At COP26, the UN Climate Change conference held in November 2021, 60 of the United Kingdom’s FTSE 100 companies signed up for its Race to Zero campaign—an alliance committed to achieving net-zero carbon emissions by 2050—which marked a significant ratcheting up of ambitions by the UK private sector to reduce carbon emissions.
McKinsey senior partner Harry Bowcott, who also leads our Sustainability Practice in the United Kingdom, spoke to hundreds of executives during McKinsey’s Driving the Difference event series at COP26. Thomas Farrar, a manager of communications in the firm’s UK office, caught up with Harry to learn more about how companies have been responding to the sustainability imperative since the conference ended.
Thomas: What did you make of the level of private-sector engagement at COP26? Do you think it marks an inflection point for how businesses are approaching sustainability?
Harry: I think COP26 does mark a turning point. Much of the analysis has attempted to add up the commitments that were made and predict what type of temperature trajectory that puts us on. While the global temperature really matters, I think it’s too simplistic a way to think about what COP26 achieved.
If I look beneath the announcements, where the private sector is concerned, I think COP26 marked an inflection point because the debate moved past the why and is now fully focused on the how. Net zero is now an organizing principle for businesses, and COP26 set the demand signal for a net-zero transition economy.
That said, it’s equally important to avoid overstating things. There’s still a huge amount of difficult, complicated work that needs to be done. Companies must now think about creating strategic resilience in a period of volatility.
Thomas: At the company level, how have different stakeholder groups reacted to the sustainability imperative?
Harry: If I think about the way CEOs, board members, and shareholders are reacting to a net-zero economy, they have much more in common than differences—but where you will find differences is where they place more emphasis.
For instance, a common question among different stakeholders is “How does the financial case for the transition stack up?” The response will typically fall between those who approach decarbonization reactively and those who approach it proactively.
Those organizations looking at this reactively are those for whom the money involved looks like a cost. If you’re reactive, it’s usually because you recognize the need to make the transition, and you’re doing it to comply with regulation or wider trends in your sector—it becomes table stakes. You might be decarbonizing your operations and your business, but not looking at how your business should change.
The ones who are proactive choose to see the transition as an investment in the future and are looking to capture new opportunities for growth generated by the sustainability imperative.
Thomas: Could you provide an example where a large business has captured these new opportunities?
Harry: Consider meat or dairy producers who have expanded offerings to include plant-based products, or large steel manufacturers who are funding R&D to unlock opportunities in green streel. These are new business sectors that have been created by the sustainability imperative.
The companies that are likely to thrive are not only decarbonizing, but also thinking about how to shift the business into faster growing areas.
Thomas: How should companies that have been slow to respond to the sustainability imperative adapt? What could business leaders think about doing first?
Harry: A few thoughts come to mind.
The first is to think about the strategic question. Think about how the movement of all this capital at this scale is going to affect the markets and sectors they operate in, and crucially, the markets and sectors they don’t operate in. So, how are CEOs thinking about which pools their business needs to operate in? Moreover, it’s important for leaders to explain their plans to stakeholders. Leaders will want to consider an investor relations and external-engagement program that helps explain how they see the future, what they are doing now, and what they will do next.
The second is every good business leader needs to be thinking very carefully about how resilient their company’s assets are to climate risk; how that’s going to change, and how that compares to the competition. In the short-term, most companies can make “no regrets” moves even while drawing up the long-term agendas. Starting with straightforward changes that are sure to generate value, such as investing in energy efficiency, for example.
Thomas: What sectors have already responded to the sustainability imperative?
Harry: There are different kinds of moves in different sectors depending on how exposed companies are to greenhouse emissions today. In the oil-and-gas sector, energy supply and power generation—where the decarbonization agenda is corporately existential—incumbents are shifting business models, embracing innovation, and seeking new sources of power.
New entrants in sectors like transport, automotive, and advanced industries—which are heavy emitting sectors, but where it’s not core to what these companies do—have been able to capture advantage from moving quickly. The obvious example would be to point to new entrants in the automotive industry, where a number of vehicle manufacturers have pioneered the development of electric vehicles and have successfully acted upon consumer-demand signals. These new disruptors have pushed incumbents to innovate and act quickly to keep pace.
In other sectors, efforts to improve transparency through climate-related disclosures are driving change. For example, in banking and finance, the Task Force on Climate-related Financial Disclosures recommends institutions provide reliable climate-related financial information. These disclosures are helping investors, lenders, and insurers identify and price climate risk and subsequently reallocate capital accordingly. At the same time, these disclosures are creating opportunities for investors, lenders, and insurers to support new and fast-moving low-carbon growth sectors generated by green business building.
Thomas: What innovations do you think will have the most impact in helping businesses reach net zero?
Harry: At the macro level, new and emerging technologies often dominate conversations about what will be required to get to net zero. Our research on Europe’s net-zero pathway suggests that climate technologies that are already mature or have been demonstrated, could, if deployed widely, deliver 80 percent of the emissions abatement needed to stabilize the climate by 2050. Most of the required technologies are available, but scaling them will be critical.
If I’m thinking about where innovation needs to come from in a company, I’m thinking about what levers it needs to pull to build strategic resilience. I think there are two main areas of innovation:
First is a reinvention of the finance function. As supply chain pressures intensify and price volatility continues, procurement will become increasingly important. To remain competitive, business leaders will have to sharpen their procurement levers to secure the in-demand raw materials needed to remain in business. Can they establish futures contracts for materials that will ensure they have supply when their competitors may not? Can they mitigate increased risk? Can they model different scenarios and stress test their business plans? Can they build circularity into their business model so they’re less exposed to raw-material price fluctuation? These are just a few examples of possible innovations in the finance function that could be a source of competitive advantage.
The second area is in digital. Some companies may still be afraid of taking the first steps on the sustainability journey because their leaders don’t have full transparency on how the journey plays out over a 15- or 20-year horizon. I think there are two thoughts here: the first is that many of the classic digital technologies adopted in the last decade, such as data analytics and automation, if adopted more uniformly, can give you that first step. The sustainability imperative this decade can be the catalyst for completing the technology revolution of the last.
The second thought on digital innovation is that as companies begin to make commitments covering scope 3 emissions—emissions generated in the upstream and downstream value chain—there will need be a reliable way to track how business is performing against those commitments. Technology will start to show how and where carbon is distributed along a company’s supply chain, which will give a new level of insight into the performance of a supply chain, and this can form the basis of the next era of productivity improvement.
Learn more about concrete opportunities for UK businesses arising from the transition to net zero in our latest analysis.