The decarbonization divide is widening – while 90% of businesses are SMBs, less than 1% have set science-based targets. As Sridhar Maheshwar, EMBA participant at IE Business School reveals, this isn’t just an environmental crisis but a catastrophic competitive blindspot. The companies bridging this gap today – through AI-driven efficiency and circular innovation – will own tomorrow’s markets.

Decarbonization on a Budget: Maximizing benefits, minimizing costs by Sridhar Maheshwar.

What if businesses could increase profitability while reducing carbon emissions? Decarbonization is not just an environmental necessity, it can be a strategic financial advantage (McKinsey & Company, 2024). But for resource-constrained companies, the challenge lies in finding a way to implement sustainable solutions without straining their budgets. So, how can businesses strike the right balance between cost-efficiency and decarbonization efforts?

Despite growing awareness and tightening regulations, the transition to low-carbon operations remains slow. We all recognize the far-reaching impact of carbon emissions on our planet. As Pope Francis rightly stated, “The climate is a common good, belonging to all and meant for all.” (Laudato Si, 2015, p.23). While the importance of decarbonization is widely accepted, participation lags, and current progress is at a slow rate.

Considering that 73.2% of global greenhouse gas emissions (Our World Data, 2023) come from the energy sector, with over one million energy-based companies worldwide, the commitment to change is still minimal.

As of November 2024, (SBTi, 2024) only 6,600 companies have set emissions reduction targets through the Science Based Targets initiative (SBTi). It indicates less than 1% adoption rate even before factoring in other industries, highlighting the urgent need for broader participation and investment in decarbonization efforts to achieve overarching net-zero emission by 2050 set by EU and US, and to limit global warming below  2 degree C signed by 196 countries as Paris Agreement (2015) (UNFCCC, 2015).

According to the World Bank, Small and Medium-sized Businesses (SMBs) account for over 90% of global companies (World Bank, 2022), meaning most businesses yet to invest in decarbonization are SMBs or resource-constrained companies. Our research reveals that long-term benefits like cost savings, cleaner air, and reputation gains are not strong enough motivators for SMBs. The key barriers include:

• Competing priorities – Short-term financial goals take priority over decarbonization investments due to the uncertain cost-benefit structure of such initiatives.
• Lack of expertise – Many SMBs lack the technical expertise for decarbonization.

Establish a Process: Assess, identify, estimate and analyse carbon-emitting business areas

Moreover, this should be an ongoing, iterative process, with periodic reassessments to account for market dynamics, economic conditions, geopolitical factors, technological advancements, competitive landscape shifts, and changes in business models or product/service offerings that may directly or indirectly impact decarbonization opportunities.

Additionally, companies can enhance this process by adopting a mindset of continuous learning, collaboration, and innovation, unlocking their full potential to develop creative, cost-effective, and impactful decarbonization solutions.

As a first step, companies can assess key business areas, identify major carbon-emission hotspots, and estimate the costs and benefits associated with decarbonization. By analyzing these areas, businesses can categorize ‘opportunities’ based on their cost-benefit potential.

Once decarbonization opportunities have been identified and their costs and benefits assessed, the next step is to strategically categorize them into four distinct groups based on a cost-benefit analysis.

• Winners – These are quick wins that are financially feasible and easy to implement, making it easier to gain buy-in from key stakeholders. Companies should prioritize these opportunities due to their strong cost-benefit potential.
• Fixers – These opportunities may not be immediately justifiable based on the initial cost-benefit analysis. However, companies can explore various strategies (which we will discuss in the next section) to enhance benefits and improve feasibility, making them more attractive investments.
• Challengers – These initiatives present financial and operational challenges at both company and industry levels. With high upfront costs and a break-even point in the medium to long term, they are strategic yet complex decisions.
• Long-Riders – These opportunities require significant upfront investment, with a break-even point extending beyond five years. Companies should consider investments in this category based on resource availability or adopt a wait-and-monitor approach, assessing potential shifts in market conditions, regulations, or technological advancements that could enhance the expected benefits and justify the costs.

Balancing Act – Strategies to Maximize Benefits & Minimize Costs

Companies can achieve an optimal balance between benefits and costs by implementing the following strategies:

1. Process Optimization Through Digital Technology (AI, Data Analytics, IoT, ERP) – Simplifying, monitoring, and optimizing processes can significantly enhance operational efficiency, reduce energy consumption, and lower costs. In fact, this approach is one of the most cost-effective ways to reduce carbon emissions while delivering tangible benefits. For example, a study conducted by the Institute of Logistics at the University of Miskolc, Hungary found that implementing real-time maintenance process optimization using IoT and ERP technology led to a 21% reduction in both energy consumption and greenhouse gas emissions (Nemeslaki & Horvath, 2023).
2. Value Chain Collaboration – Since one company’s Scope 1 emissions may be another’s Scope 2 or Scope 3 emissions (Bain & Company, 2023), companies can align decarbonization goals, collaborate, and share costs and benefits with value chain partners. For instance, Patagonia, US retailers for outdoor clothing and food, partners with suppliers to reduce emissions across its supply chain, transitioning to renewable materials and energy-efficient factories (Patagonia, Sustainability Report, 2023). This kind of value chain collaboration helps businesses cut costs while meeting sustainability goals.
3. Embracing the Circular Economy – Recycling and reusing waste can significantly reduce costs and lower emissions, making sustainability a financially viable strategy in the short term. For instance, Sprouts Farmers Market, one of the largest specialty food retailers in the U.S., plans to replace single-use plastic bags with reusable bags, a move that will eliminate 200 million plastic bags from circulation annually (Sprouts, 2023). At $0.05 per bag, the shift could save $10 million annually, showing how sustainability can deliver both environmental and economic gains.
4. Building Brand Value Through Sustainability – Companies can tap into climate-conscious customer segments and expand into new markets by highlighting their commitment to sustainability through strategic marketing (BCG, 2021).
5. Industry Consortiums & Workforce Training – Participating in decarbonization-focused industry consortiums allows companies to gain technical expertise, train employees, and reduce costs through shared knowledge and best practices in the short-run and long-run.

How can Government support SMBs or resource-constrained companies?

Governments primarily implement tax credits, subsidies, grants, carbon pricing, carbon trading markets, and regulations to limit carbon emissions and achieve long-term net-zero goals. However, to enhance SMBs and resource-constrained companies’ participation on a broader scale, governments can make the following key adjustments:

Enhancing Monitoring & Policy Adaptation: Invest in registration and tracking technologies to monitor company participation in near real-time. This enables data-driven policy adjustments, ensuring a balanced benefit-cost structure for decarbonization investments.

Reducing Bureaucracy & Simplifying Access: Simplify applications and reduce bureaucracy to make government incentives more accessible for resource-constrained companies. For instance, U.S Department of Energy – Industrial Efficiency & Decarbonization Office(IEDO) funding opportunity supports industrial decarbonization, its complex multi-step process, technical focus, and competitive nature create barriers for SMBs, particularly those lacking specialized expertise, grant-writing experience, or access to advanced R&D capabilities(U.S. DOE IEDO, 2024).

In conclusion, decarbonization is a pressing global priority, yet SMBs face significant barriers, including financial constraints and a lack of expertise. To accelerate participation, businesses must adopt a structured process to assess, categorize, and implement cost-effective decarbonization strategies.

By leveraging digital technology, collaborating with value chain partners, embracing circular economy practices, and investing in sustainability-driven branding, companies can balance benefits and costs effectively. Governments need to make targeted adjustments to increase participation. By enhancing real-time monitoring for data-driven policy adjustments and simplifying access to incentives, governments can make sustainability more achievable for resource-constrained businesses.

Useful links:

• Link up with Sridhar Maheshwar on LinkedIn
• Read a related article: Achieving a net-carbon world on credit
• Discover IE Business School
• Apply for an IE MBA program.

Learn more about the Council on Business & Society

The Council on Business & Society (CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business, society, and planet including the dimensions of sustainability, diversity, social impact, social enterprise, employee wellbeing, ethical finance, ethical leadership and the place responsible business has to play in contributing to the common good.  

• Follow the CoBS on LinkedIn
• Download magazines and learning content from the CoBS website downloads page.

Member schools of the Council on Business & Society.

• ESSEC Business School, France, Singapore, Morocco
• FGV-EAESP, Brazil
• School of Management Fudan University, China
• IE Business School, Spain
• Indian Institute of Management Bangalore, India
• Keio Business School, Japan
• Monash Business School, Australia, Malaysia, Indonesia
• Olin Business School, USA
• Smith School of Business, Queen’s University, Canada
• Stellenbosch Business School, South Africa
• Trinity Business School, Trinity College Dublin, Ireland
• Warwick Business School, United Kingdom.