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ML Journal

ML Journal

Developing a Manufacturing Net Zero Action Plan

Combatting climate change in a manufacturing operation can be daunting — but it doesn’t have to be. Here is a roadmap manufacturers can use to reduce their carbon footprint and take the lead in the race to net zero.  

On the opening day of COP26, U.N. Secretary General Antonio Guterres laid bare the challenge associated with reversing the effects of climate change. “The science is clear. We know what to do. First, we must keep the goal of 1.5 degrees Celsius alive. This requires greater ambition on mitigation and immediate concrete action to reduce global emissions by 45% by 2030.”

Held in Glasgow in November 2021, the COP26 climate summit was a global gathering of world leaders, climate activists, and business representatives hosted by the United Nations in pursuit of the goal to reduce carbon emissions to net zero by 2050 and to mitigate the risks we already are facing.

Consensus has coalesced around the need to address the climate emergency, both through climate risk management and decarbonization. Governments are establishing stricter regulations and setting targets to stimulate investment and action. At the highest levels of industry, leaders are making ambitious, broad-based commitments to positively contribute to addressing the climate emergency. Global organizations are advancing frameworks and guidance to support the drive to net zero carbon and beyond.

What role should manufacturers have in responding to climate risk? A significant one, it turns out.

What the Research Tells Us

A pre-pandemic study by the International Energy Agency (IEA) found that nearly 40% of total direct and indirect CO2 emissions are driven by the built environment. Additionally, according to IEA’s recent Energy Efficiency 2020 report, in only one type of building — food sales services — was average energy intensity higher than in manufacturing and industrial facilities, based on smart meter data in two regions of the U.S. Taken together, these statistics lead us to a stark conclusion: The manufacturing and industrial sector shoulders a disproportionate share of the burden to reverse the impacts of climate change.

Incorporating Climate into Corporate Operations

As global consciousness, increasing regulations, and increases in costs continue to drive companies to commit to ambitious sustainability targets, the manufacturing sector will increasingly feel pressure to reduce its carbon footprint. Companies are establishing sustainability commitments, many of which include achieving net zero carbon operations by 2050 at the latest. But setting commitments is the first step in a long journey. In a survey of global JLL clients, 96% responded that their companies had established ambitious, publicly stated sustainability goals, but only 19% of companies had an action plan with identified financing sources to achieve these targets.

This gap between ambition and action will likely drive more pressure down into the organization to realize sustainability outcomes. The responsibility for driving emission reductions will increasingly fall on managers and directors, most of whom have little guidance on how to successfully achieve these goals across the scale of their real estate portfolio. With respect to climate, the challenge for leadership of manufacturing firms is twofold: affirmatively acting to mitigate climate risk and driving decarbonization of operations, while facing increasing costs and increasing regulation.

Climate Risk Management

Climate risk management includes identifying, quantifying, and addressing both transition risk and physical risk. Transition risks arise as our global economies transition from dependency on fossil fuels to low- or no-carbon economies. Examples of transition risks include reputational risk, regulatory risk, legal, and market risk. Physical risks arise from the changes in weather patterns and climate. Examples of physical risks include both chronic impacts, such as extreme heat or drought, and acute risks such as hurricanes and wildfires.

To understand current exposure, leadership should employ climate risk analysis, which entails assessment of physical climate hazard risk and financial exposure related to operations, supply chain, assets, or markets. Once risks are known, companies should identify specific actions to mitigate and, where possible, eliminate risks.

“What role should manufacturers have in responding to climate risk? A significant one, it turns out.”

 

Climate risk analytics are increasingly powered by artificial intelligence and digital platforms, although the quality of the output of these technologies is limited by the veracity of the inputs. The most arduous part of assessing climate risk and establishing mitigation strategies often relate to gathering and verifying data on operations and ensuring accuracy and relevance of market-sourced information.

In addition to internal drivers of climate risk assessment, the manufacturing sector is increasingly facing market-specific regulatory requirements related to assessment and disclosure of climate risk exposure. Increased scrutiny of climate risk management is creating demand for monitoring, reporting, and disclosure of company- and asset-level status with respect to transition and physical risks.

The Time to Align with TCFD Is Now

The Task Force on Climate-Related Financial Disclosures (TCFD) was established by the Financial Stability Board to identify guidance on corporate disclosures related to climate to enhance decision-making of investment, credit, and insurance stakeholders. Alignment to TCFD is intended to advance the inclusion of climate-related risks into corporate strategy while also providing transparency to the market on the exposure of companies to climate risk. TCFD’s climate-related financial disclosure recommendations incorporate four areas: governance, strategy, risk, management, and metrics and targets.

Companies are increasingly expected to align to TCFD, particularly with the growth of ESG investing. Climate risk management is a key underpinning of TCFD alignment, and companies will be increasingly challenged to demonstrate robust and outcome-driving initiatives to assess and address the transition and physical risks in business operations.

Decarbonization Journey Starts With Three Steps

The corollary to climate risk management is decarbonization, which involves transitioning to a net zero carbon economy. A hallmark of the Paris Agreement, a legally-binding commitment to address climate change and to pursue a sustainable carbon position, is to maintain global temperature rise below 2 degrees Celsius relative to pre-industrial levels and an ambition to limit the rise to 1.5 degree Celsius. Substantially reducing the aggregate carbon footprint of the global economy is necessary to achieve these targets.

“Decarbonization is a marathon, not a sprint, and requires continuous monitoring of performance relative to stated targets and commitments.”

 

Realizing the level of decarbonization needed to fulfill the Paris Agreement requires partnership between government and industry, as well as accountability on both sides. Within the manufacturing sector, ownership of carbon action plans must cascade throughout the organization, including to individual plant managers and regional operators.

How do operational leaders practically contribute to the global temperature mitigation efforts identified in the Paris Agreement? Most simplistically, by following three steps:

  1. Establishing a baseline of the carbon footprint for the business, inclusive of operations, supply chain, and assets
  2. Developing and implementing a path to reducing, eliminating, or even positively offsetting the carbon footprint across the enterprise
  3. Monitoring and measuring the ongoing performance of operations relative to stated and evolving targets

Many standards and tools exist to enable companies to establish carbon footprint baselines. Often, the most challenging part of baseline setting is accessing, verifying, and synthesizing available data from various sources, which is compounded for global operations and complex organizations.

With a baseline in hand, leaders should set action plans to achieve carbon footprint reduction in the timeline and manner set forth in sustainability commitments and identify the capital and operational funding that will facilitate fulfillment of the elements of the plans.

While decarbonization pathways for manufacturing firms are not limited to mitigating fossil fuel usage in plants, the breadth of strategies available for use in carbon reduction-related action plans is exemplified when considering energy consumption in manufacturing facilities. Considering the share of global emissions related to the built environment and the relative energy intensity of manufacturing assets, addressing energy demand and supply will provide meaningful contribution to achieving the ambitions of the Paris Agreement.

5 Levers of Change for the Built Environment

On the surface, the interconnectedness of energy demand and supply and the associated rapidly emerging technology landscape complicates the development of decarbonization investment strategies. To simplify, consider five discrete, although not all-encompassing, levers related to energy demand and supply in the built environment:

  1. Energy demand management
  2. Major infrastructure upgrades
  3. On-site clean energy generation and storage
  4. Renewable energy procurement
  5. Carbon offsets

Of the levers, energy demand management is often the default when considering reducing energy usage in an asset. Energy demand management entails a programmatic approach to assessing and establishing initiatives to address the significant contributors to a facility’s carbon footprint. These programs include actions such as reviewing and revising operational protocols, identifying energy retrofit projects and pursuing associated energy grants and incentives, incorporating carbon footprint reduction tactics into vendor contracts, and utility data management and monitoring.  Among the most common retrofit project options for consideration in action plans are optimization of building control systems, smart building technologies, LED lighting and lighting controls, and retrocommissioning of Heating, Ventilation, and Air Conditioning (HVAC) systems.

While the adoption of energy efficiency retrofits and demand management programs has grown, underinvestment in major infrastructure improvements is prevalent due to the high capital investment required, complexity of the upgrades, and criticality of the major building equipment to production and overall site operations.  This opportunity is often the most substantial in older assets and can be the single largest action owners can take to reduce onsite energy use.  Energy demand management and major infrastructure upgrades combined can typically only address between 20%-40% of total carbon emissions. As a result, a comprehensive path to net zero carbon requires supply-side strategies as well.

The 2018 Corporate Sourcing of Renewables, published by the International Renewable Energy Agency, identifies Industrial, with 19 TWh of renewable energy consumption, as the fourth-ranked sector with respect to renewable energy sourcing. According to the same report, only 8% of electricity consumption in the Industrial Sector is renewable energy.

In geographic markets where on-site renewable energy generation is both viable through favorable regulation and financially supported, manufacturing sites often provide ideal conditions for a variety of clean energy solutions, including rooftop and carport solar photovoltaics, scaled wind turbines, battery storage and microgrids, and electric fleet and vehicle infrastructure. Costs of renewable energy technologies have declined substantially in the past decade, and the reliability of various approaches has increased. Further, the marketplace of renewable energy developers continues to mature, providing more aligned capital and financing structures and reducing counterparty risk.

Beyond utilities, the availability of alternative approaches to reduce carbon footprint of assets through energy procurement is increasing.

 

This convergence of positive drivers of the growth of on-site strategies is well-timed. With increasing regulation and investor pressure for decreased carbon footprints, the ability to generate energy on-site and to integrate storage and infrastructure such as EV charging and fleet electrification provide the benefit of achieving sustainability goals while simultaneously enhancing resilience.

In situations where on-site generation is not viable or feasible, offsite solutions, including renewable energy procurement, provide meaningful outcomes and are becoming more readily available in many major geographic markets globally. In some jurisdictions, investor and regulatory drivers are greening the grid, as local utilities have incentive to accelerate the transition from fossil fuels to clean energy.

Beyond utilities, the availability of alternative approaches to reduce carbon footprint of assets through energy procurement is increasing. Among the suite of available options are power purchase agreements (PPAs) or virtual power purchase agreements (vPPAs), renewable energy marketplaces, and aggregation of demand to achieve scale. Each of these strategies allow manufacturing firms to maintain, if not enhance, operational performance of the asset while decarbonizing their footprint.

The final major lever in decarbonizing manufacturing assets is unbundled energy attribute certificates (EACs), which allow companies to purchase specific units of renewable electricity through a contract that specifies the source of that energy generation. The purchaser of unbundled EACs does not purchase specific electric generation. Unbundled EACs are often secured through marketplace agents. The most widely-known energy attribute systems include renewable energy certifications (RECs), International Renewable Energy Certificates (I-RECs), and guarantees of origin (GOs). While important in the decarbonization ecosystem, unbundled EACs are transitioning from a solution of first resort to an approach to offset residual carbon footprint not mitigated by the first four levers discussed above.  M

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