Reduce

How to embed sustainability across your operations

Implementing sustainability will draw upon every aspect of your organization’s operating model. Therefore, without making sustainability a natural and integrated component of your corporate operations and culture, your company will have difficulty realizing the sustainability vision and corporate strategy on climate. Sustainability needs to be viewed by everyone as a “value-add,” not an “add-on.”

Figure 17 depicts some of the key facets of your company’s operating model that will need to be tailored and enhanced to serve as critical enablers of the sustainability transformation. These are also described in more detail below.

Figure 17: Sustainability’s role in an operating model. Source: BCG analysis (1).

These enablers are also, unsurprisingly, strongly aligned to primary challenges that companies believe they are currently facing in accelerating their sustainability transformation (Figure 18 below). Your company will need a concerted and sustained effort to retool with sustainability as its core driver.

Figure 18: Common stated challenges in embedding sustainability across operating models as of 2023. Source: BCG analysis (2).

Strategy and vision

When it comes to sustainability, it is important to start with a clearly articulated vision and mission – the why and the value. From there, you can cascade priorities for different parts of the organization. This forms the basis of the other enablers. Everything else radiates from here.

Organization design and accountability

At the start of your climate journey, your company will likely achieve climate goals through central stewardship of sustainability efforts handled by a dedicated central team. This stage is covered in Chapter 1: Prepare.

As your company matures, you can aim to cascade and embed sustainability-related responsibilities across the organization. For example, during implementation, while your organization would likely still require the central climate team to coordinate initiatives and serve as a center of excellence, business unit leaders should take ownership of decarbonization goals and be responsible for implementation, with senior leadership participation for executive support and resources.

As your organization matures further, and when sustainability and climate action become an integral part of its core business strategy, and business units have experience in working toward climate goals, you can adopt a further decentralized model focused on sustainability action aligned with business strategy. For example, business units should not only own lever implementation, but also their own climate-aligned business strategy, ensuring that sustainability and business priorities are in sync (see Figure 19 for an illustration below). However, even in this case, you can maintain some form of centralized guidance, potentially through a Center of Expertise, to ensure coordination and innovation across the organization.

Figure 19: Climate responsibility is embedded more deeply with increasing maturity. Source: Public reports and corporate websites; BCG experience.

Governance

Having a clearly defined governance model and decision-making structure in place is essential to managing and accelerating your climate efforts. As your company matures, it should increasingly develop accountability at three levels of governance for sustainability efforts: board governance, executive oversight, and management oversight.

Board governance includes regularly providing strategic guidance, steering on sustainability priorities, risk management, and overall sustainability oversight. Strong oversight from the board will be necessary to ensure organization-wide progress at pace. You can define clear roles and responsibilities for the board and nominate a leader to own climate efforts to ensure sufficient senior management attention and accountability.

Next, executive oversight can be handled by a committee set up specifically for sustainability (or ESG) strategy and oversight, made up of a cross-functional group of senior business leaders who meet regularly. They should oversee strategy development, performance, and resource allocation.

Finally, management oversight involves all business leaders across the organization (i.e., leaders of business units, management of core business functions) incorporating sustainability into their regular business and performance updates, including relevant KPIs. By doing so, they can and should treat business and sustainability performance as fundamentally linked. In summary, managers need to be thinking about carbon and tons as much as they do dollars and cents.

KPIs and incentives

In 2019, the CDP found that around half of Europe’s largest firms already link executive pay to climate change (3). This is a promising sign of how seriously businesses are regarding their climate ambitions. However, ideally such incentives should not apply to executives alone, but should also stretch to the rest of an organization.

Your company’s KPIs and incentives will need to cascade across your organization in line with the progress it makes on its climate efforts. To do so, it will become increasingly important to institute clearly defined, transparent goals at all organizational levels, as well as incentives to keep the entire company aligned.

Your company might start its climate journey with all climate KPIs being set at the enterprise level with a C-level executive held accountable. As you progress, however, KPIs should be cascaded to different business functions and units as relevant, assigning accountability to business unit and functional leaders. Variable compensation can be linked to sustainability KPIs, ideally at all levels, not just at the upper echelons. To implement this successfully, it is critical to have reliable sustainability data at all levels to assess performance, and have it available in a timely manner so managers and employees can track their performance regularly and adjust their priorities and activities to improve performance as needed. In many companies, this level of fidelity is not present.

Decision making and processes

Your company can link its sustainability targets directly to critical decision-making processes in all functions, especially when making investment and operating budget decisions, as they are sure to impact emissions. The aim, however, is not to disrupt business priorities, but to incorporate sustainability as an important factor, and ideally as a value driver, in making decisions. For example, raw materials purchases affect Scope 3 emissions, and long-term sustainability considerations need to be balanced with traditional cost and quality priorities. Similarly, production capacity expansions impact energy usage, so new buildings can and should be designed using energy efficiency and clean energy options in mind.

Value-creation logic should be incorporated into your company’s sustainability planning, and investments can be prioritized using abatement curves or other mechanisms that take emissions into account. Energy cost savings, efficiency and productivity improvements, and customer willingness to pay green premiums should all be considered when making any business decisions. Sustainability programs and sustainability overlays to other business programs/activities can be incorporated into corporate planning and budgeting accordingly.

Internal carbon pricing

Internal carbon pricing can help your business integrate emissions into decision making, drive low-carbon investment, and mitigate regulatory risk, such as carbon taxes. There are two main approaches to internal carbon pricing:

• Shadow Carbon Price: Simulates potential carbon taxation scenarios to inform planning and investment decisions. While primarily informative, it can still be valuable in shining a spotlight on promising or necessary areas to decarbonize

• Carbon fee/tax: Establishes an internal direct price on a business area’s emissions, either by collecting fees based on emissions centrally or via an internal cap-and-trade market with quotas; encourages emissions reductions while potentially generating revenue to fund sustainability efforts across the organization or providing flexibility for all business areas in the case of cap-and-trade

These approaches can be adopted and combined as necessary to aid your company’s sustainability ambition and progress. Also, they are relevant across industries, though they are currently more widely adopted in certain areas, such as energy and utilities, where, according to the CDP, as of 2020, over 70% of companies had implemented internal carbon pricing or had plans to do so (4), p7.

Our recommendation for putting an internal carbon tax into action is as follows:

1. Map direct and indirect emissions across all company operations

2. Forecast potential future regulatory prices on emissions, or estimate costs to reduce corporate emissions based on the abatement curve (see section Understand the nine principal emission abatement approaches)

3. Set your internal carbon price based on this information and update as needed

4. Integrate the price into company processes, selecting and revising the mechanism as necessary, using one of the approaches above depending on internal appetite

Also, it is helpful to pilot your internal carbon pricing approach in specific business units and collect feedback before broader roll-out and monitoring. It bears mentioning that having a granular and robust emission tracking system is critical for a successful internal carbon pricing mechanism (please refer to Chapter 2: Measure and verify for further details on measuring emissions).

For more information on internal carbon pricing, see: Adopt an internal carbon price to drive decarbonization.

In addition to the core operating model considerations discussed above, your company can also take advantage of critical enablers that will help embed sustainability in its structure. These include:

Talent and skills

Regular upskilling and capability-building can be a core component of your organization’s climate progress. Upskilling and education efforts should be tailored to the seniority and role of each employee. These upskilling efforts can include continuous learning modules or immersive courses. Leaders would need to understand how to implement climate solutions, monitor performance, and ensure appropriate climate governance. Courses for mid-level management can aim to build a deep understanding of sustainability topics with a particular focus on integrating sustainability into their teams’ day-to-day activities. Finally, frontline employees can learn about the importance of climate action, how their industry is affected, and what actions the company has defined in its climate strategy (see Figure 20 below). The goal is not to turn all employees into climate experts; rather, upskilling efforts can focus on building an understanding of the key concepts, the business case for decarbonization, and the company’s climate strategy to the degree relevant for each employee’s role.

Figure 20: Tenure-specific training to upskill workforce. Sources: Expert interviews; BCG.

Technology and data

Technology and data will be essential enablers for driving initiatives and decision making. Your organization can develop integrated systems for frequent tracking, reporting, and managing data related to emissions and sustainability goals.

Data standards for emissions should be on-par with those for financial data. Complete and accurate data on your sustainability initiatives will be critical for tracking progress, informing decision making, demonstrating compliance, and meeting regulatory requirements.

While there are multiple approaches to enhance technology and data systems, here are some features to keep in mind:

• Integration: Companies typically already have a number of databases and data systems; however, they may be poorly integrated. Any new emissions tracking system should aim for better integration and improved coordination. A new stand-alone system for carbon is unlikely to see strong adoption

• Automation: The collection and updating of carbon-related data and information should be as automated as possible. This can include sensors, AI-powered data integration systems, algorithms etc

• Updates: Building on automated data, the more frequently emissions information is updated, the more valuable it becomes. Updates on a weekly or monthly basis may be as “real-time” as possible in your organization, which is more than adequate. Even quarterly information can be of substantial value

• Granularity: Ideally, a company should be able to drill down deep into the emissions tracking system, analyze emissions at the product or service level, and aggregate as needed to inform business units, regions, etc

• Auditing: On a periodic basis, it may be helpful to audit emissions data to ensure that tracking mechanisms are functioning accurately and properly

Leadership, culture and change management

• Leadership and promoting strong role models

In paving the path for your company’s net-zero journey, it is important for leadership to serve as sustainability role models by committing themselves to putting new behaviors into practice, thus mobilizing sustainability in the organization.

Additionally, leadership should not only acknowledge previous efforts undertaken by predecessors and business units, but empower and promote as role models those who have undertaken such actions. Acknowledging existing efforts at all levels within their company and encouraging them to be built on is a great way to boost momentum. Providing recognition, even in simple ways, to individuals and teams that are making noteworthy progress on climate and sustainability can lead to the creation of strong role models, and a positive, self-reinforcing culture that can drive the transition to a low-carbon business.

• Define change story, change management and communication

The sustainability transformation will necessitate change. Communicating the reasons for change is critical, starting with the organizational vision and mission, as stated earlier. Clear and continuous messaging can help generate buy-in and maintain momentum.

Climate transformation is challenging but possible

Seldom do wholesale structural and organizational changes achieve their desired end goals. A 2021 BCG survey found that more than half (57%) of all transformations failed to hit their targets (5). The key is to build on what is working and steer the corporate ship steadily down the desired path. Carefully thinking through the necessary steps to manage and effect change is crucial, as is being nimble to pivot and undertake different steps when met with resistance. Moreover, learning how to drive change does not have to happen in isolation. There are experts who can help and leaders you can follow, and, especially in sustainability.