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Do you want a smaller carbon footprint and so are thinking about launching a carbon reduction plan or net zero strategy for your business?
You may have read about companies that are cutting their carbon emissions. Perhaps you think they’re doing this out of conviction or because they expect it will give them a commercial advantage.
You may be wondering if a climate strategy is something you should consider also.
Before you take the leap, we recommend you establish a clear-eyed understanding of the opportunities as well as the risks that can arise from launching a carbon reduction strategy — the reputation of your brand could depend on it. This article aims to guide you through the process from an independent, objective standpoint.
We tackle the issue under three headings:
Be clear about why you want a carbon reduction strategy
Understanding the true motivation behind any strategy is important. It applies here equally.
Knowing your ‘why’
Are you clear about what you want to achieve with a carbon reduction strategy and why? And do you understand how your company may fit within overall government plans for net zero?
Companies face a lot of pressure to demonstrate their environmental credentials. But it’s important not to rush into anything. Integrating climate ambitions into your small business needs careful consideration if it is to be successful.
Adopting a climate strategy will add to your costs. Some of those costs will be direct – business process changes, extra staff and/or their time and so on. Other costs will be indirect, e.g. the absorption of management time.
But a well-executed climate strategy can also bring benefits. For example, increased revenues from enhanced brand equity or lower costs through more efficient use of energy.
It’s vital to be hard-headed about this and to put a realistic estimate on these costs and benefits. Some entrepreneurs are seduced by the idea that customers will flock to their brand if they can tell a compelling story about their climate strategy. That may be naïve for reasons set out later in this article.
So it's important that your analysis is not emotionally driven. It should be carefully thought through and nuanced. It's worth bearing in mind that costs will likely materialise ahead of any benefits you hope to gain. But also that while those benefits may be harder to predict (than the costs), they could be large. Nevertheless, it’s the long-term value of your business that you should be most concerned with not the impact of your actions in the first year or two.
All this makes your evaluation process tricky. But in the end, you need to come up with an answer that can be evaluated in numbers. Will the impact of your envisioned climate strategy be positive or negative?
Some entrepreneurs are driven by a moral obligation to minimise their small company’s impact on the environment even if it reduces the profitability of their business. But if you pile on costs by going beyond what the law requires, you may disadvantage yourself relative to your competitors. If they don’t act in a similar fashion — and it’s safe to assume that some will not — you might even put your business at risk. Would that be the right thing to do?
Some businesses are in a lucky position in that they are responsible for very few carbon emissions. Professional services firms are a good example. Such companies may be able to put in place a credible carbon reduction strategy at minimal extra cost. Marketing their positive climate credentials is then an easy win which these companies can take full advantage of.
If you own 100% of your business, you can of course pursue whichever climate goals you wish. But if you adopt an approach that materially reduces the value of your business, you risk turning your company into a hybrid that is part commercial business and part environmental charity. This can blur the lines of your ambition and make for complex decision-making. As an alternative to this mixed approach, you could consider following a commercial strategy for your business and ploughing some of your profits into an environmental action campaign.
If you're the CEO of a company with multiple shareholders, you would do well to make sure all are on board with your climate strategy as some may not share your priorities. If you compromise the commercial success of your business in order to achieve your personal climate goals, they might even oust you from your position to protect the value of their shares.
All this is not to say that environmental goals aren’t important — they are. But you should consider striking a balance between what you would like to achieve in a perfect world and what your small business can practically deliver in the foreseeable future. Some companies can move faster than others. And putting in place a climate strategy is not an all-or-nothing decision. It could be the start of a process that may evolve further down the road.
Let’s not forget that the UK’s target date for reaching net zero carbon emissions is 2050, not this year. With a quarter of a century to phase in the energy transition away from fossil fuels, you should be able to achieve your sustainability ambitions without compromising your core mission which is to solve your customers’ problems and strengthen your core business.
Make a realistic estimate of commercial costs and benefits
It's important to consider this as it can be overlooked by companies seeking virtue over purpose. So before deciding on any decarbonisation strategy, you should have a clear understanding of its potential costs and benefits. Your carbon reduction strategy should also integrate well with your overall business strategy.
Do the benefits outweigh the costs?
The costs you will incur are broadly a function of three factors:
How carbon intensive your business is to begin with
The extent to which you wish to decarbonise it
The cost of the measures you could take to reach your target level of decarbonisation
Costs might include upfront capital investments, ongoing higher unit energy costs, operational process changes, absorption of management time, extra staff to gather data and evaluate results, consultancy retainers, marketing/messaging costs, etc.
Potential benefits include reduced energy consumption plus any revenue upside you might realise as a result of becoming greener.
Bear in mind that the costs you will face will usually be quite predictable. By contrast, the benefits you might expect to obtain are often harder to forecast and may only be realised later in the process, after the costs have already been incurred. So it can pay to be conservative in your assumptions.
The main commercial pros of adopting a climate strategy
Of course, there is also potential upside to consider from becoming greener.
Boost your sales
Consumer-facing businesses were among the first to put in place climate or carbon strategies. The rationale — in theory — was clear. It was demanded by consumers who wanted businesses to take the initiative and start decarbonising without waiting for government to force them into action. In response, some companies have moved quicker than required by law — believing this would resonate with consumers and deliver higher revenues.
So if your business sells directly to consumers, would launching a climate strategy boost your sales?
Here are some key issues to consider.
First, which industry do you operate in and who are your target customers?
Is your product connected in any way to environmental issues or to the sustainability theme more broadly? If it is, climate change might be front and centre when your customer makes their purchasing decision.
Do you mainly target younger consumers who demonstrate, on average, more concern about climate change? Or are you selling to older consumers who may be less focused on the issue?
So, for example, if you sell a carbon-intensive product but can claim to be reducing its climate impact, implementing a climate strategy could also make good business sense. For example, many airlines offer passengers the option of offsetting their carbon emissions. This can deliver a positive result (depending on the type of carbon offsets offered, which I discuss in a later section).
Similarly, if you sell organic health drinks to under-30s, there may be good reasons for believing that you would improve your brand image and boost your sales by aggressively decarbonising your business.
On the other hand, if you sell reading glasses or stair lifts to the over-60s, your climate strategy may resonate less with buyers.
Second, will your climate strategy be sufficiently distinctive and compelling to get through to consumers? The topic of climate change is complex. Claims and promises are worded in jargon that consumers may not understand. As a result, the fine details of pledges then become more important.
On top of that, sustainability claims are now ubiquitous. There are myriad logos to prove many different types of achievements and companies rush to add them to their websites and other materials. The risk here is that they become subject to ‘banner blindness’ — where website visitors consciously or unconsciously ignore banner-like information because their attention is focused elsewhere, i.e. on finding the product or service that will meet their immediate needs. Consumers may also not understand what these logos actually mean.
Third, you should consider how your target customers buy and what leads them to choose one brand over another.
Let’s assume your brand has a climate strategy which will deliver lower carbon emissions when compared with those of your competitors. And let’s say that your target customers hear your message, understand it and agree with it.
Will that be enough to cause them to change their buying behaviour? Will they switch from their preferred brand to your brand just because you have a more compelling climate strategy? Even if they would otherwise prefer to stick with the brand they currently buy from?
That’s quite an assumption to make.
Can you argue convincingly that your superior carbon reduction strategy will overwhelm your customers' other purchasing criteria? If you can’t, you might be better off re-directing the budget for your climate strategy to improving the performance of your product instead.
So far, we have only discussed businesses that sell to consumers (so-called B2C). What about businesses that sell to other businesses (B2B)?
It might seem as if B2B businesses would face little pressure to decarbonise more rapidly than the law requires. In fact, that’s not the case. Most large businesses are publicly listed, with their shares owned by major global investment firms. These money managers need to raise capital from investors, many of whom are keen to avert global warming. Most global investment management firms are therefore putting pressure on their investee companies to adopt decarbonisation pledges.
In response, large companies of all kinds are implementing plans to squeeze carbon emissions out of their supply chains. As a result, even quite small companies may need to put in place credible decarbonisation strategies or risk losing their place as direct or even indirect suppliers to climate-aware large companies.
Save you money from becoming more cost efficient
When companies were first required by law to increase waste recycling rates, many found that it actually saved them money. It had been too easy to send waste to landfill without thinking about it. Once they were obliged to set their best minds to it, they found clever ways to reduce waste. For example, they started using materials more sparingly and switched to recyclable materials.
The same may be true for decarbonisation. Finding substitutes for fossil fuels or redesigning processes to avoid their use can be expensive. But developing ways to use fossil fuels more economically can often reduce consumption at little cost.
Common examples include digitising processes that are still manual or paper-based and converting face-to-face meetings to video conferences to reduce travel.
Boost staff loyalty and make it easier to hire
For many businesses, recruiting and retaining talented staff is critical to their success. And younger workers increasingly want to work for companies that have a purpose beyond simply making a profit.
This can create an alignment of interests. If your company puts in place a credible climate strategy that matches the values of your workforce, this may enable you to make a more compelling pitch to job candidates and engender more loyalty from your existing team.
Ability to raise outside capital
An increasing number of investors in small businesses expect their investee companies to have a climate strategy in place. If your small business is thinking of raising outside capital, having a credible climate strategy could enable you to attract capital from a wider range of sources.
Admittedly investor attitudes to climate strategies vary a lot. In general, larger venture capital (VC) firms are more likely to insist on it while smaller VC funds or angel investors may not. It’s worth noting that some investors focus exclusively on the financial return they can expect on their money without any regard to climate strategies.
Get ahead of the game if you run a carbon intensive business
If you operate in a carbon-intensive industry, your carbon emissions may already be covered by regulation. In the UK this is most likely to be via the country's Emissions Trading Scheme (ETS).
If your industry is not yet covered by emissions regulations, you are currently free to ignore climate issues if you wish. Yet this may not be the best option from a long-term perspective. If your industry is carbon intensive, its emissions are likely to be brought under regulation at some point.
In this case, you might be better off getting ahead of the curve and putting in place a long-term plan to reduce your emissions before you are forced to do so. This approach could give you more time to adapt. If you were to phase in emissions reduction over a longer period of time, your costs of adaptation might end up being lower.
Beware accusations of greenwashing
When it comes to climate policies, this is probably the greatest strategic concern for corporates.
Getting your messaging wrong can be costly
As more and more businesses have adopted climate strategies, some observers have become cynical about the sincerity of those pledges and sceptical of their worth. As a result, the term ‘greenwashing’ has entered the popular lexicon. It describes the behaviour of some companies in making misleading or exaggerated claims about their environmental achievements.
It’s not hard to see why some scepticism has arisen about corporate climate pledges. Net zero pledges have come from companies in some of the industries that are the hardest to decarbonise, including oil and gas, mining, transport and building materials. And their climate pledges are often based on small print that the layperson may struggle to understand.
Being accused of greenwashing can be very damaging to a company’s reputation and difficult to recover from. Interestingly, some companies are now so fearful of this risk that they are opting for ‘greenhushing’ where they say very little or nothing about their climate strategies.
Companies planning to adopt carbon reduction strategies for the first time would do well to take on board this wariness around corporate climate pledges. By making sure that your own company’s targets are credible and that your claims of progress are real and backed up by publicly disclosed data, you will protect yourself against unfounded accusations of greenwashing.
Misunderstanding your carbon credit purchases
One aspect of corporate climate strategies that has aroused the most scepticism is the use of carbon credits. The Voluntary Carbon Market (VCM) has been plagued by criticism which I discuss below.
Before I get into it, however, it's worth noting that there are bodies and organisations — for example, the Voluntary Carbon Markets Integrity Initiative (VCMI) and the Integrity Council for the Voluntary Carbon Markets (ICVCM) — that are committed to ensuring credibility and probity in the industry and it may be worth keeping an eye on how they plan to do this.
Overall, if you do plan to buy carbon credits, you need to be sure that you’ve bought the right product for you, i.e. projects that are consistent with your climate strategy and which don’t expose you to unjustified allegations of ‘greenwashing’.
If you want to know more, I explain what carbon credits are and how they can fit within climate strategies in this blog.
Criticisms of the VCM
The VCM is opaque and trust issues linger. So it’s worth being aware of the accusations the market has faced.
Lack of regulation and standards
The voluntary carbon offset market operates with varying standards. It lacks a comprehensive regulatory framework. This has led to concerns about the credibility and quality of carbon offsets. Critics argue that the absence of strong regulations makes it difficult for buyers to assess the environmental integrity of the carbon credits they buy.
Measurement and verification challenges
It’s not easy to accurately measure and verify the emissions reductions achieved by a carbon offset project. Critics claim that there are inconsistencies in the methodologies and processes used for quantification and verification and that this can lead to uncertainties about the actual environmental benefits of the projects.
Lack of transparency and information
Some commentators have argued that there is a lack of transparency and information in the voluntary carbon offset market. Buyers can struggle to obtain detailed information about offset projects, such as project methodologies, additionality assessments or ongoing monitoring and reporting. This lack of transparency hinders informed decision-making and can undermine trust in the market.
For example, there can be a lack of transparency in the monitoring and reporting of methane leakage in methane capture projects which can undermine their effectiveness. If methane is not properly captured and instead leaks into the atmosphere during collection and transport, the claimed emission reductions may not be accurate.
Additionality and double counting
This is one of the key criticisms levelled at the VCM. Additionality refers to the assurance that a carbon offset project leads to emissions reductions or removals that would not have occurred without that project and the sale of its associated carbon credits. Essentially, does the project have a genuine impact on reducing GHG emissions beyond business-as-usual scenarios?
Critics argue that many offset projects do not meet the criteria needed to prove additionality and that the claimed emissions reductions may have happened anyway. For example, some REDD+ (Reducing Emissions from Deforestation and Forest Degradation) projects finance the preservation of forests from logging or clearance for agriculture. But if the landowner would not have cleared the forest anyway, there is no additionality (i.e., no climate benefit).
As well as undermining the effectiveness and integrity of carbon offsets, this also risks double counting (should multiple entities claim the same emissions reductions).
Longevity and permanence
Projects need to be evaluated for their long-term viability and thus the permanence of emission reductions or removals. There should be mechanisms in place to ensure the continued maintenance and preservation of the environmental benefits over time.
For example, tree planting projects (also known as afforestation and reforestation and the most common form of carbon credit project) remove carbon from the atmosphere as the trees grow. Yet few trees live forever. And when trees die, they decay, releasing a significant amount of that carbon back into the atmosphere.
Worse still, trees that are planted as part of carbon offsetting schemes may not survive for their full natural lifespan. For example, they may burn down in forest fires. In countries where environmental laws are poorly enforced, they may even be chopped down illegally to clear land for agriculture.
Timescale
Another complaint about using tree planting to offset carbon emissions relates to the timescale over which the offsetting occurs. In general, carbon credits from tree planting schemes give the investor credit for all the carbon that the trees will absorb over their whole natural lifespan. Notably, this credit is given at the point at which the trees are planted. Yet a tree’s natural lifespan may commonly be 75 years.
In practice, that enables the offset investor to claim they have compensated for emissions they are releasing today by an offsetting process that will not be complete for many decades. Indeed a tree planted in an offsetting scheme today won’t finish absorbing carbon until perhaps 2100 – long after the 2050 target by which most advanced economies have agreed we must reach global net zero emissions.
Social and environmental impacts
Concerns have been raised about the potential social and environmental impacts of the VCM. Critics argue that certain offset projects, such as large-scale tree plantations or renewable energy projects, may lead to negative consequences for local communities, ecosystems or biodiversity. Concerns have also been raised about land rights and displacement of indigenous communities.
Insufficiently rigorous offset project selection
Some critics argue that the carbon offset market often supports projects that provide relatively small or questionable emissions reductions (when compared with the scale of what is needed to meet Paris Agreement goals). They claim that the market prioritises low-cost projects that offer limited environmental benefits rather than supporting more transformative and sustainable solutions to decarbonisation which would be more expensive.
Distraction from the core priority of emissions reduction
Some critics refute the entire basis for carbon offset projects and believe the industry is counter-productive. They point out that the availability of carbon offset projects is dwarfed by the size of the world’s carbon emissions. They argue that relying on offsetting may divert attention and resources from the more fundamental actions needed to reduce emissions. For example, transitioning away from fossil fuels, improving energy efficiency or adopting sustainable practices.
For these critics, carbon offsetting enables those who don’t wish to reduce their emissions to avoid pressure for action by claiming they have a credible climate strategy when they don’t. They further argue that offsetting fosters complacency among policymakers and corporates by creating an illusion of progress and enabling the postponement of painful but necessary decisions about cutting emissions.
Overcharging
Critics have also argued that some participants in the VCM artificially inflate the prices of carbon credits. This has led to some companies overpaying and/or buying low quality carbon credits. In fact, according to Carbon Market Watch only one in ten providers of carbon credits discloses its fees and profit margins. It’s been argued that fear of being overcharged can potentially hinder broader participation by corporates in climate mitigation efforts.
Adopting a climate strategy has increasingly become part of the overall agenda for most corporates, not least because it is expected by stakeholders. It can be achieved successfully provided you are clear about what you want, do what you say you are going to do and by finding a trustworthy, expert consultant to guide you.