Global temperatures have been consistently above average since the late 1970s and continue to rise (see Figure 1). Climate change is a risk factor for our economies.
Figure 1: Monthly global temperature (1880-2021)
Regulators, consumers and investors are rapidly shifting their economic perspectives to more sustainable paths. This creates complexity for organizations, impacting their reputation, brand and future viability. To act responsibly, organizations must first measure the impact of their products.
Product carbon footprint (PCF) is the sum of direct and indirect carbon emissions a product generates throughout its life cycle. Each product releases a certain amount of CO2 into the atmosphere during the phases of production, distribution, usage and disposal/recycling. By measuring PCF investors, consumers and regulators can improve their investment/consumption/policy decisions in a data driven way.
Figure 2: PCF
States started introducing regulations to reach sustainability goals
Just after the Paris Agreement, governments around the world have begun to introduce regulations aimed at rewarding actions by companies and individuals that contribute to sustainability, and soon there will be regulations that penalize companies and individuals that do not comply with countries’ sustainability goals.
The Paris Agreement is a binding international treaty that aims to keep global warming below 2 degrees Celsius compared to the time before the Industrial Revolution. As we have almost reached the 2 degree limit, nations believe that we need to transform our economic activities towards a carbon-neutral/waste-neutral economy fast. Thus, under the leadership of EU countries, states have started to introduce regulations to reach their sustainability goals.
Such regulations might mean difficulties for companies that have grown financially in an era when pollution of the atmosphere had almost no legal cost since:
- Carbon labels: Such labels, which indicate the PCF of a given product, could soon be mandatory for selling their products on the market. The labels will help customers and firms easily assess substitute products that are relatively carbon neutral and will immediately reduce sales of companies that do not care about their carbon footprint.
- Carbon tax: It is already implemented in many countries such as the US, EU countries, Australia, Japan, etc. Due to carbon labels and environmental audit reports, the effect of carbon tax could expand quite soon. Such examples of taxes can encourage customers to adopt active environmental behaviors. After all, environmentally harmful goods will soon be more expensive thanks to the expanded carbon taxes.
- Environmental audit or ESG reports: The Corporate Sustainability Reporting Directive (CSRD) is one of the EU’s Green Deal regulations that will be mandatory for all companies except micro-enterprises. EU authorities will require companies to submit ESG reports assessing their environmenatl and social impacts. EY expects companies with more than 500 employees to be affected by the CSRD in 2023. This EU initiative may set an example for other countries. Such ESG reports can mean penalties for companies that do not adhere to compliance regulations. Moreover, these kinds of reports will be a parameter that will influence investors’ decisions.
- Widening the “Trade War”: since 2018, we have seen a new era of restricted trade that began with Trump’s tariffs. AIMultiple argues that countries that invest more in meeting the terms of the Paris Agreement can impose further tariffs on countries that make less effort. In this context, countries/states that are unable to make a green transition could be shut out of global trade and blamed for their cheaper prices, which hurt competition. In this regard, PCF can be a quality certificate of an exporter company.
- Ask for more clarity from policy makers and regulators by demanding specific recommendations that make it easier for your organization to act.
- Measure your PCF and carbon footprint of your company. Prepare for regulations as they are already being implemented.
Consumers are willing to pay more for environmentally friendly products
Consumer perceptions of goods and services determine their value. A new study from Business Wire reveals key insights regarding customer perceptions of environmentally neutral products. We predict that these consumer expectations will further force companies to act soon. Highlights of the study include the followings:
- 85% of global consumers prefer more environmentally friendly products compared to five years ago.
- 34% of global customers are willing to pay a higher price for low-carbon products.
- The younger the generation, the more environmentally friendly behavior is observed. This is particularly important for companies because millennials and post-millennials will make up almost half of the adult population by 2030. In this respect, companies that do not invest in sustainability may steadily lose market share.
- Consumers’ sensitivity to sustainability varies from country to country. European consumers are generally more concerned. On the other hand, U.S. consumer trends are roughly in line with the global average.
It is important to note that consumer intention is not necessarily a guarantee of sustainable action. For example, many people resolve every day to quit smoking, exercise, or eat healthy, but few can do so. As discussed in the Harvard Business Review, there is also a gap between positive attitudes toward sustainable goods and demand for such goods when the price of sustainable products are more expensive.
On this point, regulations can help close the gap by reminding consumers of the environmental costs of products thanks to carbon labels or by raising the price of non-environmentally friendly goods by imposing a carbon tax. Regulations can thus act like cigarette cessation under a doctor’s eye.
- Don’t wait for regulations to come along and calculate the PCF of your products and prepare carbon labels as your own incentive. Determine areas where you can improve the lifecycle of your products’ carbon emissions by measuring PCF. Prepare an action plan and determine an intended PCF level as a KPI. Remeber that digital transformation can be an effective way of reducing product carbon footprint. You can announce your strategies and their results to customers through various marketing channels. Remember that many successful companies like Tesco, Coca-Cola and Oatly have already used carbon labels.
Investors consider sustainability in investment decisions
According to Harvard Business Review, investment companies and asset managers are weighing sustainable investment projects more heavily than ever before. They are investing $81.7 trillion in sustainable investment projects in 2018, or about 25% of the funds they manage for asset managers’ clients. By comparison, $81.7 trillion was just $6.5 trillion in 2006, according to HBR.
As we have discussed from a consumer perspective, investors are more likely to invest more in companies that will be more concerned about sustainability because other companies lose market share, pay more carbon taxes, and may face penalties for non-compliance in the long run.
- Be transparent and upfront, and begin preparing environmental audit reports as soon as possible, before CSRD or other rules force you to. Calculate the carbon footprint of your firm and the PCF of your product portfolio. Present your existing issues to investors at the end of the environmental audit report, and tell them about your action plans for reducing your company’s carbon footprint, as well as the KPIs they must use to evaluate the success of your strategy.
It is the right thing to do
Do you want to support to a company that is worsening the greatest threat to global health and environment in this century? Do you want to support that company if it doesn’t even attempt to measure its impact?
We are still living in a world where most of companies’ negative impact to the environment is not compensated, measured or even estimated. Estimating a company’s impact is the first step to understand its impact and take steps to improve it. It will be hard to say positive things about our work life to the next generations if we didn’t even estimate our company’s impact to climate change.
How to calculate PCF?
Simply, there are four steps for calculating PCF:
Determining the life cycle
Since the PCF aims to measure the carbon emissions of a given product from cradle to grave, you need to determine each step of the product life cycle. For example, the extraction of raw materials and intermediates, the energy required to produce the final product, distribution and recycling are all sources of carbon emissions.
This can be challenging because you need both external and internal data sources to calculate a product’s PCF. As an internal data, you need to know your energy consumption for the composition of raw materials and intermediates you use for production, as well as transportation routes and vehicles and their operation spesific emissions rates. These reflect the direct CO2 emissions of your product. However, to capture indirect emissions data, you need access to external data sources. In this context, the use of ERP cloud-based tools specifically designed for PCF calculations can be helpful, as they can more easily capture external data and already have operation spesific emissions rates.
After data collection, you need to perform some calculations to determine the PCF. You can use your own sources for the calculation. On the other hand, carbon footprint calculator tools mentioned earlier provide some templates to perform this task.
Without interpreting the data, it would be difficult for employees to figure out pain points of your PCF results. Therefore, advanced analytics can be useful for your business to determine strategies and KPIs. Again, cloud-based software offers such solutions and facilitates the analysis of PCF results.
To find real-world examples for sustainability you can also read our article: Top 10 Sustainability Case Studies and Success Stories.
We can identify a vendor for your PCF calculation if you require one.
Cem has been the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per similarWeb) including 60% of Fortune 500 every month.
Cem's work has been cited by leading global publications including Business Insider, Forbes, Washington Post, global firms like Deloitte, HPE, NGOs like World Economic Forum and supranational organizations like European Commission. You can see more reputable companies and media that referenced AIMultiple.
Throughout his career, Cem served as a tech consultant, tech buyer and tech entrepreneur. He advised businesses on their enterprise software, automation, cloud, AI / ML and other technology related decisions at McKinsey & Company and Altman Solon for more than a decade. He also published a McKinsey report on digitalization.
He led technology strategy and procurement of a telco while reporting to the CEO. He has also led commercial growth of deep tech company Hypatos that reached a 7 digit annual recurring revenue and a 9 digit valuation from 0 within 2 years. Cem's work in Hypatos was covered by leading technology publications like TechCrunch and Business Insider.
Cem regularly speaks at international technology conferences. He graduated from Bogazici University as a computer engineer and holds an MBA from Columbia Business School.
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