[Announcer] Hello and welcome to L.E.K. Look Forward into 2024, L.E.K. Consulting's annual analysis of the challenges and opportunities in the year ahead.
In this short video, John Goddard, L.E.K.'s Vice Chair of Sustainability and leader of our Sustainability Centre of Excellence outlines L.E.K.'s recommendations for corporate leaders to keep pace with sustainability into 2024 and beyond.
[John] At L.E.K., we've seen companies of all sizes continue to make commitments towards sustainability. As of this month, 985 of 2,000 of the world's largest publicly traded companies are committed to net-zero, a 50% increase in just over a year.
Similarly, our 2023 decarbonisation survey, which interviewed over 400 corporate leaders across our sectors and regions revealed that 82% of businesses have an established formal decarbonisation plan, of which 73% are either on track or ahead of their goals.
We believe companies will be under increased pressure to thoughtfully navigate regulatory, consumer, investor, and talent demands as 2030 deadlines for these commitments near. In terms of regulation, we recognise that there has been some pushback against ESG in the U.S. and delays to policy changes in the U.K. However, we maintain that the overall pace of global regulatory change is increasing.
While consumers may tend to overstate their willingness to pay for a green premium, our consumer surveys suggest that 54% of global consumers would switch to more sustainable brands and products. Investors and talent also continue to put pressure on businesses to drive sustainable transformation.
Given these underlying drives of change and the developments we are seeing in leading businesses globally, we believe that in 2024, it will become particularly important for businesses consider four important themes:
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How to consider to redesign operational business models to embrace and deliver increased levels of circularity.
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Collaborating more effectively across the value chain to reduce Scope 3 emissions.
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And starting to consider the impact and develop initiatives around natural capital.
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And fourthly, increasing the corporate's own scrutiny on its carbon offsetting and strategies.
Let's delve into each of these in turn.
We have seen increased corporate recognition of the need and opportunities for circular economy models as a method to reduce waste and deliver financial returns by reusing and recirculating immediate products and waste.
For instance, our recent conversations with a global med tech company have revealed the operational and commercial imperative to improve the circularity of regulated medical waste and unlock value. We've advise clients on ways to reduce waste and achieve input cost reductions by using their own recyclets as a replacement for virgin materials.
Circularity raises a number of questions for businesses to consider, including what is the most appropriate business model to enhance circularity, how to lock in customers and reduce switching, overcoming increased supply chain complexity, and establishing the appropriate cost structure and scaling.
Addressing these carefully and pragmatically can lead to reduced waste, enhanced sustainability credentials, as well as value creation opportunities for many sectors. Moving to our second trend, collaborating across the value chain to reduce Scope 3 emissions.
Scope 3 typically accounts for more than half of a company's total emissions, and the number of companies setting Scope 3 targets is rapidly increasing. We've seen increased client attention on operationalizing these commitments through their value chains.
For upstream, this requires understanding emission sources with the supply chain and engaging with suppliers on reduction initiatives. EcoVadis, the rating agency, reports a 134% increase in their supplier assessments over the last five years. As an example, we've seen many pharma companies building alliances with industry participants to influence suppliers.
Reducing downstream emissions also requires collaboration, this time with customers, in order to test preferences and develop more sustainable products or services. In our experience, tackling Scope 3 emissions also requires extensive internal coordination within an organisation to ensure alignment across functions and prioritise and phase initiatives. Overall, we believe leaders with actionable plans focusing on collaboration across the value chain are best set to navigate complex Scope 3 reduction pathways.
Our third theme, natural capital, is relatively new for business, and refers to sustaining the stock of natural resources that yield benefits to humans, companies, and economies, from water, from land, to minerals, to reefs. With the new task force for nature-related financial disclosures launched at Climate Week recently, we are observing corporates across sectors increasingly developing strategies around natural capital.
For example, a global consumer products firm has woven the protection and regeneration of nature into their strategy, committing to a deforestation and conversion-free supply chain by the end of this year. Looking forward, we expect that corporate leaders will increasingly be required to assess their business' natural capital dependencies and impact, and subsequently designing thoughtful risk mitigation initiatives.
One of the increasing areas of focus for corporates in 2024 will be to increase their scrutiny of the quality and impact of their offsetting. Over the last 12 months, there have been increased allegations of greenwashing, with around 90% of Verra's rainforest offset credits found not to translate into genuine carbon reductions.
As a result, we recommend organisations be increasingly careful in their sustainability communication strategies to only reflect genuine environmental responsibility and transparency. Driven by stricter regulation and supply constraints, we expect carbon offset prices to rise significantly, both in the near and longer term. This will be reinforced by certain respected organisations such as SBTi calling for a shift to removal offsets as more legitimate than avoidance credits.
Corporate leaders will need to develop detailed purchasing roadmaps, clear accounting strategies, as well as conducting thorough diligence to navigate these offsetting challenges. Leaders should also further explore removal solutions and assess the funding requirements. Drawing these trends together, we see some important implications for corporate strategy development.
L.E.K. has developed a six-step plan for leaders to seek to keep pace with sustainability trends in 2024 and beyond.
Firstly, if you don't have a formal strategy that embraces sustainability in place already, it's time to establish one.
Next, assess the key strategic choices and identify targeted solutions to overcome the barriers to realising them.
Thirdly, build the capabilities within your organisation to handle the new requirements and change agenda that sustainability brings. Make sure you establish KPIs to enable you to measure progress against your goals, and with these KPIs established, the organisation is in a position to align remuneration accordingly to reward sustainability performance.
And finally, cutting across these steps, it's critical to drive collaboration, not only internally, but across all stakeholders. In this way, we can all play our part in creating a sustainable business world for all.
