Mr. Littwin, why does msg advisors concern itself with decarbonization?

Because it is a profound, transformative challenge for a growing number of our customers. In recent months, companies have really had to focus on simply staying afloat given the conditions imposed by the corona crisis. As a result, a lot of strategic topics fell by the wayside. However, that is only partially true for decarbonization – it will quickly become a focus for decision-makers once again.

There are numerous reasons why. For one, we are already seeing the destructive impact of climate change. There is no denying that the trend is rapidly increasing and the world is responsible for doing something about it. That causes a significant shift in society’s priorities. The movement is no longer about particularly dedicated activists, but about a new social consensus that we are seeing form. Customers actively demand environmentally-friendly products and hold companies responsible for creating an entire value chain that is environmentally friendly. They are ready to pay more for it too.

To meet this demand, however, companies need to shift their business models toward low emission products and services and that can be a major shift for some companies. They also have to modify their delivery chains to ensure end-to-end tracking and transparency, while also using smart technologies to prevent decarbonization from becoming cost prohibitive, perhaps even using it to lower costs in a best case scenario.

What role do national and international regulators play in that context?

A significant one. The European Green Deal is an impressive testament to that. In its position paper, the European Commission names managing climate-related and environmental challenges as the task of this generation. In doing so, the EU is ramping up an enormous package of measures and subsidies and its goal is to fundamentally change economic activities in the EU. According to the European Green Deal Investment Plan (EGDIP), 100 billion euro are scheduled to be provided over the course of the next six years for the transition phase alone. Within that context, the commission will be actively intervening in markets in a targeted manner; it may even create new markets. Yet that is just a fragment of the big picture that will be borne out by national goals and programs, as well as other tools, including sanctions, of course. Companies have to prepare for this very early on in order to minimize financial and legal risks.

What areas of the industry hold the greatest potential for decarbonization right now?

That very much depends on the specific industry. We have high energy consuming industries that rely on a constant energy supply and for which the related price fluctuations are extremely relevant. The obvious scenarios here have been played through. Which is why, for example, the withdrawal from brown coal is no longer a real lever for decarbonization. We need solutions that are based on a systemic approach and combine different aspects.

What could that potential interaction between optimization levers look like?

A prime example is larger municipalities where public utilities play a key role. Public utilities have the capacity to generate clean energy and to better market and thus use locally generated energy that is fed into the grid. However, they also have access to public transport fleets. If, for example, buses could be operated CO₂ neutrally, that would be a very strong approach to decarbonization. To a limited extent, that also holds true for snowplows, garbage trucks, etc.  These are major levers.

A lot can be achieved through pooling, virtual power plants, electrification and the use of hydrogen technology. Although, when a city systematically analyzes potential sources of CO₂ emissions, a whole cluster of improvement options becomes apparent. While individual measures may only contribute a small percentage, together they provide a real chance for decarbonization – especially when looking at the bigger picture. This large number of CO₂ drivers can be found in every industry.

What difficulties might companies face in implementing measures?

There is a lack of transparency on the one hand. Companies must begin by performing an in-depth analysis of the processes and interfaces used in their value chains and understanding where and to what extent they are producing climate-damaging emissions. This analysis of CO₂ drivers is definitely a challenge, because even though the necessary information tends to be available, it is rarely ever consolidated or harmonized and the processes required to work with the data are not in place. Not to mention the fact that those values can be quite complex to calculate, requiring both method expertise and the right tools. It requires data scientists, process experts and IT specialists.

Can you provide any concrete examples?

A good example is travel. Every air carrier is required to print the CO₂ emission from a flight on the ticket. The information is there, but is not analyzed or put into context with other data. In the case of public transportation – another example – the fuel consumption of the bus fleet, the fuel and even vehicle CO₂ emissions are all known. This means a precise projection could be performed and optimization approaches developed; however, it is hardly ever done. That is basically true for most processes that rely on fossil fuels. Needed are CO₂ indices that are based on sound base values and show what the largest emission factors and optimization options are. At the moment, hardly any company has such comprehensive knowledge.

Where might the potential lie in industries with fewer emissions?

Take the telecommunications industry, which is not among the top CO₂ producers, but major operators do operate up to 20,000 radio masts each and each one of those masts consumes up to 30,000 kilowatt hours a year. Together, that is the energy consumption of a mid-sized company – per operator. That is a good starting place for thinking about energy efficiency and for formulating measures. The measures could include open public radio access networks (open RANs), for example, or a permanent deactivation of obsolete radio technologies as part of the introduction of 5G.

Those are very industry-specific examples though. However, there are very effective cross-industry approaches, such as the increased use of virtual collaboration platforms, enhanced efficiency or better use and equipping of data centers and distributed computing capacities.

So the greatest potential for decarbonization can be achieved more through a portfolio of targeted and networked measures and less through impressive, big-bang approaches?

It takes both, otherwise it would be impossible to achieve ambitious goals. A supplier can, for example, decide to shut down a fossil fuel power station. Which can work, but which, for obvious reasons, cannot be accomplished overnight and not without negative effects and resistance. Which is why it is very important to try to generate quick wins that go into effect immediately, that make a positive contribution and are valuable in achieving the goal. These ideas can often come from inside a team and it is a good idea to pick up on them in an organized way.

How does msg advisors support these kinds of initiatives?

On the one hand, we combine know-how about the challenges and specifics of different industries. That is essential in the development of systemic approaches and for implementing changes on the value-creation network and business model level. On the other hand, we have the methods, tools and resources for creating a clear image of the actual emissions landscape. We can thus create the basis for any strategy that needs to be developed and for the reporting that regulators may require.

In addition, we have already developed a very extensive portfolio of both industry-specific and industry-independent measures, which companies can apply directly to decarbonization. Finally, we can effectively coordinate the different activities and incorporate accompanying change management. Even as technical as decarbonization may seem, it is after all, a profound transformation process that also has a significant impact on the roles and culture within a company and on how a company sees itself.