A devilish duality: How CEOs can square resilience with net-zero promises

Courtesy of McKinsey & Company

by Bob Sternfels, Anna Moore, Daniel Pacthod, and Humayun Tai

Key takeaways

·       To make the most of volatile environments today that can be challenging to the path to net-zero commitments, CEOs can shape strategy around resilience now to tap value-creating businesses tomorrow as the world continues to head toward net zero in the long run.

·       CEOs who understand the virtues of strategic resilience know that addressing immediate hardship and building a sustainable future can—and should—be pursued at the same time.

·       By maintaining vision, moving nimbly, playing offense, and embracing opportunity instead of recoiling from risk, leaders can improve the future of their businesses and the planet, 5 actions recommended by McKinsey could help.

As net zero has become an organizing principle for business, executives are on the spot to lay out credibly how they will deliver a transition to net zero while building and reinforcing resilience against the certain volatility of ongoing economic and political shocks. The right response to such challenges has always been a matter of “and,” not “or”—that is, maintaining focus on the long term while adjusting in the face of present conditions rather than opting for one or the other. A resilient stance permits companies to weather not just the current moment but also the future storms that are likely to come their way in a world of rising risks.

There are many significant challenges to leaders across both the private and public sectors towards the path to net zero these days. Key challenges are energy availability and security either from political risks such as Russia-Ukraine crisis or physical risks such as tropical storms found in Japan, Koreas and China. Affordability of net zero also comes into question as the problems of supply chain and talent shortages regarding net-zero commitments arise, possibly resulting in price surges for key inputs needed for the transition to net zero. There is also a backlash against standardized ESG along with skepticism of ESG funds that seem to aim to penalize fossil-fuel producers and hurt local economies.

However, there are many opportunities for CEOs to pursue and they should create a virtuous cycle for economies among affordability, decarbonization, energy security, job creation, and resilience. Renewable energy is one example with the potential to promote energy security, create high-quality jobs, and reduce emissions in tandem. New sources of capital and VCM could make sustainable investments more affordable, bringing them to market sooner, and successful delivery of these projects would in turn boost returns and attract further capital. Sustainable materials could facilitate the energy transition while creating new value from existing systems and infrastructure. And so on. These examples illustrate the power and possibility of the “and”—a flywheel-like effect that enables meeting security, socioeconomic, and sustainability goals in parallel.

Resilience today and value tomorrow: Five actions for CEOs

Accelerate capital deployment with a private-equity mindset

Leading with resilience while navigating toward net zero means participating early in the materials transition and green-business-building wave to secure exposure to promising innovations (exhibit). Earlier-cycle investments have higher risk but also higher returns because they benefit from early policy funding, greater willingness for counterparties to participate (for example, through sustainable aviation fuel contracts, which guarantee demand from airlines that allows investment in supply), new talent, and the opportunity to gain first-mover advantage in nascent and emerging value chains.

In many industries, there will be multiple sustainability winners. For example, we expect both hydrogen-fueled and electric vehicles to be part of the 2050 ground transport system. This is another reason to consider an investor mindset—spreading bets across multiple potential investments earlier. Companies can further manage their transition risk by aggressively pursuing operational decarbonization measures that already pay for themselves (for example, through energy efficiency) while making longer-term investments in sustainable infrastructure and building new businesses. Pursuing energy efficiency and rapidly scaling distributed clean heating (for example, via heat pumps) will become a critical lever in Europe to manage the energy crisis.

Play offense through a sustainable value creation strategy

Two objectives should be paramount: to extend and decarbonize the core business and to build new sustainable businesses in reshaped value chains. This would represent an “Apollo 11 moment” in many industries—a moon shot requiring not just incremental improvements but wholesale rethinking of how to build, operate, and maintain every sector of the economy. Leaders need to make quantum leaps to meet the moment, by getting smart on climate tech fast, engaging with the innovation ecosystem, and leveraging their engineering and business-building talent. Similarly, a focus on sustainability—and ESG measures, more broadly—is defensible, pragmatic, and needed. CEOs can articulate their approach to ESG topics proactively by focusing on resilience and value creation, not simply as part of “right to play” and risk mitigation.

Go beyond net zero

CEOs should also look to make their companies net nature positive. Actions include moving ahead in the game on biodiversity, demonstrating stewardship of shared water and air resources, ensuring a responsible supply chain, and contributing to a just transition, among other steps. Adaptation investments to address physical risks will also be critical. Companies able to weather the storm, literally, will have a material advantage.

In some instances, sustainability aims come into conflict—for example, lithium brine operations are less carbon intensive than hard-rock extraction but consume far more water. CEOs will need to weigh current trade-offs carefully and invest in innovation that meets multiple aims, “squaring the circle” in an increasingly complex ecosystem. The bar is rising on sustainability; companies need to have a plan on these and other factors.

Build the partnership and ecosystem muscle

CEOs should realize that the challenge of maintaining resiliency while driving toward net zero is too great to go it alone. New public–private partnerships will be needed because many of the emerging energy and materials value chains will require full ecosystem development. Consider, for example, clean-fuel consortiums, such as those developing around hydrogen hubs, and shared CCUS networks. There are also opportunities to partner with competitors on shared tech road maps to mitigate tech risk and to better direct innovation funding.

Aggressively reskill leadership teams, boards, and frontline workers

As companies embrace a sustainable future, they will need new skills. Sustainable fashion, for example, requires fully rethinking design, manufacturing, procurement, marketing, and waste management processes while also better tracking carbon emissions and circularity. Talent across the organizations will need to reskill to meet these new demands. Companies need to identify the skills needed for their more sustainable business models and work toward acquiring them and building them internally.

To read the full article, please visit https://www.mckinsey.com/capabilities/sustainability/our-insights/a-devilish-duality-how-ceos-can-square-resilience-with-net-zero-promises

About the author(s)

Bob Sternfels is Global Managing Partner in Bay Area, Anna Moore is a partner in London, Daniel Pacthod is a senior partner in New York, where Humayun Tai is also a senior partner.