Report: European business is willing, but not equipped, for low carbon transition

Research from Climate-KIC reveals that most European business leaders have prepared strategies to respond to climate change, but with a lack of focus on innovation, those strategies are likely to be ineffective for a 2°C trajectory.

The study from Climate-KIC, the EU’s principal knowledge and innovation community focused on climate change is entitled, Sparking an Innovation Step Change.  It analyses the readiness of C-level European business leaders to deploy radical innovation to turn climate change from a threat into an opportunity.

Most European business leaders, (63%) acknowledge the regulatory and physical risks posed by climate change.  63% also believe responding to climate change would drive growth as demand for environmentally sound products and services increases.  To address the identified risk and opportunity, most businesses (59%) said they have a strategy to respond to climate change.

However, despite the positive ambitions of European business, only 3 in 10 (29%) see a large amount of scope to respond to climate change using innovative technologies and ways of working.  Even less (14%) believe there is a large amount of scope to evolve their business model to reduce resource consumption and carbon emissions.

An even more concerning insight was that irrespective of climate change, over a third (35%) of respondents concluded that their market is not subject to external changes, so they do not need to incorporate any form of innovation. 

Bertrand van Ee,
Climate-KIC CEO

Speaking from the Paris launch of the study, Bertrand van Ee, Chief Executive, Climate-KIC, said: “Innovation has played a critical role in most socioeconomic revolutions.  Climate change is no exception.  The science shows we need to reconfigure the economy in-line with the 2°C trajectory – and innovation must sit at the centre of the transition.

“Many businesses seem to have forgotten how to innovate, or are delaying innovation until they get a policy silver bullet.  That strategy doesn’t reflect business’ understanding of the risks of climate change; or the realistic timelines to scale up radical innovations to turn the threat into an opportunity,” he said.

Research & Development (R&D) departments are the critical business function for identifying and responding to the needs of the changing marketplace, so they were a key focus of the Climate-KIC study.  Despite climate change appearing clearly on boardroom risk registers, R&D departments were found to lack the skills and resources to meet the challenges of a carbon constrained world.

• Less than 4 in 10 (38%) of R&D departments have sufficient expertise to respond to climate change
• Most firms (29%) invest between 10-20% of their budget in R&D, but nearly two-thirds (63%) only dedicate 5% or less of their R&D budget to innovation to respond to climate change
• 1 in 10 (11%) dedicate none of their budget to responding to climate change

Whilst R&D departments were the ‘least worst’ at understanding how to respond to climate change, the research also highlighted a severe lack of skills in other key business functions. 

• Only 10% of accounting and finance teams, which are critical to forming corporate strategy, have climate change expertise
• 6% of Human Resources departments; i.e. those responsible for hiring personnel with skills to respond to climate change, understand it

The research also explored the barriers that have led to the addiction to incrementalism, as well as potential solutions to break that cycle.  There was a clear signal to the COP21 negotiators that business needs the certainty to internalise the challenge of climate change in order to apply innovation to responding: only 3 in 10 (30%) said climate change regulation encouraged them to develop new innovation to respond to climate change.

Given the global scale of the climate challenge, the study explored the role of industry collaboration for enabling businesses to tackle common carbon-related issues.

• Two-thirds (65%) believe EU-level competition law has limited industry’s ability to collaborate and respond to climate change
• A third (33%) believe sharing costs and resources to improve efficiency and reduce emissions would enable them to respond effectively
• 32% believe sharing the results of tests and best practice related to improving efficiency and reducing emissions could enable them to respond effectively

Paul Simpson, CEO, CDP, which contributed to the Climate-KIC report, said: “Most companies, especially in the commodities space, cannot be seen to discuss or share ideas amongst themselves on carbon pricing as they could be called out for price fixing.  Corporate law has been designed to prevent monopolies, but it can hold back sustainability.  In my view, business needs to first collaborate to create a sustainable system – then compete.”  

Climate-KIC’s experience as Europe’s largest collaboration community on climate change is that greater sharing of information can actually raise more competition, not limit it.  The willingness of business to collaborate is a clear opportunity to evolve policy to encourage greater diffusion of radical innovation to address climate change.

Bertrand van Ee, Chief Executive, Climate-KIC, added: “Business has a choice, either to shape the needs and impacts of a zero carbon future, or to be shaped by it.  Education is needed to equip business leaders with the knowledge and skills to shift them to a larger, “system-level” approach.  Business must actively place themselves on an innovation journey; creating channels for radical innovation to flow into their operations, making them more resilient and equipped to seize first mover advantage.”

Scientists estimate that by deploying technologies business can potentially reduce the emissions intensity of industry by approximately 25%, with innovation reducing this by up to another 20 percent, before technological limits are approached in some energy-intensive sectors.

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