Clearly there are sectoral differences. There has been rapid progress by wind and solar power and electric vehicles, while construction and heavy industry have much further to go. The shift in the car sector towards electric vehicles, particularly in Europe, has been massive in only a short space of time, and provides an example to other sectors of what can be achieved.
Action will trickle down to SMEs
Large organizations are best placed to lead the way because of the resources at their disposal, but there is likely to be a trickledown effect as small and medium-sized enterprises copy the practices of their larger peers.
Action by many SMEs will be driven through the supply chain. While many of the upcoming regulations technically only apply to large companies, these firms will require data from their value chain firms to comply with the new rules, and SMEs will have to provide this information if they want to continue supplying bigger companies.
This is perhaps the biggest challenge of all, because the bulk of a company’s greenhouse gas emissions are Scope 3. Many large companies will only be able to reach net zero if their supply chains and distribution networks decarbonize too, and this will be the hard for their SME suppliers.
Reluctance to move first
Another barrier to action is a reluctance to move first because of the uncertainty of going it alone when you have nobody to learn from. So, while big companies in most industries have been ready to take decisive action and to move relatively early, they have often been wary about moving first.
Uneven regulation on how companies pay for the societal impact of carbon emissions is also a concern for businesses. Carbon taxes are generally imposed where goods are produced, and wide variations in these taxes have led some companies to play the system and relocate production facilities away from places like Europe to countries in Asia and the Middle East where they pay a much lower price for such “externalities”.
The EU is hoping to address this problem through its Carbon Border Adjustment Mechanism (CBAM) regime, which will introduce a carbon tax on goods entering the EU from 2024. By ensuring that a fair price is paid for the carbon emissions generated in the production of certain goods imported into the EU, the regime is intended to encourage cleaner industrial production in non-EU countries and support the decarbonization of EU industry.
Overcoming backlashes
Another challenge is the need to overcome resistance from those who think that companies should focus on maximizing profits rather than issues like climate change.
Such backlashes can come from investors – as seen when fund manager Terry Smith criticized Unilever for putting purpose before profit, blaming the consumer goods group for the underperformance of his Fundsmith Equity Fund – or from politicians, as seen with the anti-ESG movement in some US Republican states.