Reaching net zero—what will it take?

Across industries, the great cleanup is underway. Driven by tightening regulations, pressure from investors, and shifting customer preferences, companies are striving to reduce the burden of their activities on the planet. Conventional wisdom has always been that achieving net zero is a holy grail, possible only through heavy investments, on the one side, and sacrificing margins, on the other. However, environmental responsibility doesn’t have to be at odds with productivity—and, by extension, profitability.

In this episode of the McKinsey Talks Operations podcast, host Daphne Luchtenberg speaks with John Revess, senior director of Net Zero Transformation at the World Business Council for Sustainable Development (WBCSD), and with McKinsey’s Ruth Heuss and Peter Spiller on building sustainable operations on the path to net zero. The following is an edited version of their conversation.

Daphne Luchtenberg: Your company’s future success demands agile, flexible, and resilient operations. I’m your host, Daphne Luchtenberg, and you’re listening to McKinsey Talks Operations, a podcast where the world’s C-suite leaders and McKinsey experts cut through the noise and uncover how to create a new operational reality.

I’m joined today by John Revess, senior director of Net Zero Transformation at the World Business Council for Sustainable Development, and McKinsey’s own Peter Spiller and Ruth Heuss. And we’re going to challenge the notion that environmental sustainability comes with a trade-off. Welcome, everyone.

John, let me start with you. You represent an organization of more than 200 companies, with high ambitions to pursue sustainability and decarbonization. If you reflect on the last 12 months, how has the attention on sustainability changed from the point of view of business?

John Revess: The way we look at it in our organization is that sustainability has really gone mainstream, meaning that it is now affecting the many rather than the few. The pressure points on business are getting more complex than ever before, we all know that. It’s no longer just about financial performance that business has to manage.

But if that is not difficult enough, there’s no real pressure from the outside, whether it’s activists, legal threats, whether it’s competition trying to transform businesses faster and companies that your colleagues and listeners may be involved in, whether it’s capital markets beginning to ask questions or consumers beginning to ask for more sustainable products, whether it’s the risk profile of a business, the unpredictability in supply chains, or the regulatory risks of changes that are coming toward business, sustainability is now everywhere, it has gone mainstream.

And as a key example of that, as an organization with over 200 members at COP26, we had more CEOs participating actively in the program and contributing to the work than we’ve ever had before.

Daphne Luchtenberg: It’s really encouraging to see that shift in focus, right, John? Can you give some examples of some of the innovations that companies are now talking about when it comes to decarbonization?

John Revess: Innovation is definitely part of it. But the innovation is coming, because companies and the conversation have moved from why we need to engage to, exactly as you say, how do we operationalize the commitments that society expects leadership to take? In this decade of action, it’s really imperative that every company deals with its impact on climate change, biodiversity loss, and mounting inequality.

These actions will anticipate and connect with our customer demands. Regulations are being put in place, and capital markets are using this ESG [environmental, social, and governance] information to actually allocate their capital. And innovation is right at the heart of that.

Daphne Luchtenberg: Thanks for that, John. Ruth, I wanted to come to you because you’re working day to day with business leaders. And it feels like they are moving fast and accelerating. What are some of the biggest actions you’ve seen in the private sector that are really helping to make a step change?

Ruth Heuss: I think you’re absolutely right in that observation. To give you a few numbers, just in the last year alone, more than 1,400 businesses committed to science-based targets [SBTi]—more than ever committed before. Just the first three months of this year, 500 businesses already committed, and that shows us a bit the trajectory that we are on.

At the same time, people have initially committed themselves to achieve targets in 2050, which is quite a long way out. But since we all realize and notice that we must be much quicker, we also see that people are pushing forward on the targets. I work a lot in the automotive industry, targets are being set for as early as 2030 at the moment to be completely net zero across their own operations, but also in the supply chain, and obviously also in the lifetime of their products.

It’s absolutely fair to say that businesses are accelerating. John already mentioned that there’s a lot of push from consumers, banks, and financial institutions, but there’s also a push within the value chains, so that companies that are closer to the consumer actually asked their suppliers to do much more in terms of climate change. That’s a great movement we see at the moment.

Daphne Luchtenberg: We’re seeing so many countries announcing bans on the sale of fossil fuel–powered cars, for example, over the next three decades, with Norway imposing the rule. And I think they said that they would start that in 2025, which is just around the corner.

And then, of course, Peter, I wanted to bring you into the conversation. In Germany, where you’re based, the Supply Chain Care Obligations Act is requiring organizations to ensure that their direct and indirect suppliers meet the broad range of environmental and social standards. And, again, they’ve set a target for 2023. So right around the corner. How are you talking to clients about that, and what types of changes are needed in these industries to make real progress to hit some of these targets?

Peter Spiller: The change is obviously massive. Let me try to put this into perspective. Carbon emissions have increased steadily since the Industrial Revolution. We emitted 1,200 gigatons of CO₂ from the time when people first set foot on the planet all the way until 1980. In the 40 years that followed, from 1980 to 2020, we basically emitted another 1,200 gigatons of carbon emissions. And now, we have half of this left—so 600 gigatons—until 2050 to meet the 1.5-degree Paris pathway.

So, basically, emissions have to fall off the cliff over the next couple of years. There are a couple of practical indicators of what this would have to mean until 2030. We have to completely change how we power and fuel our lives. We need tenfold the amount of renewable electricity that we are using, from one terawatt to ten terawatts. We need to get 250 million electric vehicles on the street; we have 15 million now.

Daphne Luchtenberg: Peter, what kind of operational changes can businesses expect?

Peter Spiller: We have to build a completely new industry around carbon capture, use, and storage [CCUS]. Forty megatons of CO₂ are accumulated through CCUS. It has to be 1,700 megatons—40 times that. These are all massive operational changes in existing businesses, and these build up to completely new industries and completely new operations as well.

Now there are a couple of things that really make the difference here. Regulation is one, and you mentioned a few regulations already—banning internal-combustion-engine cars, carbon pricing mechanisms, cap and trade schemes, and so on. I mean, they are needed and make a difference.

Companies make commitments, but they also need to track. What you don’t measure, you don’t really manage, so a lot has to happen on this dimension of tracking emissions in value chains. We need real demand signals—premiums being paid, consumer demand, growth in more sustainable businesses.

And, probably the most important, we need to work together and form alliances. No single company on the planet can decarbonize alone and become sustainable. You absolutely have to work with your peers, with your suppliers, with your customers, to get something done.

Daphne Luchtenberg: That’s such a critical point—the point of building alliances, working together as part of an ecosystem. And, John, I wanted to come back to you, of course—that’s where the World Business Council for Sustainable Development really comes in. Can you talk a bit more about the role of alliances and partnerships in tackling these big targets?

John Revess: The reason that many companies joined WBCSD is because they want to start addressing some of these bigger systemic issues, and decarbonization is definitely one of those. The pressure felt by companies obviously affects the electricity and the fossil fuels that they are burning themselves.

But the majority of a company’s carbon emissions are part of their upstream supply chain, so within the language of the greenhouse-gas protocol, it’s what’s called scope 3 [emissions]. And there are challenges around dealing with scope 3, because you have to ensure that you calculate consistently—you need to start moving from industry average data to really granular primary data at the product level. And then, lastly, you need to ensure that there’s a system to access that data from across complex value chains.

Without this data transparency, accelerated decarbonization is going to be really hard to happen. Differently put, you can’t track and reduce what you’re not measuring, and that comes to one of the big projects we currently have called the Carbon Transparency Partnership, rallying key stakeholders in the ecosystem to jointly work on resolving this challenge to achieve full transparency of carbon emissions across value chains.

This partnership is joining the dots and creating alignment on the way forward. We’re doing that in many different parts of the ecosystem. Just to mention a few, we’re working together with policy makers, with academia, with the key technology players, or with auditors with some major supply chain actors, because they’re the ones that have the use cases, and with industry associations, with standard-setting bodies, with target-setting and reporting bodies. You can see this is a big ecosystem, and we’re working within it to try and drive forward this work of primary scope 3 data.

Daphne Luchtenberg: Ruth, I wanted to come back to you to talk about how business leaders need to think about this. When they consider the prioritization, they’re obviously always thinking about the trade-off between cost measures and decarbonization. Is there a middle ground to be found there?

Ruth Heuss: There’s a fantastic instrument called the abatement curve, which exists for industries but also for products. This has existed for more than ten years by now and has obviously been refreshed over the last years a lot. If I look at that instrument, it basically tells me that one-third of all the emission reductions is actually cost positive. When you implement these measures, costs are being saved. And the only thing that sometimes holds companies back is because there’s an investment needed up front to realize some of those [cost savings], and [before] the investment will be recovered. The key question here is how fast can the investment be recovered?

Coming back to the curve, there’s another third of the emissions which is cost neutral. So altogether, we are now at two-thirds, which are typically either cost positive or neutral. From my point of view, these are things that we absolutely must implement.

Then there’s another third, which today is still expensive. For example, coming to a topic that we currently work quite a lot on, how do we decarbonize some of the basic materials, like steel, that is a completely new process? In order to industrialize this process, we need take-off agreements, we need to collaborate across the value chain, as John and Peter already mentioned.

Then, when we have enough scale in this technology, we will obviously also overcome at some point in time the current cost disadvantage of some of those ideas, but we need to initially pay more, and I think that’s the challenge ahead. Even if some of those measures are not yet fully industrialized, we need to leap now in order to overcome the problems of the CO₂ that we currently have.

Daphne Luchtenberg: Thanks for setting that out so clearly, Ruth. John, I know another initiative that you’re spearheading is the SOS 1.5 campaign [to limit global warming to 1.5 degrees Celsius]. Can you talk a little bit more about it and what some of the early achievements have been?

John Revess: SOS 1.5 stands for Safe Operating Space 1.5, which, of course, is also a call for urgent action. In that, we bring together the world’s leading sustainable companies to accelerate climate recovery and work collaboratively on some of these systems change issues.

We look at the work in two ways. Firstly, we support capacity building within the organization and we do that through master classes and through an opportunity of safe spaces, where companies can be honest about their challenges, learn from each other, and create tools and publications that help and support others on their decarbonization journey. We’ve established a clear 1.5 road map for companies, which looks at six different areas and their different levels of maturity as they engage their internal organization to drive this change.

We also do work on climate accountability, and one of the basic parts of that is the greenhouse-gas protocol climate standards, which is used by over 90 percent of multinationals. That document is good. It’s the best we’ve got. It’s a voluntary standard, and WBCSD is a coconvener of the protocol, together with the World Resources Institute, in order to make sure that it consistently provides the guidance that’s necessary for companies as they’re looking to disclose and report on the progress they’re making. You asked about some early achievements, I mentioned the Carbon Transparency Partnership earlier, pulling together all of this work and our members.

At COP26 last year, we were able to launch an allocation methodology for how you can attribute organizational scope 3 emissions to an individual product—that, again, is a voluntary guideline. The intention, similar to the greenhouse-gas protocol, is that others will take it up and it will end up being referenced in regulations and in policy. But for the first time, that allows a consistent way for companies to correctly allocate their carbon emissions.

Daphne Luchtenberg: Fantastic. And lots more to do, I’m sure. Peter, Ruth alluded to this enormous amount of investment capital that’s going to have to be channeled into climate change accelerators. Where do you see some of the biggest momentum both in industries and geographies?

Peter Spiller: We estimate that $9.2 trillion per year on average will have to be invested between now and 2050 to make climate change not happen, to get to decarbonization. This is $3.5 trillion per year on top of what we are investing anyway. All the rest is basically shifting investments away from fossil fuels and into other areas, which is 7 to 8 percent of GDP. So indeed, the numbers are massive.

The financial flows in depth and equity, they reflect this already. We see this clearly. For example, sustainable debt instruments like green loans and green bonds have gone 60 percent per annum over the last five years. The US, Germany, and China are the biggest markets on this in terms of regional perspective. So the capital market is shifting, and they are putting their bets into sustainability. Different sectors are very unevenly exposed. This is important to notice. If you take fossil fuels, which are responsible for 80 percent of global emissions, they have to shrink by 70 to 80 percent and be replaced by hydrogen, by renewable electricity, by biomass.

If you’re in coal and oil, this is going down. At the same time, if you’re in wind and solar, you have to double or triple your capacities, basically, over the next couple of years. Take mobility. The path to electric vehicles is very clear now. New battery factories need to be built. OEMs are looking for green steel. In nickel and other materials, lithium will be very relevant and will need to be mined. So there’s a massive change that’s happening in the portfolios.

There are even bigger changes in agriculture. We estimate that tens of millions of jobs have to shift away from meat production into plant-based proteins, where we see tons of start-ups and also established companies expanding their portfolios. Then, there’s obviously the whole new energy sector and carbon capture sectors, where wind, solar, and CCUS capacities have to be built up, and all the operations in line with that.

Daphne Luchtenberg: Ruth, I wanted to come back to you. This particular podcast channel is really addressing an audience of operations leaders, and we often talk about the importance of making the connection between the board vision and the front line. We’ve talked about how CEOs and leadership teams have been setting bold aspirations and visions. But, really, it’s in the operations that we make these things happen, right? What role do you see for people who have leadership roles in operations today?

Ruth Heuss: Peter already perfectly spoke about what role operations will play in this transition. We heard him speak about companies buying green materials. The purchasing function will play a huge role, especially for those sectors that buy things and then process it along the way before they resell it, mainly consumer goods and automotive.

But, obviously, also in many other industries, manufacturing will play a key role. For example, in pharmaceuticals and chemicals, there are all kinds of processes that need to be decarbonized. And not to forget one important piece—we will see a huge capital expenditure wave coming, which is needed for building all those decarbonized supply chains and operations for battery plants, as Peter explained.

And the cheaper we can actually build this green infrastructure, the cheaper the transition will be and the faster it can get done. So there’s a huge demand for operations in terms of cost reduction for the transition, but also in speeding up for the transition. If you just think about it, we need to build ten times more capacity in solar and wind every year than we did before. How will that go if the operations folks don’t really speed up their processes in that time?

Peter Spiller: Let me build with one point. What we see our clients do a lot now is, they not only look for cost reduction, they not only look for carbon reduction separately, they look for dual mission. They really try to hammer down cost and carbon at the same time in integrated programs because there are a lot of synergies, in fact, in doing this.

You start with baselining carbon emissions and costs, and you look at the different levers. Many levers, if they relate to energy efficiency in particular, basically cover both. They reduce cost and they reduce carbon. And then people put the tracking and execution mechanisms in place that really hum down on both of these different missions in integrated programs.

Daphne Luchtenberg: John, let me leave us with a final thought from you. In the next two to three years, what are some of the imperatives for moving forward? I know you’ve gone through quite a lot of the infrastructure and some of the key initiatives that are being driven. But when we’re talking face to face to our audience, what’s the lasting thought you’d like to leave with them?

John Revess: I would love to give us all the collective challenge that we have to resolve for not only this climate crisis but also this looming challenge of inequality. The opportunity is that we have an economic system that ensures that our incentives and the global accounting standards and the capital market valuations are no longer just based on the financial performance of business but that they integrate the impact on the planet and people as part of how we define success and determine enterprise value. I think we’re on that road already, but there’s so much to be done.

Daphne Luchtenberg: Indeed, John, thank you so much. And it just occurs to me that we’re not doing this in a stable environment, right? The surroundings are ever more volatile. Ruth, how should we be thinking about that? What are the imperatives for moving forward while we try and navigate this environment?

Ruth Heuss: When you look especially at what happened to us in the last years with COVID-19, and also now with the geopolitical tensions that we see, we need to be much more flexible in adjusting our supply chains. Going forward, that will also likely be needed because of severe weather and other climate implications that we will face.

Especially for our colleagues in purchasing and supply chain, we need to be a lot quicker, more agile, have more options. And, potentially, also having things a bit closer to home to avoid long transport distances is something that we can completely rethink now in this decade.

John Revess: Yeah, Ruth, I’m happy to build on that. Because we see our members shifting their focus to create more resilient supply chains. And COVID-19 was the start of it. We know with the war taking place in Europe, this is really going to focus people’s minds. Now, business faces massive supply chain disruptions, and faces a choice of shifting [supply chains] from no longer just being lowest cost but also how to build resilient and more adaptable systems that are going to support us in the future. I guess a great example of that is a choice of whether we start reinvesting back into fossil fuels or investing into renewable-energy sources.

Daphne Luchtenberg: Let me thank our guests today. John, thank you for making the time. I know you have a very busy day job. And so we really appreciate you giving this a little bit of your time. John, Ruth, Peter, thank you so much. It’s been a fascinating discussion. We’ve only just scratched the surface, and there’s clearly so much more to dig into. Ruth, as the leader of our sustainability efforts in operations, let me leave you with the final word.

Ruth Heuss: This decade counts. We must make it in this decade. Operations must play an important role in accelerating this transition and in really making it happen and implementing it. So let’s take it on. That would be my final word.

Daphne Luchtenberg: The time is now. Thanks so much, everyone. Really great to have you here today.

You’ve been listening to McKinsey Talks Operations with me, Daphne Luchtenberg. If you like what you’ve heard, subscribe to our show on Apple Podcasts, Spotify, or wherever you listen. We’ll be back with a brand-new episode in a couple of weeks.