Today, climate change is an issue that no company can afford to ignore. In this interview, Wolfgang Saam and Prof. Jens Hesselbach discuss their joint project “Wege zum klimaneutralen Unternehmen” (Paths to climate neutrality for businesses) and explain the factors companies need to bear in mind, the potential pitfalls, and how company policy has evolved over recent years.
Professor Hesselbach, over the course of two years, your project will support ten of your member companies in developing their own individual road maps to climate-neutrality. How exactly does this process work?
Prof. Hesselbach: We start by running a three-day workshop with each company. This allows us to take stock and draw up a balance sheet for their greenhouse gas emissions at each stage in their value chain. For this, we use the Greenhouse Gas Protocol, which divides emissions into three categories: Scope 1, 2 and 3. Scope 1 covers any direct emissions, in other words emissions from heating systems or company vehicles powered by fossil fuels. Scope 2 are indirect emissions, for example, electricity or district heating. And then there's Scope 3, the most challenging category, which covers any emissions generated in the production of upstream products or raw materials that go on to be processed by the company.
We also talk to the company about the measures they have already adopted and discuss different strategies they can employ to achieve climate-neutrality within a certain period of time. After the initial workshop, we step back and develop some potential solutions. We then present our findings to the company and come to a final agreement on the road ahead. Ultimately, the company should come away from the process with a clear and achievable strategy, which they can implement to meet their target of becoming climate-neutral.
Mr. Saam, climate-neutrality is a much-used term, but is it even clearly defined? Is there a standardized set of criteria and checks that must be met? Or do policymakers need to do more to clarify what it means to be climate-neutral?
Mr. Saam: You're right. The term climate-neutrality needs to be more precisely defined if we are going to give companies clear benchmarks for achieving this target. Of course, we’re all familiar with the basics: minimizing energy consumption by increasing energy efficiency, replacing fossil fuels with renewables and offsetting any remaining emissions. But that still doesn’t give companies a practical set of guidelines to follow. An international standardization project is currently underway to develop a stricter definition of climate-neutrality. But that’s still going to take quite some time.
Mr. Saam has just outlined the basics – minimize, replace, offset – which you also mentioned earlier, Professor Hesselbach. Considering these aspects, what concrete actions has your project identified that could help companies reduce their harmful emissions?
Prof. Hesselbach: That's right. These are the three basic building blocks on the road to climate-neutrality. And, there’s a certain order that should be observed. The first step is to introduce energy-saving measures to increase energy efficiency at all stages in the production chain. Next, we assess where fossil fuels could be replaced by renewables. At first, priority is placed on increasing the company’s own clean energy capacity, for example, by installing solar panels on the roof. Then we look at possible sources of green heating and electricity. When looking for an electricity provider, it’s very important to ensure they are directly contributing to the expansion of the renewable energy sector and are not, as is sadly often the case, simply engaging energy trading. The final step is offsetting. This is an area where we have a number of concerns, especially given the way the system currently operates. As things stand, it is very difficult for companies to work out which offsetting programs really do help to reduce global and national CO2 emissions, and which, as rightfully criticized by many NGOs, are just helping companies buy their way out of a problem.
Mr. Saam, your association has been active in the industry since 2013. How have companies changed the way they approach this issue over the years?
Mr. Saam: A decade ago, the main focus was on traditional measures to increase energy efficiency – in particular, this included cross-cutting technologies, such as lighting, ventilation, air-conditioning and pumps. Once companies had made the big changes, though, it became increasingly difficult and expensive to make further improvements. That’s why companies began looking more closely at options to generate their own electricity and heat, starting about five or six years ago.
In the last three years, we have seen two major developments. The first is the changing requirements of the financial markets. Initially, this affected publicly listed companies who found that capital market investors were only willing to provide long-term financing to companies that had adopted sustainable business practices. However, since the introduction of the EU's Taxonomy Regulation and everything it entails, small and medium-sized businesses and the banking sector that finances them are also feeling the impact of these same sustainability standards. The second important development is the shift in public opinion. Companies and political institutions can no longer afford to ignore the issue of climate change.
In the last two years, companies have really started to focus on developing much longer-term strategies. In the past, they might have planned two to five years ahead and technological developments would have been a core element of their strategy. But now they are thinking much more broadly and more long-term. Companies are considering how they want their businesses to look in 2050. What products can they continue to manufacture? How are they going to finance themselves? How can they adapt their product or service portfolio to meet the requirements for a climate-neutral business?
Professor Hesselbach, it sounds like companies are looking to the future and are open to change. So, what's the hold up? Is it money or a lack of expertise?
Prof. Hesselbach: Expertise is definitely an issue. Companies need to look much more closely at what others are doing and see what lessons they can learn. I think money is less of a factor. But it’s often uncharted territory for companies when they start making their own investments in renewable energies. For example, it’s important to understand that energy suppliers that invest in renewable energies generally use the rate of return as the basis for their investment. Manufacturing companies are more familiar with using a fixed payback period – a completely different, and generally tougher, benchmark based simply on the lifespan of different plants. A photovoltaic or wind power plant has a lifespan of at least 20, 25 if not 30 years. That’s why using a rate of return makes more sense in such cases. And companies need to understand this.
There is also uncertainty among companies about what the best options are for replacing fossil fuels and offsetting emissions. Is it best to invest in their own plant? Should they source green electricity from energy providers on the open market? Or should they purchase green PPAs (power purchase agreements), so that they’re sourcing their electricity directly from the plants? All these questions are holding companies back. There’s real uncertainly around green electricity and what options are considered good or bad. This is an area where policymakers need to provide much more clarity for businesses.
Would you like to learn more about how your company can become climate neutral or at least reduce its energy requirements and emissions? Then visit our "Climate-Neutral Companies" topic page.
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