Professors from IMD and Oxford Saïd Business School explore the opportunities and risks presented to executives as they transform their businesses on the road to decarbonization....
Business needs to play a leading role in tackling climate change and the most successful companies will be those which reframe the emergency as a positive catalyst for new, innovative business models, said experts from IMD and Oxford Saïd Business School.
The professors were speaking as part of a joint webinar on Climate Change, Business Transformation and Risk Management – the fourth in a series hosted by Business Schools for Climate Leadership, a new collaboration between eight leading European business schools – to help shape climate leadership.
“Companies that deal proactively with climate perform better,” said Knut Haanaes, IMD Professor of Strategy and Lundin Chair Professor of Sustainability during the event which was moderated by Peter Tufano, Peter Moores Professor of Finance at Saïd Business School
On the one hand there are around 1.3 million start-ups looking to disrupt traditional business models with new technologies, but established companies that can quickly scale new solutions will also play a role, said Haanaes.
The stakes are high. Business will be responsible for up to 70% of the reduction in carbon emissions needed if the world if the world is to limit global warning to 1.5 degrees Celsius, in line with the Paris Agreement, with action by consumers only able to account for 30%.
Some 500,000 companies within the European Union will need to be transformed involving business leadership where we also collaborate with multiple stakeholders and other companies, , said Haanaes.
“We are seeing many businesses move from talk to real action,” said Natalia Olynec, Head of Sustainability at IMD. “These companies don’t have all the answers, but they are asking some bold questions in order to scale their impact,”
For example, Maersk, the world’s biggest shipping company has stated its ambition to decarbonize shipping and in August placed an order for eight large vessels that will be running on zero carbon fuels. Dutch nutrition company Royal DSM is supporting the shift from intensive farming methods to regenerative agriculture by reducing the environmental footprint of the dairy industry by introducing innovative animal feed. And food giant Nestle wants to make all their packaging recyclable or reusable after noticing a substantial shift in consumer preferences towards sustainable products.
No one company can solve it alone, we need the partnerships and the different players to play along- Knut Haanae
Business leaders should ask themselves three questions on the road to decarbonization as they think about new business models, says Haanaes.
“No one company can solve it alone, we need the partnerships and the different players to play along,” said Haanaes, describing the climate crisis as the “ultimate leadership challenge of our time.”
Companies have been slow off the mark, says Anette Mikes, Associate Professor of Accounting at Oxford Saïd Business School, describing the period between 2006 and 2016 as a “lost decade” when around $1 trillion per year in investment was still funnelled into fossil fuels.
In 2021, there is mounting pressure on governments to act, creating the chance for a “watershed decade” if we manage to transition towards a greener energy future, she added.
To do this, companies will need to step outside their comfort zone and liaise with lobby groups and other actors like governments, regulators, and the EU to create the policy framework to respond to the climate change challenge.
Risk managers are now faced with challenges on an unprecedented scale and never-seen-before events.
On the one hand, they are faced with physical risk, such as the extreme weather events that can wreak havoc on their assets, supply chains, employees, consumers and communities. At the same time companies are having to contend with transition risk and the threat of becoming irrelevant because they fail to keep up with changing times, said Mikes.
With extreme weather events becoming more frequent and unpredictable we are also seeing so-called tsunami risks such as last summer’s devastating floods in Germany. Moreover, we are likely to face perfect storms where droughts lead to rising food prices, social unrest and forced migrations. Finally, business needs to be braced for so-called Black Swan events that cannot be predicted but which threaten to overwhelm our control capabilities.
It is important to recognise that companies have different starting points. Some may be more dependent on fossil fuels, while others will have different abilities to pass on the costs of the transition to customers, said Mikes. There are also big differences in the availability of low carbon technologies across sectors with utilities faced with lower cost alternatives than say the steel industry.
One thing is certain that defensive strategies are no longer tenable, said Mikes, with companies now preferring to be at the forefront of the green transition. Some will segment their businesses and charge a premium for green products. For companies without readily accessible technologies, engagement with policymakers will be key.
One such example is steelmaker ArcelorMittal which has pledged to invest 1 billion euros in decarbonisation technologies at it plant in Spain and will install a 2.3 million tonne direct reduced iron (DRI) unit complemented by a 1.1 million-tonne hybrid electric arc furnace (EAF) before the end of 2025.
Cooperation is needed on all sorts of levels and we don’t need to compete on sustainability, we don’t need to compete when it’s about saving the planet- Julia Binder
Julia Binder, Professor of Sustainable Innovation at IMD also believes companies need to shift their mindset to think like entrepreneurs who reframe problems into opportunities. They also need to stop viewing others as a threat.
“Cooperation is needed on all sorts of levels and we don’t need to compete on sustainability, we don’t need to compete when it’s about saving the planet,” said Binder.
Research shows that companies that formulated pollution risk as an opportunity were much more innovative than those fighting them with defensive strategies, added Mikes.
The professors also acknowledge the hurdles facing firms, not least the lack of a transparent and standardised way of measuring emissions across the value chain.
From a policy perspective, governments can help hasten the transition by providing both sticks and carrots, such as incentivizing companies to shift away from fossil fuels towards clean energy, said Mikes.
With 60% of S&P 500 companies facing major, stranded assets, there are clear economic incentives to take action said Haanaes. But increasingly employees are pushing for change. “Leaders of the future already have a different mindset” he said, adding that many businesses today thrive on working in sync with the planet’s resources, rather than only drawing from them.
The challenge will be ensuring that executives are armed with the questions and skills to bridge competitive boundaries and work across sectors to address the climate emergency.
“With climate comes a new job but also a purpose for business schools,” said Haanaes.
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