Corporate Decarbonization: Strategies, Challenges and the Emerging Leadership of Chief Decarbonization Officers

The emergence of decarbonization and corporate sustainability

A growing public concern about environmental protection is pressuring companies to accelerate a shift towards a low-carbon economy. With more natural disasters occurring globally, reducing greenhouse gas emissions to net zero through decarbonization strategies is critical to mitigate climate-related risks and exploit opportunities for a sustainable future.

Despite the urgent need to reduce carbon emissions for a net zero future, Accenture's ‘Destination to Net Zero’ report identified that only 18% of the most prominent global public and private companies by revenue are on track to reach net zero by 2050. Nevertheless, decarbonization is growing in importance in corporate sustainability.

Decarbonization aims to achieve zero emissions by reducing or eliminating carbon dioxide (CO2) emissions, typically from human activities like industry, transportation and energy production. This can be done through strategies like switching from fossil fuels to renewable energy and improving energy efficiency.

Governments worldwide are enacting climate-related policies and regulations to lower emissions, and investors are increasingly integrating environmental, social and governance (ESG) factors into their decision-making processes. Companies that transform their operations to accelerate decarbonization can improve risk management, build stakeholder trust and gain competitive advantages by contributing to a sustainable economy.

The rise of ESG officers

As companies integrate ESG factors into their strategies, operations and reporting, the need for chief sustainability officers (CSOs) is growing. A study by PwC shows that the number of companies appointing CSOs has jumped from 9% in 2016 to 28% in 2021.

The responsibilities of CSOs vary from effectively communicating with stakeholders and promoting sustainable initiatives to ensuring compliance with environmental laws and regulations. While demand for CSOs is expanding, organizations face skills gap challenges when recruiting CSOs.

Deloitte's ‘The Future of the Chief Sustainability Officer’ report found that companies are likely to approach and recruit CSOs from within their organizations. Moreover, organizations continue to prioritize sustainability to meet stakeholders' expectations. However, However, finding ideal candidates for CSO roles can be challenging. These positions are expanding and require specific ESG knowledge and executive skills to transform businesses sustainably, but the supply of qualified CSOs is limited.

Some organizations have appointed Chief Decarbonization Officers (CDOs) specifically focused on reducing carbon footprints to achieve net zero targets. CDOs play a critical role in developing and driving decarbonization strategies, investing in low-carbon technologies, monitoring and reporting on carbon reduction progress and ensuring compliance with environmental regulations related to carbon emissions.

What are the key strategies used by companies to reduce carbon emissions?

Not only do companies need to introduce ESG officers to incorporate sustainability in decision-making, but they must also understand and incorporate decarbonization strategies to reduce emissions. Businesses are actively pursuing various decarbonization strategies to achieve net zero targets.

These strategies include generating more electricity from renewables in the energy sector, electrifying vehicles in the transport sector and developing innovative products like cultivated meat in the agriculture and food sector. Here are three common approaches companies have used in recent years:

Sustainability initiatives

Increasingly, companies have committed to sustainability by investing in clean and renewable energies. For example, Microsoft has signed several power purchase agreements (PPAs) with renewable energy providers in a commitment to make their energy-intensive data centers more sustainable.

While companies in carbon-intensive sectors choose to invest in clean energies, but the growing need for decarbonization is also encouraging governments, consumers and businesses in the broader sectors to shift towards sustainable energy sources. The global transition to renewable energy has accelerated over the past few years. However, global energy consumption growth has outpaced renewables, and the world still relies on traditional energy sources such as oil, gas and coal. Decarbonization is occurring, yet fossil fuels must be replaced more rapidly with renewable energy sources worldwide to achieve the net zero targets.

Carbon credits and offsetting

Using carbon credits is a cost-effective way for companies to offset emissions and achieve net zero targets. The global carbon market has expanded as more companies introduce net zero targets and purchase carbon credits to balance their carbon footprint.

According to the World Bank, carbon pricing revenue was $104.0 billion in 2023, with 75 carbon pricing instruments operating globally. Growing pressures from stakeholders to achieve net zero targets encourage more companies to turn to carbon credits, strengthening demand and expanding carbon credit markets over the coming years.

Energy efficiency improvements

Another decarbonization strategy that companies have been taking is improving energy efficiencies through their operations and supply chains. Businesses leverage technological advancements, including automation and intelligent systems, to optimize energy use.

For example, the industrial sector has leveraged the latest technologies to regulate and monitor energy usage via smart energy management systems (SEMS). SEMS benefits businesses by minimizing energy use and expenses, improving operational efficiencies and reducing carbon emissions.

What are the challenges and opportunities in decarbonization?

Challenges

Companies that have adopted decarbonization strategies in their corporate sustainability initiatives face several challenges in their decarbonization efforts:

Financial constraints

Implementing decarbonization initiatives requires significant investment, posing a financial risk for companies. For example, the oil and gas sector, one of the most carbon-intensive industries, requires an upfront investment of approximately $600.0 billion to halve its global emissions by 2030.

Technological availability and maturity

The availability and maturity of innovative technologies necessary for decarbonization, like advanced renewable energy technologies, can limit companies' decarbonization efforts. However, companies like ExxonMobil, Shell and BP are overcoming these challenges by implementing multiple decarbonization strategies, including investing in clean and renewable energies and biofuel production.

Regulatory and policy uncertainty

The lack of a unified standard for ESG reporting complicates planning and long-term investments for companies. The ever-evolving nature of environmental regulations adds to this uncertainty, making it difficult to strategize effectively. This unpredictability can lead to compliance risks and unexpected costs, requiring companies to stay adaptable. Investing in flexible technologies and engaging in policy advocacy are essential to navigate these challenges and influence favorable outcomes.

Opportunities

Despite the challenges, decarbonization presents promising opportunities for businesses:

Emerging markets

Small enterprises, including start-ups, have capitalized on growing business opportunities in to decarbonization. These companies, such as Ørsted and NextEra Energy, have expanded their market share by delivering new products and services in emerging areas, like green energy.

Technological growth

The IEA's Net Zero Emissions by 2050 Scenario highlights rapid growth for emerging technologies like hydrogen and biofuels, while established technologies like solar and wind continue to expand. Businesses can seize growing opportunities through strategic actions like investing in clean technologies and developing products and services to satisfy the growing demand for sustainable solutions.

Real-world successes

Accelerating decarbonization requires significant effort from companies and investment in new technologies and resources to achieve long-term net zero goals. However, forward-looking organizations that embed decarbonization strategies into operations and financial planning, together with the appointment of CSOs and CDOs, can foster sustainable growth by strengthening resilience and mitigating climate risks.

The mining sector

The mining sector is vulnerable to climate change, with extreme weather conditions like droughts, floods and extreme heat, which could disrupt operations and incur additional costs like cooling costs. That's why the mining sector must mitigate climate risks and improve resiliency through decarbonization strategies.

Rio Tinto

Rio Tinto, a multinational mining company headquartered in Australia, is an example of a company that improved operational performance by prioritizing decarbonization during the energy transition in the mining sector.

The company has invested in several decarbonization projects, including installing carbon-free aluminium smelting cells in Quebec, testing a low-carbon ironmaking process in Western Australia and securing a 20-year renewable electricity agreement for the Tiwai Point aluminium smelter in New Zealand.

While these decarbonization strategies incur significant capital investment, these investments by Rio Tinto show how strategic decarbonization can propel both sustainability and profitability.

The healthcare sector

In the US, the healthcare sector contributes 8.5% of total greenhouse gas (GHG) emissions. A study shows Scope 3 accounts for 82% of GHG emissions in the healthcare sector. Eliminating direct and indirect carbon emissions is challenging for health systems, which is why decarbonization is essential to achieve carbon neutrality.

NYC Health + Hospitals

Recently, NYC Health + Hospitals appointed a CDO for the first time to lead decarbonization efforts and comply with Local Law 97 of 2019. The newly appointed CDO will integrate energy efficiency, electrification and renewable energy into operations and capital planning.

Decarbonization challenges in the healthcare sector involve complex efforts by health systems, which must engage multiple stakeholders and ensure a long-term commitment to sustainability. Yet, their initiatives set a benchmark for other organizations to follow, accelerating decarbonization in the healthcare sector.