Reframing net-zero emissions and environmental sustainability as mission critical

April 2023 | SPOTLIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

April 2023 Issue

Corporate boards face a fundamental paradigm shift, one that implores them to reset and reframe their leadership and guidance of chief executive officers (CEOs) and companies to embrace the global transition to net-zero emissions and sustainability.

For more than a century, since the foundational principles of corporate leadership were codified and then further refined by Michael Porter’s classic ‘Five Forces’ framework, boards have held CEOs accountable for strictly defining their value proposition, delivering financial returns to investors, and staving off competition through innovation and acquisition.

But just as the technology revolution has ushered in massive changes in data, sensing, computing, platform applications and business models, the Paris Agreement on climate change has fundamentally altered the business operating environment.

Under this international commitment to nationally determined pathways for achieving climate-related objectives, governments around the world have pledged their leadership through the creation of policy environments (both punitive and incentive-based), in reducing greenhouse gas (GHG) emissions to limit average global warming to 2C, with an ambition of holding it to 1.5C.

Collectively, these targets reflect a $200 trillion-plus market for clean energy technologies and sustainable solutions, including food, packaging, clothing, vehicles, building management and more, over the next few decades, as well as complementary innovations that reduce waste and increase the use of compostable materials.

In nearly every market worldwide, businesses and consumers are pursuing and demanding ‘green’ solutions.

Around the world, there is a need for fundamental change by boards and CEOs. The required framework would build on Porter’s ‘Five Forces’ but also recognise the overwhelming pressure on companies to craft and execute new strategies that position their organisation for continued leadership in a landscape that is evolving. It will take decades.

Such corporate strategies must prioritise low GHG emissions and environmental stewardship while delivering unprecedented financial returns and re-establishing employee, community and stakeholder engagement that encapsulates human flourishing. They should include five areas of focus, as outlined below.

Data-driven and IT-enabled solutions. Leading companies have recognised that advanced sensing, data and analytics have substantial impacts on returns. This includes the use of increasingly sophisticated planning and exploratory analysis to inform strategy, investments, technology directions, product development and operations.

Strategically evaluating the cost and value of massive data collection and availability, use of artificial intelligence (AI) and machine learning (ML) methods, cloud computing, ubiquitous available internet, and automated processes is increasingly material to financial returns through enhanced efficiencies, tightly planned operational cost management and improved insights for critical decisions.

Social engagement. Corporate leaders must centre social considerations in engagement with their evolving workforce, their communities, their investors and their stakeholders, including the larger ecosystem of non-governmental organisations and governments. No longer are corporations solely responsible for delivering financial returns to their investors.

Wise leaders recognise they must engage in and embrace a thoughtfully developed social engagement strategy to effectively lead an enterprise that depends on the licence to operate, as well as a strong organisational culture and capacious employee wellbeing. Some companies have personified this through a new senior executive role that goes beyond public relations or human resources, elevating the corporation’s role in human flourishing.

Physical and cyber resilience, and environmental stewardship. This area of focus incorporates essential elements that must be considered for investment, research and development (R&D) and near-term operations, as well as long-term resilience, particularly within an overall transition to a net-zero economy, and circularity.

Companies that overlook these elements face physical and operational risks, as well as regulatory risks ranging from severe penalties for environmental negligence to loss of their licence to operate. All of these translate directly to top-line and bottom-line impacts and must be considered integral to the strategic framework.

Hyperefficient use of assets. This constitutes a fundamental rethinking of asset investments, balance sheets, leveraging of others’ capital in the creation of services, business models and platforms, and flexible use of assets in integrated polygenerational integrated facilities, such as featuring risk-adjusted inputs and multiple revenue streams. Mapping out the strategic alternatives and hedging among options that are appropriate for each operating jurisdiction will be critical to maximising the return on investment and developing highly scalable, flexible business operations.

Radical innovation at speed and scale. It used to be that businesses could define a core value proposition and a core set of assets, products and services to sell to customers. Innovation refined and continued to evolve those product lines. Threats from innovation came from new entrants into the sector. That paradigm has changed over the last few decades.

Today, companies must embrace the strategy of innovation at speed and scale, potentially remaking themselves, as well as looking much more broadly into the innovation ecosystem to seek new acquisitions and ideas to scale through strategic investment.

There are multiple leading examples of this where traditional ‘high-carbon-emitting’ positioning has been fully redefined for leadership in the low-carbon economy. This does not mean operations have changed immediately (consider major oil & gas companies such as BP), but rather that the strategy adopted sets forth a fundamental change of direction that is reflected throughout the business.

Leaders should also embrace new approaches to feeding the pipeline for innovation, such as engaging with universities and other start-up incubators throughout the world, approaching applied engineering facilities (such as the national laboratories), and devising a strategy for leveraging those investments in a highly effective and efficient manner.

All this must be framed within a strategy that recognises innovations are coming at a much faster pace and must be brought to market at a speed and scale that are unprecedented.

The operating context for these five strategic thrusts also continues to evolve. More importantly, the interconnectivity between health, food, water and economic resilience is increasingly critical. While this is particularly true in fast-growing developing economies, it is applicable across all of Europe and in many markets in the US and other places where the traditional producer-consumer relationships are more dynamic.

Take, for example, the current competitive positioning among corporations and countries to establish leadership in the low-carbon hydrogen sector. Here we see top-tier strategic leadership incorporating all the elements described above into their project development strategies, whether they are in the US, Europe, Asia or Africa.

The contextual dynamics, as anticipated, must address local concerns (from the community to the country level), and in nearly all cases, solutions can be innovated to create win-win-win solutions, as framed in the context of public-private partnerships. Unique to the operating environment but true to the core principles, as set by the board and implemented through the CEO, business solutions translate across geographies, and geopolitical and sociopolitical situations.

This reflects a fundamentally different set of strategic priorities for boards and CEOs. Rather than ‘meeting the required conditions’ for investment and operations, they are rooted in critical elements that foster interconnectivity in the evolving geopolitical dynamic and economic landscape.

It also reflects the roles that businesses play in the provision of critical products and services for health, clean water, food and economic resilience through the provision of power, energy, employee wellness programmes, disaster preparedness and more.

Leaders who embrace this new and evolving paradigm for boards and CEOs impart an enormous opportunity to boost shareholder value while also creating a platform and a set of principles for investment and operations that will have lasting impact.

It is the board’s responsibility to set the strategic direction, hire CEOs and hold them accountable for effectuating this imperative shift – one that affords enormous opportunities for value creation, environmental stewardship and shareholder returns.

Douglas J. Arent is an executive director and Bill Brown is a strategic adviser at National Renewable Energy Laboratory (NREL). Mr Arent can be contacted on +1 (303) 384 7502 or by email: doug.arent@nrel.gov. Mr Brown can be contacted on +1 (303) 275 3016 or by email: william.brown@nrel.gov.

Douglas J. Arent and Bill Brown

National Renewable Energy Laboratory (NREL)