Pēteris Celms

BluOr Bank Investment Portfolio Manager

There is an ever-growing share of companies publicly committing to achieving climate neutrality and sustainable business objectives in the foreseeable future. This is motivated by both changing consumer habits and increasing demands of national and international organisations. But what do these climate neutrality and sustainable business goals really mean for companies? What methods do companies reduce their environmental impact and what can we learn from the good examples?

The UN Paris Agreement, signed by 196 countries in 2016, committed the world to limit warming to 1.5 to 2.0 degrees Celsius above pre-industrial levels. To achieve a 1.5-degree pathway, all sectors of the global economy will require dramatic emissions reductions over the next ten years. 

As a result, an increasing number of companies are proactively working towards sustainability goals. Unfortunately, it is difficult to discern stronger corporate climate pledges from weaker ones. Most companies are not transparent enough on what the climate commitments entail.

You might have recently seen a company set a goal of reaching “net zero” greenhouse gas emissions or announce that it has become “carbon neutral.” But what do these words mean? At face value, a net zero pledge means that the company will not pump out more greenhouse gas emissions than it can either offset or remove from the atmosphere. Carbon neutrality in production, energy consumption and logistics The next thing to look at is how expansive a particular pledge is. Take Intel, one of the world’s top semiconductor manufacturers, recent pledge to reach net zero greenhouse gas emissions by 2040, for example. That target takes aim at pollution from the company’s “global operations.” It includes emissions that come directly from the company’s own facilities and vehicles as well as pollution generated from its use of electricity. In industry speak, these are called Scope 1 and Scope 2 emissions, respectively. For most companies, experts say, most of their emissions come from their supply chains and the use of their products and services. These are called Scope 3 emissions. Intel’s Scope 3 emissions were more than 10 times as large as its Scope 1 and 2 emissions combined in 2020, but it has no plans yet in place to effectively combat those wider emissions.

While cleaning up an entire supply chain is a tall order for any company, there are tech giants that have taken on this task. Apple, for instance, includes all three scopes in its commitment to have net zero climate impact by 2030. Just recently, Apple announced that it had pushed over 200 of its suppliers to make Apple products using clean energy.

It is not only tech giants though, who are working towards these goals. Schneider Electric SE is another company that is working toward the full net zero goal. The massive French multinational company provides energy and automation digital solutions for efficiency and sustainability, but you probably know them best for their elevators. Given their higher emissions profile, they aim to be net zero in operations (Scope 1, Scope 2) by 2030 and fully carbon neutral across their supply chain by 2040.

A product that helps its customers be more sustainable

So what do these sustainability pledges entail? What are companies actually doing to mitigate their emissions?

One interesting example is Autodesk, a company that makes software products and services for the architecture, engineering, construction, manufacturing, media, education, and entertainment industries. Not only have they already achieved net-zero in their own operations by utilizing 100% renewable energy resources, but they are improving their software design products to help their customers become more sustainable. One example is in their architecture/construction software, where they now use machine learning to perform integrated building performance analysis in the early stages of conceptual design. By doing so, they can make models to better predict energy use and alter designs before anything is even built to provide maximum efficiency.

The output is green, but the input is anything but

Software is not the only space where huge improvements are happening. Across several different rankings, Denmark’s wind turbine manufacture Vestas Wind Systems consistently shows up among the leading companies in sustainability. Wind turbine manufacturing, as opposed to software development, is extremely resource intensive and comes with a heavy carbon footprint. Even though the turbines themselves generate clean electricity, the turbines themselves are mostly constructed from carbon fiber, which is so far very difficult or expensive to recycle.

Vestas Wind Systems has taken several steps to lower this footprint in their own operations, including electrifying their entire fleet of vehicles, transitioning their heating systems from natural gas to biomass. They are also engaging with their suppliers to try to lower emissions across their own supply chain, as well as increasing the “circularity” of their own products by improving designs to make sure components can be reused after turbines reach the end of their useful life.

Packaging – the stumbling stone for many

Just as important that the energy that we use is green and sustainable, there is another important, if not overlooked industry that needs to become more sustainable – packaging. One of the leading companies in this space is Smurfit Kappa, one of the world’s largest cardboard packaging producers, and they are intently focused on sustainability. They realize that the demand for sustainable packaging continues to grow, with consumers increasingly the driving force, so the company is taking steps to decrease water usage and overall waste, increase recycling, and improve the sustainability of their supply chain via smart forestry management. This entails making sure that the wood pulp they use is sourced in a sustainable way from forests so as not to destroy biodiversity.

Another great example of a company leading the way in sustainability is Ikea. Like Smurfit Kappa, it is a big consumer of wood and has a significant climate footprint as a result. To reduce this footprint, the company has made change in their product range, such introducing more energy-efficient LED bulbs and increasing their plant-based food offer. They are also working towards reaching 100% renewable energy for their operations across the globe.

Commendably, the company is also engaged in a systemic shift towards a circular economy, even though this will likely impact their own sales. They plan to design every one of their products to be reused, refurbished, remanufactured and eventually recycled. For a company that has been successful selling very affordable furniture to the masses but has always had questions about durability, this is a big shift but a welcome one.

There are many more examples of what some of the most successful companies are doing in order to shift towards more sustainable business models, but there are a few key characteristics that set them apart. First, leadership in sustainability generally comes from those that are acting proactively, not those that are reacting to consumers are being more vocal on the issue. In addition, well-run companies understand that, despite the challenges these shifts pose to their financial performance, not addressing these concerns will likely mean the destruction of their business entirely. Finally, consumers are already rewarding companies that are sustainable with their business while shunning those that are not. These are trends that will only accelerate.

Written by Pēteris Celms, BluOr Bank investment portfolio manager