As company leaders look to confront climate change and navigate the transition to a low-carbon future, positioning an organization to thrive requires a transformative and farsighted approach much different in scope and scale from previous technology- or consumer-driven shifts, according to Scott Corwin, Deloitte U.S. leader for Sustainability & Climate Change. “It demands a systems lens that grapples with the complex and multifaceted net-zero economy and looks for opportunities to accelerate decarbonization and create entire new sources of value,” Corwin writes in the report Leading in a Low-Carbon Future: A “System-of-Systems” Approach to Addressing Climate Change.
Corwin discusses how company leaders can use a system-of-systems framework to understand how this shift is shaping their business environment and, more importantly, how to leverage those insights to identify opportunities to “win” in the future while taking purpose-driven actions to address catastrophic global temperature rise.
To help achieve a net-zero economy by 2050 and successfully position their company for the low-carbon future, you suggest that leaders can use a system-of-systems lens. That is, they can identify opportunities to create value in the “synchronized transformation of multiple, interdependent systems.” That sounds like an overwhelming task for a single company. Where do you start?
Corwin: First, set aside existing frameworks about what your industry looks like and who your competitors are, and look at what is required at a system level for us to achieve the Paris Agreement targets and have a chance to keep the planet’s temperature from rising by more than 1.5 degrees Celsius. We see five core, interconnected systems emerging as we transition to a net-zero economy: energy, mobility, industrials and manufacturing, food and land use, and negative emissions.
Then, assess how your organization can play a leadership role in the system you operate in to realize the ambitious goals of the Paris Agreement. There are numerous examples across these systems of companies in multiple industries undertaking profound transformations of their business to rise to the challenge. This transformation will require companies in every sector to adopt new technologies, introduce more sustainable operating processes, and transform their business models to succeed in reducing their carbon impact and creating enduring value. Understanding the company-level implications provides an organizational framework to help executives reimagine how value chains might operate in the future―“where to play”―and identify opportunities for “how to win” for your organization in a low-carbon future.
A CEO or business or function leader should look at their enterprise today and use scenario planning to map out alternate future realities, asking some basic questions: How do we institute more sustainable practices in our operations? Where is this transition heading, and how do we invest in innovation or help scale it? Where do we play and how can we win in the transformation needed for our respective systems? What assets and capabilities do we have today that are of less value in a low-carbon future, and how do we transition away from them? What new ecosystems need to be formed to transform value chains? What does this future trajectory mean for adapting our business model, and what is the time horizon and investment profile?
For some companies, the answers could be a natural evolution of the organization’s current market position. For example, the success of the transition to a low-carbon economy by 2050 hinges in large measure on the ability to mobilize capital at the requisite speed and scale. Financial services organizations, which will have to provide much of the $30 trillion to $60 trillion of additional capital investment needed, can identify significant opportunities to win in the transition to the net-zero economy by supporting sectors that are poised for rapid growth or transformation while enabling their own net-zero goals. Indeed, several top banks and asset managers such as Citigroup, which has set a $500 billion environmental finance goal as part of a $1 trillion commitment to sustainable finance by 2030, are already directing billions of dollars toward restructuring high-emitting companies to help them transition. Moreover, Citi has established net-zero greenhouse gas targets in line with the global goal of capping warming to 1.5 degrees Celsius by midcentury. That reduction covers not only its operations and supply chain, but also the impact of Citi’s financing and investment decisions.
For other companies, repositioning their business with a system-of-systems lens may require a more significant pivot. At Shell, for instance, achieving its aim of becoming a net-zero emissions energy company means transforming its business by reducing the carbon intensity of its energy products by 100% by 2050, shifting investments away from fossil fuels and towards alternatives like solar and wind power and synthetic fuels, and working with customers to help them transform. Consider Shell’s collaboration with Deloitte to produce a series of reports on how to decarbonize hard-to-abate industries such as shipping, aviation, and road freight, including its role in the effort: producing low-carbon fuels to power those industries and working in cross-industry coalitions to rapidly bring down their cost curve and make them price competitive with fossil fuels.
Many companies are struggling to balance rising stakeholder demands for net-zero commitments with near-term business issues and shareholder expectations that constrain climate action, according to Deloitte’s 2021 Climate Check survey of executives. How can the system-of-systems approach help executives drive purpose and profit?
This is an enormous challenge that many legacy incumbents face in the low-carbon transition. Shifting away from proven and still-profitable activities into new and uncertain areas can be daunting. Meanwhile, many Wall Street analysts increasingly expect them to demonstrate that addressing climate change is central to their business plans but can also punish them for delayed or uncertain financial returns on the significant investments it will take to get there.
The system-of-systems approach helps create a road map to identify the challenges and highlight new business opportunities where collaboration across the broader business ecosystem―with competitors, other industries, suppliers, customers, and policymakers―can drive innovation at scale, help organizations reach critical tipping points, enable sharing of costs and risk, and accelerate adoption of impactful climate solutions. Participating in emerging low-carbon ecosystems enables companies to invest in long-term business transformation because their competitors, suppliers, and customers are also doing so, meaning no single player has to disproportionately bear the cost.
How might that ecosystem approach work today, in a real-world situation?
Look at aviation, one of the hard-to-abate industries I mentioned earlier. Decarbonizing air transportation in the next 15 years requires airlines to eventually shift to cleaner energy power systems, but modernizing the global fleet will take time and depend on technological breakthroughs. In the interim, sustainable aviation fuel (SAF) offers a compelling bridge solution. Existing aircraft can use these fuels to reduce carbon impact by as much as 50% but at a cost that today is roughly two to four times more expensive than conventional fuel due to extremely limited supply.
Making SAF more economically competitive requires rapidly bringing down its cost curve. Rather than addressing it as just a technological challenge, the solution requires moving supply and demand in tandem to tip this market faster. That will require capital investors and suppliers to accelerate production and large corporate customers to pay a premium for these cleaner fuels. On the demand side, Deloitte, for instance, has entered into SAF agreements with several airlines to underwrite an investment in their purchases of SAF because it both helps achieve our net-zero commitment and sends a market signal that hopefully encourages suppliers to build additional production capacity. We and other large customers are also working with airlines, fuel service providers, and airports through the Clean Skies for Tomorrow initiative and the Sustainable Aviation Buyers Alliance to accelerate SAF adoption.
As this convergence begins to take hold through the independent actions of numerous companies—and with the support of government policies and incentives―the aviation value chain ecosystem can help accelerate progress to produce competitively priced SAF at scale. These collaborations work because they unite the goals of business organizations seeking to reduce their carbon footprint with airlines and energy suppliers that are also setting net-zero goals and trying to transform their business to take advantage of opportunities in the transition to a low-carbon economy.
Approaches like this one can be applied across many domains to reduce carbon impact much faster. The systems framework can help each of these players understand the opportunity available to them i
n the low-carbon value chain and how to participate in this ecosystem.
—by Andy Marks, Deloitte Services LP, editor, Deloitte Insights in The Wall Street Journal
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