companies don’t follow that guidance, they will struggle to operate. In other regions of the world, however, regulators that incentivize the continued exploitation of legacy fossil fuels form an obstacle to decarbonization.

The C-suite and the Motivations for Decarbonization

ENGIE Impact commissioned a survey polling 200 executives about the level of confidence in their companies' ability to decarbonize and the extent to which they are investing in the enablers of Net Zero transformation. As the graphic below shows, most company leaders see creating upside and intrinsic value as motivating their decarbonization investment decisions.

Deep Dive: C-suite Members See Value in Sustainability but Many Lack Understanding on How To Act On Their Ambitions

Chart: C-suite and the Motivations for Decarbonization


Executives are generally interested in taking their companies in a sustainable direction, with 45% of them seeing sustainability as a high or top priority right now, and three-quarters seeing it as a top priority within five years. The big question is how to enact their sustainability goals, as only 40% of those surveyed feel they understand the relevant technologies for decarbonization.

The takeaway is clear while decarbonization is important to C-Suite members, there is a wide gap in confidence between the C-Suite and the people responsible for delivering on the targets operationally.

The C-Suite was consistently more confident than those whose job it is to make decarbonization happen.

When planning, be aware that if the operational crew has a better idea of which decarbonization lever would work better in a particular context, it might be advisable to give them a larger role in engaging C-Suite members.

Another function that should be more involved in companies’ decarbonization strategy is CFOs. When asked which titles are responsible for developing and monitoring sustainability goals at their company, only 4% of respondents answered the CFO. We believe having the CFO assume a leading role is critical, particularly as companies move beyond less expensive solutions such as renewable electricity and start looking at process heating and thermal decarbonization, which will require significant investments. At that point, innovative financing models will need to be considered, requiring greater CFO involvement, so companies should make sure they have a seat at the table.

Learn the importance of stakeholder alignment in achieving a Net Zero factory. Read Article →

Tapping Into Governance, Incentives, and Finance

To enable a company’s energy transition, the governance structure — and incentives that create feedback about taking business decisions in line with sustainability goals — as well as financing that can help you implement those actions and decisions must all be in place.

Governance

One key to success is to embed sustainability in your organization through actionable standards and key performance indicators (KPIs). Various ESG-related metrics can be introduced to monitor not just progress on sustainability targets, but also the ways business decisions or employees are evaluated through the sustainability lens. We recommend three different types of metrics to help assess sustainability success.

1. Activity-based

Track behaviors and activity. Hold yourselves accountable by completing an annual sustainability report, sending questionnaires to suppliers, and conducting ESG reviews and training on a regular basis to ensure ESG policy compliance.

2. Outcome-based

Track the results of your behaviors. These results could range from the diversity of the executive board to your interview pool and hires. Ask whether various functions other than the sustainability team are incorporating ESG in the decision-making. Are other functions considering climate risk? Are you disclosing your ESG performance according to common standards?

3. Impact-based

Track achievements against what would have happened in a business-as-usual scenario. Know which emissions have been avoided by the products produced, whether your carbon footprint has tangibly declined, or even if the company's value has increased from having implemented ESG best practices.

Measuring the level of achievement might be difficult to measure, especially if you lack impact-based measurements that would be credible to stakeholders. It is still beneficial to present a mix of activity and outcome-based metrics. The key here is to gain a clearer view of the change you are trying to enable, and ensure you have a set of KPIs that will help the members of your team track and focus on the performance you want to see.

Incentives

One powerful internal incentive is the internal carbon price (ICP) which integrates carbon emissions into business decisions and serves as a strategic planning tool that can assist the low-carbon transition. Companies can set an ICP voluntarily to assign a monetary value to carbon using either a carbon fee (a per-unit fee on GHG emissions), a shadow price (hypothetical cost of carbon emissions for modeling purposes), or some combination of the two.

An ICP can be used in different ways. Say you are selling a product with high embodied carbon emissions in an unregulated market, and you want to be socially responsible, or you expect those emissions to eventually be regulated. Assigning a shadow price will help monitor the impact of that product and inform business decisions about what to produce in the future, as it facilitates conducting scenario analyses on climate-related risks. If you expect a carbon-intensive product will be heavily taxed down the road, you might want to sell lower-carbon products in the future that will not be taxed. The point is that an ICP prepares your decarbonization strategy for future risks while raising awareness throughout the organization.

ICPs may also be used as a carbon fee based on GHG emissions to create an actual fund used to invest in internal and external GHG reductions. Microsoft is well known for using this method to great effect, accelerating reductions while generating awareness about climate change within the company. An added benefit is that an ICP measures the carbon impact of every decision as it is made, rather than waiting until the end of the year to see what the carbon impact of your decisions has been. This also raises the accountability of the decision-maker, which is a good way to implement change quickly across an organization.

Alongside ICPs, there are an increasing number of external carbon-pricing incentives implemented by countries around the world. These include emissions trading systems (ETS), carbon taxes, offset mechanisms, and result-based climate finance. Europe’s Carbon Border Adjustment Mechanism (CBAM), expected to enter into force in 2027, is a good example. Its objective is to level the playing field for heavily regulated EU producers by applying a border tariff to imported goods with a higher carbon footprint than they would have if produced in the EU. It will serve to protect the competitiveness of European producers and encourage producers in non-EU countries to green their production processes.

Financing

As organizations start drafting their decarbonization plan, they’ll likely realize investing in new technologies and purchasing greener power is going to increase their CAPEX. Many decarbonization strategies actually cost less over the long term, yet it remains a challenge to find enough capital in the near term. Most companies look to the familiar options: investing their own capital; government subsidies to lower the cost of CAPEX for technologies and OPEX through green sourcing; and grants, mainly for new technologies, to facilitate clean energy development. Subsidies and grants can reduce costs, but the wait for a decision can delay your timeline and they are highly competitive to obtain.

Some other financing tools on the market to consider include external financing options such as green loans and green bonds that are created specifically for sustainability projects and provide capital at or below the typical cost of debt. The number of such options issued has been rising steadily.

Deep Dive: Green Bonds & Loans

Chart: Global Green Bonds Outlook & Green Loans Quarterly


Another option is energy-savings-as-a-service contracts in which energy efficiency measures are introduced to a facility with the goal of lowering energy consumption by about 15%, generating significant cost savings. The idea of this model is that a specialized provider takes responsibility for the upfront investment in, and operational management of, the decarbonization assets, assuming the risk for their performance. The client only pays for the services provided, with savings generated from the balance sheet. Also interesting is that it is immediately cash flow positive, as the client is paying the service provider for each megawatt, and the number of megawatts consumed declines as soon as the measures are introduced.

Leveraging Data and Digitalization

Carbon management digital tools have become essential companions for creating and implementing an informed, detailed decarbonization strategy. They enable an organization to gather and synthesize data about their operations and run scenarios for optimization according to key parameters.

Digital tools are needed for three main tasks:

1. Measuring Your Carbon Footprint

A digital tool should identify sources of high emissions and critical areas to address across a portfolio. Scope 1, 2, and 3 emissions data is spread across disparate siloed systems, teams, and suppliers, with frequent inaccuracies. Your tool should provide an accurate and unified view of your footprint by aggregating energy and sustainability data, cleansing that data and filling gaps with artificial intelligence, identifying opportunities for emissions reductions, and benchmarking sites, business units, suppliers, and geographies.

2. Building Your Net Zero Roadmap

A good roadmap starts by identifying the best decarbonization options for your business. A digital tool should help identify targets, set clear ambitions, and chart the best- and least-cost pathway for your transformation by providing an understanding of the decarbonization levers available. By modeling scenarios and comparing KPIs and investment priorities, digital tools are critical for optimizing the impact of your investment in terms of cost, high-quality options, and carbon reductions.

3. Monitoring Your Carbon Footprint, and That of Your Suppliers

Businesses should manage their carbon like they manage cash. Real transformation occurs with ongoing oversight of project performance across its entire scope. Are you and your partner meeting stated goals and are investments delivering the expected return? By identifying anomalous behavior across the portfolio, continually measuring return on investment, informing course corrections with performance insights, and modeling cash flows with on-demand OPEX and CAPEX figures, digital tools help track your roadmap progress.

Decarbonizing a business portfolio is not a one-off exercise nor a task to be accomplished with a few quick fixes. A successful transformation requires constant refinement, whether in response to market changes or material conditions. As companies learn, their plans should evolve. Digital tools provide decision support powered by the hindsight of hundreds of projects and the foresight of advanced scenario modeling.

Learn how overcome data challenges to unlock decarbonization potential. Read article →

Building a Programmatic Approach and Overall Strategy

The job isn’t finished when you have a plan and digital tools in place. Building the right approach starts with opportunity identification concerning the best pathway to achieve emission reduction targets. This should follow a five-step approach:

  1. Ambition Setting: What does success look like?
  2. Site Potential Assessment: Which decarbonization levers would fit this site, and what commodities are available in this geographic area? Will it still fit my needs when the company grows?
  3. Options and Pathway Definition: Which levers can I pull to achieve the least cost pathway given my energy needs?
  4. Optimal Financing and Contracting: What options are available for funding and contracting to reduce risk?
  5. Actionable Roadmap: This is a great tool for engaging your stakeholders, especially for a complex organization where multiple divisions will need to align and act.

The next step is to think through deal structuring, which is mainly about selecting the best financing models to deliver the pathway, but also includes identifying who your suppliers and perhaps your partners will be, as well as the contractual mechanisms (i.e., turnkey contract, leasing contract, energy savings certificates, energy performance contracts, service contracts) that are available for engaging these suppliers or partners. Evaluating the different financing and contracting models will accelerate the final step: implementation. This involves the work of launching tenders and sourcing commodities, identifying high-quality voluntary carbon credits, attracting funding, and then designing, building, and operating your assets.

The huge effort needed to rise to the challenge of a Net Zero future in manufacturing will not take place by being satisfied with the low-hanging fruit. Technological innovations will be needed, and perhaps some influence from regulations as well. But if your team is mobilized and you have the right systems and tools in place to support the decision-making process and secure the right financing, you can create a pathway to a Net Zero manufacturing plant, a Net Zero organization, and even a Net Zero manufacturing supply chain.

How Can We Help?

Get in touch with our sustainability consultants to kick-off your zero-carbon manufacturing transformation.