The EBITDA of Decarbonization

Climate change, and energy transition that is being driven by it, is both the greatest challenge and the greatest opportunity of our lifetime. The implementation of this energy transition will require nothing short of the decarbonization of the global economy. The incredible scale and breadth of this effort will offer companies an unprecedented opportunity to drive a sustainable business transformation that will not only address their emissions footprint but also lower costs and improve returns on investment, directly benefitting their bottom line.

To capture these opportunities, organizations need to decarbonize their supply chains. This is where the most significant investments – and gains – will be made. Decarbonizing global supply chains is estimated to take over $100 trillion by 2050, with half of this investment coming from large enterprises and half from small and medium-sized firms (Figure 1). But supply chains will not decarbonize themselves; for companies to successfully integrate sustainability across their business model, they need to shift their focus and be early movers on investing in decarbonization talent. Hiring, retaining, and upskilling talent will be crucial for those that want to achieve net zero that leads to value creation and can fuel long-term revenue and EBITDA growth.

Figure 1: Cost of net zero by 2050

_{Source: BCG and HSBC, Delivering Net Zero Supply Chains: The Multi-Trillion Dollar Key to Beat Climate Change. https://www.hsbc.com/insight/topics/seven-steps-to-tackle-a-usd50-trillion-challenge, October 27 2021.}

Reducing Scope 3 emissions: A crucial priority for organizations aiming to achieve their targets

While more than 4,000 businesses and financial institutions are already working to reduce their emissions in line with a science-based target,¹  the operational challenges of achieving this are just starting to become apparent. The strategic business transformation needed to reach net-zero requires outcome-oriented roadmaps that identify greenhouse gas emission (GHG) hotspots. For most companies, the largest source of risk and opportunity are Scope 3 emissions, which include upstream and downstream emissions that span across a company’s value chain. These emissions represent over 90% of most organizations’ total GHG emissions.²

Scope 3 emissions can only be reduced through collaboration with customers and suppliers. Despite numerous challenges, many companies are already producing detailed decarbonization and transition plans. However, broader commitments are needed: less than one-third of the world’s 2,000 largest public companies have a GHG emissions reduction target that includes all or part of their scope 3 emissions. Predictably, this percentage varies across countries—in the US, 30% of organizations have committed to reductions, while 66% of companies in France and 57% in the UK have made similar commitments.³

Decarbonization in action: How three companies are creating value by reducing emissions

Effective global leaders view decarbonization as a value-creation strategy through which they can increase their operational efficiency and cost competitiveness. Many companies are driving decarbonization of their own operations and supply chains, investing in renewable energy infrastructure and electric mobility. But for best-in-class organizations, decarbonization initiatives are already core to their business strategy.

• Philips uses an Environmental Profit & Loss (EP&L) account for insights into main environmental hotspots and innovation areas to reduce the environmental impact of their products and solutions. Green/EcoDesigned products and solutions generated nearly 72% of Philips’s revenues in 2022, up from 2021.⁵
• Schneider Electric has launched the Zero Carbon Project, which aims to lower the carbon footprint of its supply chain by partnering with its top 1,000 suppliers.⁶  At the same time, Schneider is leveraging learnings from its own decarbonization efforts to drive new revenue streams, with their sustainability business having grown +20% in Q4 2022.⁷
• Dow Chemical has valued their total addressable market opportunity at more than $800 billion as they seek to expand their market verticals to deliver solutions designed for recyclability, enhanced plastics circularity and sustainability for key markets.⁸

Operations and supply chain: the natural home for decarbonization efforts

The business case is clear: best-in-class organizations are making progress, but decarbonization of the global economy requires prioritization of Scope 3 emissions at scale. Companies today still focus most of their efforts on 10% of their emissions, while supply chains are responsible for almost all of their negative climate impact.

To achieve net zero targets and returns on related investments, operations and supply chains must become the priority. These organizational functions need to take a more central role in their organization’s sustainability journey, most notably in companies where manufacturing and supply chains are core to the business. While some organizations have decided that operations and supply chain should lead the charge, sustainability often still sits with the legal and regulatory, finance or separate ESG function (Figure 2). A 2022 Russell Reynolds’ study found that only 19% of surveyed organizations give operations and supply chain ownership of sustainability. However, when we asked finance executives which function they should partner with in order to drive impact in ESG efforts, 77% chose operations and supply chain.

Figure 2. Who owns ESG & Sustainability in your organization? (Select all that apply)

_{Source: RRA survey ‘The Evolving Role of Finance: ESG & Sustainability’, n = 113, 2022}

Companies at the forefront of decarbonization are experimenting with different supply chain leadership enablement models. It’s no coincidence that each of these companies below are also featured on Gartner’s Supply Chain Top 25, with many having appeared for several consecutive years.⁹ These companies are willing to push boundaries to innovate their approach to supply chain management and, in doing so, are providing a roadmap for other companies seeking to replicate their success.

At Schneider Electric, the supply chain function leads the execution of the decarbonization strategy, and the supply chain leader serves on the Group Sustainability Committee.¹⁰ Furthermore, the chief supply chain officer is part of the C-suite and reports directly to the CEO – a governance model that will benefit the firm’s sustainability strategy.¹¹

At Cisco Systems, John Kern, the SVP of supply chain operations is the executive sponsor of the company’s Circular Economy initiative, which seeks to embed circularity across the product lifecycle.¹² After realizing that each function was working in isolation and with different orientations towards the company’s circular economy goals, Cisco assembled the Executive Change Network made of up top executives from across the business to co-create solutions to the circular economy challenges.¹³

At Johnson & Johnson, chief sustainability officer Paulette Frank is a member of the Supply Chain Leadership Team and is a direct report to chief global supply chain officer Kathy Wengel. This integration of sustainability into the supply chain reporting structure enables Frank to partner directly with suppliers to reduce upstream carbon emissions, in support of the company’s transition to 100% renewable electricity and carbon neutral operations.¹⁴

At Microsoft, corporate vice president and chief sustainability officer Melanie Nakagawa works closely with her supply chain peer Donna Wharton, corporate vice president for supply chain and sustainability. Nakagawa’s policy and strategy development expertise are complemented by Wharton’s deep expertise in supply chain and process engineering in service of meeting Microsoft’s ambitious goal to be carbon negative by 2030.¹⁵

Leading the way in decarbonization: the model of the sustainable leader

Even though it’s best practice, companies that place sustainability strategy management within operations and supply chain may encounter a different challenge: key talent shortages. According to a report from LinkedIn, “green talent” in the global workforce has grown at roughly 6% per year between 2016 and 2021, while concurrently job postings requiring those skills grew at 8% annually.¹⁶ To make this supply and demand mismatch even more challenging for industry, consulting and other professional services firms are hiring sustainability talent in volumes, shrinking the talent pool further for others and increasing market rates for these skills.

At Russell Reynolds, we believe that a mix of hard and soft skills are needed to achieve sustainability targets. Our analysis revealed four critical attributes that differentiate sustainable leaders, underpinned by the most important leadership quality: a “sustainable mindset.” (Figure 3) The sustainable mindset is the purpose driven belief that business is not a commercial activity divorced from the wider societal and environmental context in which it operates. Skills can be trained and complemented by the right team, but having an orientation towards sustainability that enables the leader to assess opportunities and risks through the lens of sustainability and decarbonization is even more critical. Whether the leader is an internal promotion or an external hire, an assessment of the candidate for these qualities is essential.

Figure 3: Russell Reynolds Associates’ Model of the Sustainable Leader

_{Source: Leadership for the Decade of Action: UN Global Compact-Russell Reynolds Associates study on the characteristics of sustainable business leaders, 2020.}

Recommendations for companies and leaders seeking to decarbonize:

• Recognize and champion decarbonization’s value creation opportunities: The most successful companies recognize that decarbonization is becoming essential to maintaining their social license to operate and leads to value creation when treated as a strategic priority. Successful implementation requires the right talent and then developing and training them in ways that support the decarbonization strategy. Furthermore, leaders must ensure their current organizational structure is appropriate for the strategy and align rewards to support its implementation. 
  
  
• Enable cross-functional collaboration to support solution co-creation: Operations and supply chain are the natural home for leadership and execution of decarbonization, but desired outcomes can only be achieved through collaboration. Ensuring you have an organizational structure and culture that encourages cross-functional collaboration and co-creation of decarbonization strategies is essential. Leaders must establish strong relationships within the function, across the organization, and outside the organization. They need to effectively navigate organizational complexity to collaborate successfully within a matrixed environment, and be comfortable with being the “external face” of the function.
  
  
• Assess, identify and develop your organization’s sustainable leaders: The transition to a net-zero reality will require disruptive innovation, inclusive leadership, a multi-level systems approach, and the courage to stay the course in the face of setbacks. Assessing, identifying, and developing these qualities in both current and next-generation leaders will be critical to ensuring companies have the sufficient bench of talent needed to navigate the challenges – and reap the rewards – of decarbonization.

Authors

Kurt Harrison co-leads Russell Reynolds Associates’ Global Sustainability Practice. He is based in New York. 
Emily Meneer leads Russell Reynolds Associates’ Sustainability Knowledge team. She is based in Portland.
Mika Nurminen leads Russell Reynolds Associates’ Operations & Supply Chain Officers Knowledge team. He is based in Toronto.
Ben Shrewsbury leads Russell Reynolds Associates’ Global Operations & Supply Chain Officers Practice. He is based in Dallas. 
Sylwia Zieba leads Russell Reynolds Associates’ Sustainability Research team. She is based in New York.

References

_{¹ Science Based Targets. Captured January 3rd, 2023. https://sciencebasedtargets.org/companies-taking-action
² US Environmental Protection Agency. January 17, 2023. Supply Chain Guidance. US Environmental Protection Agency. January 17, 2023. Supply Chain Guidance. https://www.epa.gov/climateleadership/supply-chain-guidance
³ Net Zero Tracker. Captured January 27, 2023. https://zerotracker.net/
⁴ Sean Ashcroft. March 16, 2022. Dell supply chief Kevin Brown has sustainability in sights. Supply Chain Digital. https://supplychaindigital.com/sustainability/dell-supply-chief-kevin-brown-has-sustainability-in-sights
⁵ Philips. February 21, 2023. Annual Report 2022. https://www.results.philips.com/downloadcenter#ar21
⁶ Schneider Electric. June 15, 2021. Schneider Electric named as Best Global Sustainable Supply Chain Organization spearheading climate action throughout its ecosystem. https://www.se.com/ww/en/about-us/newsroom/news/press-releases/schneider-electric-named-as-best-global-sustainable-supply-chain-organization-spearheading-climate-action-throughout-its-ecosystem-60c8994c244643554f295a44
⁷ Schneider Electric. February 16, 2023. Full Year 2022 Results. https://www.se.com/ww/en/assets/564/document/378891/release-fy-results-2022.pdf
⁸ The Dow Chemical Company. June 15, 2022. 2021 Environmental, Social & Governance report. https://corporate.dow.com/content/dam/corp/documents/about/066-00397-01-2021-esg-report.pdf
⁹ Mike Griswold. May 26, 2022. The Gartner Supply Chain Top 25 for 2022. Gartner. https://www.gartner.com/en/articles/the-gartner-supply-chain-top-25-for-2022
¹⁰ Laura Cohn. April 25, 2022. Does Your Organization Need a Chief Sustainability Officer? Gartner. https://www.gartner.com/en/articles/does-your-organization-need-a-chief-sustainability officer#:~:text=The%20leader%20of%20the%20supply%20chain%20function%20is,ESG%20and%20sustainability%20leaders%20%E2%80%94%20work%20closely%20together
¹¹ Mourad Tamoud. December 13, 2022. Remaking the role of Chief Supply Chain Officer. Schneider Electric. https://blog.se.com/supply-chain/2022/12/13/remaking-the-role-of-chief-supply-chain-officer/
¹² Cisco. Executive Biography – John Kern. https://newsroom.cisco.com/c/r/newsroom/en/us/executives/kern-john.html
¹³ GreenBiz. December 2, 2019. John Kern on driving Cisco's circular economy efforts forward. https://www.greenbiz.com/video/john-kern-driving-ciscos-circular-economy-efforts-forward
¹⁴ Johnson & Johnson. Our Approach to Climate Action. https://www.jnj.com/environmental-sustainability/climate-and-energy-action%20/ ; Johnson & Johnson. About: Paulette Frank. https://theorg.com/org/johnson-johnson/org-chart/paulette-frank
¹⁵ Microsoft. April 21, 2022. 2021 Environmental Sustainability Report. https://query.prod.cms.rt.microsoft.com/cms/api/am/binary/RE4RwfV
¹⁶ LinkedIn. February 22, 2022. Our 2022 Global Green Skills Report. https://news.linkedin.com/2022/february/our-2022-global-green-skills-report}