How Decarbonization Drives Long-Term Resilience

Mike Lyons, BCG managing director and partner, talked to us about why industrial-company efforts to build resilience must not come at the expense of progress toward net zero and financial performance.

Mike Lyons

Managing Director & Partner

BCG: You work with companies in a number of industrial sectors including oil and gas, chemicals, aluminum, and steel. What are you hearing from them about the current period of uncertainty and economic headwinds?

Mike Lyons: These industries are cyclical in nature—so from time to time they experience booms and busts. They’ve long dealt with uncertainty and have the capabilities to understand and manage in uncertain times.

Having said that, the sources of uncertainty today are significantly different than in past cycles. For one thing, there is a wider spectrum of potential outcomes. And some permanent changes have taken place, including in trade flows.

Many companies I work with run a multitude of operational and financial scenarios as part of their annual planning cycles. But some organizations have started to put more advanced capabilities in place. These companies have shifted from fearing uncertainty to embracing the new uncertainties as a way to carve out advantage. For example, some run advanced simulations such as Monte Carlo or other statistical models to augment a smaller number of user-defined scenarios. Whether companies are using human-driven or machine-driven tools, they are getting an understanding of the resilience of their business and supply chain under these scenarios.

They then take steps—whether it’s conserving cash, reducing capital expenses, or safeguarding their credit ratings—to ensure that they can thrive in most of the likely scenarios. At the same time, they identify the milestones that would signal the arrival of an unexpected, negative scenario and outline a well-considered response.

Do companies need to slow or pause their decarbonization efforts temporarily given the challenging economic environment?

Absolutely not. Leading companies are not hitting pause but instead are accelerating their drive to net zero.

Of course, some of this is driven by increasing regulatory and reporting requirements as well as positive financial incentives to deploy new technologies at scale. The European Green Deal, for example, contains a series of policy initiatives designed to encourage a green transition and the achievement of net zero by 2050. In the US, meanwhile, the SEC has proposed a rule that would require public companies to disclose information on climate-related risks as well as companies’ greenhouse gas (GHG) emissions. And the Biden administration has proposed a regulation that would compel “major” government contractors to not only disclose their GHG emissions but also set science-based emissions reduction targets.

There are also important new incentives in place through the Inflation Reduction Act (IRA) that improve the investment case for many newer technologies. The law essentially creates a reasonable baseline return and clarifies the rules of the road. As a result, more decarbonization projects will generate positive returns going forward. In Michigan alone, five or six large-scale solar projects have come alive in the past 12 months that cite IRA as the unlock for the project.

And it’s worth noting that the IRA has implications well beyond the US. In green steel, for example, the law will put US players at a potential advantage and foreign exporters at a disadvantage. That’s why we see a number of countries and regions considering implementing their own incentives.

These seismic policy shifts reinforce what leading companies already understand: that going green is about more than compliance—it is also about capturing share in fast-growing markets and building lasting competitive advantage.

Over the past few years, leaders have begun tracking the carbon footprint of their offerings, in many cases down to the individual-product level. And most have moved to commercialize low-carbon solutions. This means being able to make credible claims about a product’s low-carbon profile and identifying where consumers or businesses are willing to pay for green products. That drives a company’s capital investment plan, its R&D strategy.

For example, many chemical companies are announcing large recycling efforts as part of an effort to offer low-carbon, low-waste plastic material. And at BCG, we are working with steel and metal distributor Klöckner to launch a product carbon footprint (PCF) algorithm called Nexigen. This tool enables PCF calculations for 200,000-plus products, creating additional visibility and margin in the low-carbon product market.

What should companies be doing now to continue to advance their net-zero agenda while ensuring that they are building resilience?

First, there are some steps and investments that generate positive returns regardless of the environment. Energy efficiency measures, for example, reduce carbon emissions and decrease costs. Things like investments in efficient HVAC systems or retrofitting—those steps pay back in almost any environment. In addition, these actions allow companies to start developing the right operating model and capabilities, upskilling their workforce, and building the required governance structures for a low-carbon business.

Second, they can identify decarbonization investments that typically have not cleared the pure financial hurdle but that now make sense. Some of these are viable due to the new incentives. And others make sense when companies factor in what it would cost to offset emissions in the future in order to meet their net-zero target.

Third, and perhaps most critically, companies should be investing in their people and capabilities to predict and mitigate stockouts for critical green materials. As organizations boost their efforts to decarbonize and develop lower-carbon products, there is inherent scarcity for some green inputs. And this is exacerbated by the shifts in supply chains and trade flows. The world has changed: you are no longer guaranteed to get what you need when you need it. If companies are short of some inputs, it can cause major disruptions and hurt financial performance. As a result, organizations need to up their game and augment capabilities to deal with a fragile and emerging supply chain—for example, by creating supply chain resilience teams.

At the end of the day, whether we are talking about actions to drive decarbonization, build resilience, or strengthen supply chains, companies should not view these as cost drivers or distractions. These are new battlefields where organizations will distinguish themselves by seeing the opportunity—not just the risk. But to do that they must open their eyes fully, see the potential to build competitive advantage, and step into the void. Those that do will differentiate their company and products, capture market volumes, and create value.