The Covenant of Companies asks…David Lammers

What is the biggest challenge that European companies face in transitioning to a net zero carbon economy?

Net-zero won’t be achieved without companies dealing with their impacts outside their direct operations. Our data shows that supply chain emissions alone are on average more than 11 times higher than operational emissions, for example. At the same time, only 53% of European companies disclose their most important Scope 3 emissions, which indicates that the full scale of the decarbonization challenge is not even fully known yet. So, the priority for companies is first ensuring they have a good understanding of where their biggest value chain impacts lie – ideally via primary data received from their suppliers and other value chain partners - and then incentivising and working with them to set ambitious emission reduction targets and lower their respective product carbon footprints.

Another more recent challenge particularly for European companies is the rise of immediate energy costs, as well as the economic uncertainty resulting from the current energy crisis and the covid pandemic in the past months. These may all pose challenges to making additional investments into the low-carbon transition. That is why financial assistance from both public and private sectors is key. And at the same time, rising energy prices of course provide an even stronger business case for realising any further energy savings that a company can identify.

In which sectors do you see the biggest opportunity for companies to transition, and why?

Transition opportunities exist in each sector, and we do need all sectors to decarbonise further. However, there are a few industries where this potential appears even larger:

• Since wind and solar technologies are already available and growing rapidly at scale, the power sector has the highest potential to decarbonise quickly – and help other industries reduce their Scope 2 footprint. The ongoing energy crisis should serve to accelerate the shift towards renewable forms of energy, particularly as windfall profits are being accrued.
• Emissions in the transportation sector could also be swiftly reduced with the switch to electrical vehicles - although this is more challenging for aircraft and ships.
• The construction sector can reduce gas usage through the renovation of buildings - a massive undertaking - and an increase in the use of renewable heating sources.
• In the food and agriculture sector, adopting more efficient farming practices and land use - not only within Europe but also through ensuring commodities that the continent relies on are produced in a sustainable and deforestation-free environment - could reduce emissions at large and halt nature and biodiversity loss.
• Europe’s established industries — chemicals, cement, and iron & steel — and emerging industries — battery, pharma and data centres — can accelerate emissions reductions through further investment into the research of breakthrough technologies, ideally via cross-industry consortia and clusters, and in close collaboration with their customers and value chain partners.

What role do you think the Covenant can play in decarbonising the EU economy?

Through offering support and technical assistance to SMEs, which form a core part of most organisations’ supply chains, the Covenant can help European companies take concrete actions and step up their contribution to a clean energy transition. It can also facilitate the formation of cross-value chain collaboration initiatives, and thereby support joint action among value chain partners. The Covenant can play a particularly important role through providing entry routes and bridges for small and medium-sized European enterprises into well-established climate initiatives. This provides them with the opportunity to benefit from additional client incentives and financing options, which more and more often take into consideration companies’ climate commitments, such as emission reduction targets approved by the SBTi.