The European Union (EU) Environmental policy, which has been built up with environmental action programmes since the early 1970s, has the most extensive environmental laws of any international organisation. Against this backdrop, around 11,700 large companies and groups across the EU have typically been leaders in the fight against climate change.
In comparison with climate change efforts in the Asia Pacific and other parts of the world, a recent study by Schneider Electric has found that only four of 10 companies in Singapore have a climate action plan that addresses climate risk. On the other hand, only 1 in 5 Fortune 500 companies have a climate goal that covers emissions across their value chain.
IAA asked Alpesh Patel, Partner and Leader, Digital Capability Centers Asia-Pacific, McKinsey & Company why there is a stark contrast, and whether it has to do with leadership mindset or corporate culture.
Q: Across the globe, corporations in the EU are more advanced in their environmental sustainability journey while in APAC, some of them are just starting. What are your thoughts on this?
McKinsey’s latest report – Net zero or bust: Beating the abatement cost curve for growth – suggests companies will need to rethink the conventional approach to carbon reduction and move beyond the abatement curve and involve a combination of top-down and bottom-up activity:
- Finding the upside in emissions reduction. For the journey to become value creating rather than value destroying, companies will need to rethink the conventional approach to carbon reduction. Moving beyond the abatement curve involves a combination of top-down and bottom-up activity: empowering frontline personnel to drive emissions reductions while making significant long-term strategic bets on markets, technologies and production footprint.
- Operationalising emissions reduction. Translating emissions-reduction goals into a practical reality involves working on three fronts at once: redefining the decarbonisation business case in finance, building an integrated sustainability production system into the organisation, and assembling an infrastructure to support tactical innovation in operations.
- Based on their strategic postures, companies will want to reevaluate their existing portfolios, potentially disposing of assets or exiting certain businesses. In other areas, they will likely need to place their big bets across one or more of three key dimensions: geographies, products, and processes.
Together, these forces mean that decarbonisation is no longer an option but an imperative. Across most of the world, companies with ambitions to stay in business over the long term are already on a 30- or 40-year journey to net-zero emissions.
After some initial hesitations, a huge wave is slated to take place in APAC too. Our global survey of manufacturing companies highlights that 47 percent of surveyed companies in middle-income APAC countries have indicated willingness to grow their investment in ESG by over 20 percent compared to pre-COVID times. In comparison, only 15 percent of EU-based industrial companies surveyed have similar plans. From our perspective and discussions with companies in the region, this could be driven by two key aspects: (1) an increasingly large number of countries are deriving their path to net-zero emissions, which in turns impacts their key industrial sectors; (2) the global nature of supply chains implies that for an OEM in Europe or US to reach its targets, suppliers also need to play their part, as they contribute to Scope 3 GHG emissions.
Q: Is it mindset/legacy/company culture, or is it due to cost/lack of purpose/a one-off initiative as part of their business strategy that becomes the major roadblock for organisations in this region to adopt environmental sustainability policy in their businesses? What’s your take on this?
The transition to net-zero emissions will have a profound impact on almost every aspect of the business.
However, the journey will not be easy. Our global survey highlights that out of the surveyed APAC industrial companies, only 3 percent in high-income countries and none in medium-income countries have defined a clear pathway to decarbonisation by 2040. Of the mid-income APAC companies surveyed, ~80 percent believe that it will likely not be possible for them to fully decarbonise at all – compared to 20-30 percent in other geographies.
Success will require a transformation mindset with two primary elements. Within the boardroom, leaders will need to rethink their strategic positioning, adapt their existing portfolios, identify the growth opportunities emerging from the disruption of decarbonisation, and invest strategically in their long-term futures.
Beyond the boardroom, companies will need to double down on a triple transformation of business, technology, and organisation.
- Business: Take a hard look at their existing operations and identify areas where emission reductions can also result in cost savings, which can partly offset some of the investments in making a difference in their climate-change impact.
- Technology: Pilot and scale up new and unproven technologies within their existing production networks, which can confer a decisive competitive advantage.
- Organisation: Existing frontline will need to be equipped with new skills to understand and act on sustainability-related data, and new roles will need to be created. Greater cross-functional coordination will be required as well as along the value chain.
Demand for sustainability and digitisation are driving change in business today. Now is the time for companies to act – from the board room to the engine room.
 Environmental, Social and Governance
(Image by McKinsey & Company)
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