Flipping the switch - Making the Transition to Clean Energy

Transitioning to a world of clean energy has been discussed and aspired to for a long time. However, in the last five years, the urgency to begin this transformation has swept the globe. The 2015 Paris Climate Agreement was a major catalyst for this. For the first time, there was global agreement on climate models and a path forward, calling for a reduction in global warming, in order to keep the long-term average global temperature to less than 2°C higher than pre-industrial levels. Accomplishing this goal would decrease the severity of risks resulting from rising ocean levels, extreme weather and other climate-related phenomena.

Subsequent events; such as the Business Roundtable’s statement on the purpose of a corporation, outlining “a modern standard for corporate responsibility,” and Black Rock’s letter to CEOs, highlighting sustainability as the foundation of its investment strategy, have further accelerated the strategic imperative for organizations to transition to clean energy and a more sustainable future.

The consequences of climate change seem to be in the media headlines every day with more frequent high-impact events such as storms and wildfires, polar ice caps melting, persistent drought induced mass migrations, and more. However, for companies, it’s one thing to see all of these events in the news; it’s another to see a growing number of financial services firms declare that they are only interested in investing in companies built on sustainable values. This has caused Environmental, Social and Governance (ESG) factors to become core components of business strategy.

All of this adds up to an unprecedented challenge, as companies recognize that their ability to gain funding, win customers and operate profitably in the future depends on how well they can transition to sustainable business models. One of the key building blocks to this sustainable future is making the transition to clean energy. It is the most impactful way to decrease carbon emissions across the extended enterprise, and build the ESG foundation that stakeholders seek.

Beginning the Transition

There is no single playbook for the transition to clean energy. Each industry is different, with its own unique challenges and realistic timelines. There are a common set of steps, however, that organizations can take to firmly place themselves on the road to a clean energy future:

• Gaining an understanding of carbon-reduction pathways - The first step is to quantify the carbon footprint of the enterprise. This can be a challenging undertaking, because enterprises need to understand their own emissions, as well as those of their partners (and their partners’ partners) in the supply chain, particularly if they are setting Science Based Targets. This information must be known in order to effectively define pathways for emission reductions and report on progress. Once an accurate baseline and pathways for emission reductions are established, it becomes possible to develop a coherent plan for transitioning to cleaner energy, and communicate this plan to the stakeholder and investor community.
• Building the plan: emissions abatement and portfolio management - Every plan needs to articulate an ultimate business target. In the context of carbon emissions, in many cases that target can be “achieving a net-zero state.” The timeline for achieving net zero will vary depending on the industry and the particular carbon abatement projects that can have the highest impact, at the most viable cost to the business. Once the various abatement projects have been identified and assessed for impact and cost, it is time to plan and manage them as a portfolio. Optimizing the portfolio of abatement projects over time, while managing growth, divestitures and other business changes, becomes critical to staying on target.  
• Building the narrative - Just as important as having a target, companies need to have a corporate narrative in place that clearly communicates the rationale behind the target. This narrative will help to inform stakeholders, in plain language, on how the company plans to achieve its transition to clean energy. Strong disclosure across all channels is a critical tool in meeting the requirements of ESG investors and other stakeholders, whilst building competitive advantage as a responsible business

The Time is Now

The transition to clean energy has become a competitive imperative as investors, customers and other stakeholders realign around sustainable business. Even the world’s largest fossil fuel companies are implementing strategies to become diversified energy companies. They understand their current “extract and refine” business models will not be viable in 30-50 years from now, so they need to develop new opportunities that make them relevant and profitable in the clean-energy future.

This transition does not have to be a “shock to the system.” Understanding one’s current baseline of carbon risk exposure, building a plan for transitioning to clean energy, and communicating that plan through a well-constructed and easily understood narrative, can make the transition to clean energy an opportunity filled journey, that delivers benefits both in the short and long terms for the business, the community and the planet.

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