Is your organization ready for the raft of regulations that will transition society toward net-zero emissions over the next thirty years? The European Union (EU) has set ambitious goals and adopted legislation across multiple policy areas to implement its international commitments on climate change.
Moreover, Europe’s parliament has introduced ambitious legislation to direct capital flows to green investments under the European Green Bond Standard. Today, the EU is the largest provider of climate financing in the world with serious policy about to be inked to compel industry change. In contrast, the US Treasury has issued no green bonds and it’s far behind Europe: Under the previous administration, the US exited the Paris Agreement and actively limited environmental, social and governance (ESG)-led investing; Now under a new administration, the US aims to catch up with an EU that our calculations put three to four years ahead.
This article, the second in our series, examines the Green Rush from a European perspective and looks at the initiatives in flight and highlights the three areas where European firms lead.
The primary areas of difference between US and European companies in their approach to green include initiatives to reduce greenhouse gas (GHG) emissions (European companies are embracing GHG projects at a 20% greater clip than their US counterparts), as well as in the switch in the energy mix from fossil fuels (18%) to renewable energy (15%).
In stark contrast, the EU continues to ramp up regulations to enforce environmental, social and corporate governance (ESG) reporting. Its non-financial reporting directive (NFRD) lays down the rules for large companies' disclosure of non-financial and diversity information. And by 2023, mandatory audits will be introduced under the corporate sustainability directive, requiring large companies — representing three-quarters of the region’s turnover—to regularly report on their ESG activities.
The US timeline for mandatory audits is unclear. Yet, the lack of targets at the national level to either reduce national GHG emissions or increase renewable energy deployment is delaying US corporate initiatives to reduce GHG. Setting such goals will help US corporates align their business strategies with a larger vision and prioritize the necessary initiatives.
Another environmental initiative where Europe leads is implementing smart sensors for heating, ventilation, and air conditioning (HVAC) in offices and factories (15% difference). The focus on the Internet of things (IoT), deploying sensors across real estate and instrumenting spaces, enables “always-on" data feeds to monitor environmental impacts accurately, from air and water quality to power use. These digital instrumentations of physical spaces have the potential to identify the impact on physical environments and act accordingly.
With billions of sensors and devices generating zettabytes of data through IoT systems, perhaps a better measure of IoT prowess is how other digital technologies — namely artificial intelligence (AI) and machine learning — can turn big data into smart, actionable data. For example, powering IoT with AI and creating digital twins means that a supply-chain or logistic network can be tested and reconfigured to remove carbon; or water management systems can be redesigned to reduce overall water use. Moreover, real-time sensors anchored on a data platform with effective dashboarding and AI decision-support solutions can track and control many office environmental and air quality measures. These parameters can be used as proxies for optimizing the HVAC operations, lighting, water treatment and ventilation rates, reducing carbon footprints of physical spaces but also ensuring that the building is performing optimally for the people who use it, making workplaces smart and healthy. Therefore, the return on investment from a healthy building strategy shows up in the metrics that track hiring, retention, productivity, brand capital and a building's environmental impact.
Our research revealed that more European companies are seeking to manufacture sustainably than their US peers. Calculations put manufacturing as one of the major sources of greenhouse gases; the critical question is how to prepare and transition production processes established across decades of industrial development from a mantra of cost reduction to one of low carbon.
Forward-looking companies are preparing by adopting the concept of circular economy in their business models and low-carbon manufacturing (LCM) techniques across operations. The combination of circularity principles (reuse, recycle, redesign, reduce, remanufacture and recover) together with LCM provide a lodestar, with clear goals to reduce carbon intensity across processes. This duo accelerates material innovation, new product development, R&D activities, better sourcing decisions and technology in materials, processes, and business models. Furthermore, the new as-a-service and sharing economies can increase the awareness of the end users and incentivize them to reduce their environment footprints.
The concept of “remanufacturing” used in the automotive industry, reusing durable steel and alloy steel in engines and steering systems, spreads the practice of circularity to other industries before legislation forces the issue. In addition, additive manufacturing is starting to replace the traditional manufacturing techniques of moulding and forming, reducing waste and carbon.
In the not-too-distant future, sourcing decisions could start using material innovations, circularity principles and even green steel to head off the impact from the EU proposed carbon levy. The world’s first large-scale fossil-free steel plant is scheduled to open in 2024, with a planned production capacity of five million tons of high-quality net-zero hot-rolled, cold-rolled, and galvanized steel (not enough to feed an entire global industry but a good start).
Our Green Rush study confirms that European companies are ahead of their US counterparts in designing and implementing technology initiatives that can help them meet a wave of impending climate legislation.
US companies are 15% to 20% less active in deploying initiatives such as reducing fossil fuel use, improving the efficiency of HVAC systems and using renewable energies. These initiatives are crucial to reducing Scope 1 and 2 carbon footprints. Our study reveals that EU companies are 12% more active in manufacturing with sustainable materials. Such initiatives result in carbon reduction as part of Scope 3 activities — and Scope 3 emissions are the most challenging to remove. Surprisingly, 90% of US S&P 500 Index companies published sustainability reports in 2019, and the number of corporate ESG commitments are set to grow year over year. Reporting on Scope 1, 2 and 3 and disclosing information about the initiatives taken to improve them are typically integral parts of corporate sustainability reports. Europe's leadership in the three key areas above provide a yardstick for others to follow.
One reason for the gap between EU and US companies? Attitudes. Roughly 62% of European executives believe that environmental sustainability initiatives will deliver a positive bottom-line impact over the next five years, whereas 50% of their US peers are convinced that such investments can result in higher profit in the long term (see below).
Further analysis by sector in Europe reveals a different picture (see above). Leaders from banking and financial services, technology, energy and utilities, communications and transportation are optimistic about the positive impact of environmental sustainability initiatives on long-term profit margins. Moreover, these initiatives in the service sector drive better ESG scores, granting access to ESG investors, improve company image, drive customer loyalty and tap new business opportunities. In contrast, optimism is significantly lower in manufacturing due to the legislation that will categorically disrupt global supply chains.
This article was written by Euan Davis, an AVP who leads Cognizant’s Center for the Future of Work in Europe, and Rouzbeh Amini, Senior Director – Head of Cognizant’s Sustainability Practice, EMEA.
To find out more about sustainability opportunities and business benefits, read our white paper “Green Rush: The Economic Imperative for Sustainability” or contact us at the Center for the Future of Work.