Climate change and the future of globalisation

DESPITE increasing signs of a division of the global economy into political blocs and major challenges such as inflation, we cannot make the mistake of ignoring climate change. Given ever more complex global climate change politics, one point is becoming increasingly clear: Companies will play a key role in establishing the battle against climate change as a fundamental global value.

The unpredictable nature of the operational and balance sheet risks associated with climate change provide a strong incentive for companies to act. This applies to companies individually, but even more so with regard to coordinating their efforts.

The underlying logic is straightforward: When companies set ambitious targets for themselves and simultaneously demand greater commitment and transparency from their top suppliers, pressure for action will build up along entire value chains. This pressure increases when large companies act as pace setters, shaping a path for others to follow.

The fact that many banks and institutional investors increasingly recognise climate change risk and are making changes to their lending and investment processes is a further action-forcing event.

In addition, a real commitment to fighting climate change is an important tool for many companies to attract and retain talent. We also know that we have a better chance to succeed in driving positive change when employees find their personal values reflected in a corporate mission.

The central role of companies

The tool through which networks of companies can establish combatting climate change as a fundamental value in practice is by addressing their so-called “Scope 3” emissions. Scope 3 emissions are generated by a company’s suppliers as well as its customers during and after the use phase of products. Achieving Scope 3 net-zero emissions will be no easy feat but has the potential for broad impact.

In order to achieve greater clarity about where and how action is needed, a great deal of mutual transparency is required among companies. That means verified compliance with agreed CO2 standards – analogous to the auditing practices of financial statements.

To move forward, companies can require that suppliers allow trusted verifiers to establish a sustainability scorecard, provide data for product life cycle analysis and establish their own Science Based Targets initiative (SBTi)-validated sustainability goals. If suppliers refuse to play ball, their preferred supplier status can be reconsidered or revoked. Such initiatives will create strong incentives even for those companies that have been hesitant so far to focus on decarbonising their own portfolios.

Of course, setting and managing compliance with reporting standards is only a first step on a long road. Reducing emissions in practice is a daily task that must be engaged in all across a company.

Putting it into practice

Given that mechanical engineering companies are positioned upstream of many other industries, a large proportion of the emissions associated with their products arise during the use phase at the customer’s site and beyond. That is why the task of working with customers to develop technical solutions that make products ever more energy-efficient and resource-saving is so important to all parties involved, including, ultimately, consumers. As more and more companies engage in this process, it will have significant knock-on effects globally.

A study by BCG and VDMA shows the impact the wider mechanical engineering industry can have. It suggests that technologies developed or under development could lead to emissions reductions of 86 per cent in industrial applications. Of that total, 37 percentage points could be achieved through implementation of technologies that are technologically and economically feasible today. The balance can be mitigated through technologies that are technologically feasible but not yet economically viable, including green fuels and carbon capture.

All of this entails a lot of painstaking work. But as an engineer, I also know that at times it can be small improvements – alone or in concert – that make a world of difference in even the most complex systems.

Conclusion

While the private sector must take action where it can, governments must also play a sensible role to facilitate these efforts. Viewed in a global context, focusing on reducing emissions and the efficient use of precious resources (think water, not gold) can help establish a viable, values-based bridge between companies in diverse regions of the world.

If we apply a can-do spirit and establish proper accountability, the problem-solving capabilities and continuous improvement mindset of the private sector can prove to be a great asset.

Stefan Klebert is CEO of GEA Group, Dusseldorf