Most consumer companies are not on track to meet their decarbonization targets.
While 39 percent of consumer goods companies have set near-term decarbonization targets for Scopes 1 and 2 emissions, only 18 percent of those companies appear ready to meet them. The figures are significantly worse for Scope 3 emissions. Missing decarbonization targets would jeopardize companies’ climate efforts as well as their future market positioning. To stay on track—and realize the potential inherent in the green transition—companies will need to be bolder in their decarbonization efforts.
Many companies have set decarbonization targets—but are not moving fast enough to meet them
The consumer goods industry is committed to decarbonization. Based on Carbon Disclosure Project (CDP) 2022 reported data, 39 percent of consumer goods companies globally had set near-term decarbonization targets as of January 2023.1 The average emission-reduction targets for these companies are 40 percent for Scopes 1 and 2 emissions and 30 percent for Scope 3 emissions, with the first targets due in two years (see sidebar, “Defining Scope 1, 2, and 3 emissions”).
However, a significant proportion of the consumer companies we assessed are not on track to decarbonize at the required pace.2 Only 18 percent of the consumer goods companies that have set near-term targets are on track to meet them for Scopes 1 and 2, while just 7 percent are on track to meet their Scope 3 targets.
Most companies’ historical annual emission reductions are significantly less than would be required to reach their near-term targets. Emission-reduction targets—and shortfalls—vary by subsector (exhibit). On average, for example, food and beverage companies have been reducing their emissions at half the rate that will be required going forward to meet their targets for Scopes 1 and 2 emissions and have made little or no progress in reducing Scope 3 emissions.
Consumer goods companies will have to overcome several hurdles to get emission reductions back on track. Key challenges include value chain complexity, limited collaboration among stakeholders, lack of clarity about the value at stake from decarbonization, and the unfavorable and uncertain macroeconomic situation—including geopolitical instability, volatile commodity markets, rising inflation, and frequent climate hazards.
In addition, many companies have yet to develop a clear and compelling business case for the necessary investment in decarbonization initiatives—which can be substantial—or are not sure what actions to take to achieve their targets in a manner that is efficient and cost-effective. This lack of clarity can lead to inaction; we will return to these issues in later articles in this series.
Transforming decarbonization efforts
The pressure on businesses to decarbonize will continue to grow. Part of this pressure will keep coming from regulators and end consumers, but increasingly, it is also originating with other businesses in a company’s downstream value chain. Manufacturers, for example, will find that the retailers they work with have ever-more-stringent emissions requirements for the companies in their supply chains. Companies that cannot meet these requirements may risk losing market share.
To get their decarbonization efforts back on track, companies will need a road map of actions to transform business operations. Consumer goods companies can make bolder moves than they have in the past, not only to achieve their targets but also to put sustainability at the core of their value proposition.
Companies looking to transform their decarbonization efforts can take the following steps, which will be explored in more detail in subsequent articles in this series:
Identify and evaluate key abatement levers that would allow the organization to reach its decarbonization targets.
Calculate the overall value at stake from reducing emissions.
Establish a detailed implementation plan, ensuring financial and operational feasibility.
Collaborate with suppliers to reduce Scope 3 emissions through value chain transparency, incentives, capability building, and program governance.
Establish effective reporting mechanisms across relevant metrics and targets.
Evaluate the need for—and run—programs to build skills and capabilities.
If you have any questions, please contact RSM experts for assistance!
Source: mckinsey.com