How to maintain margins while investing in emission reducing technology?

Environmental developments such as the German energy transition from fossil fuel to renewable energies have an impact all over the world. At the Paris Climate Change Conference in December, countries reached an historic agreement on the emission of greenhouse gases for the next fourteen years. This requires immediate action in some form from every country that ratified the agreement. Actions taken now are to take effect from 2020. In order to meet all requirements, companies are forced to implement costly solutions. Without operational measures like Variance Based Thinking this puts tremendous pressure on operational margins.

Key points of the agreement are to keep global warming well below 2°C and to maintain any rise in temperature to 1.5 °C maximum. Developed countries must continue to take the lead in the reduction of greenhouse gases. They also must provide financial resources in order to help and support developing countries. Other countries are invited to provide support on a voluntary basis. There is a clear requirement for greenhouse gas emissions to peak as soon as possible. From 2050 and onwards, rapid reductions are to be achieved. A review will take place every five years, the first year being in 2023, which will inform countries of their progress in terms of their pledges.

Capital expenditure
For many industrial companies the resulting wave of capital expenditure and costs will prove to be a huge challenge. Bottom line? It will impact important KPIs as EBIT hugely. The big question for these industries is how they can maintain their margins whilst they are obliged to invest heavily in emission reducing technology.

Emission measurement
From experience we know that accuracy and precision of emission measurements is often instable; measurements contain huge variance. So, how sure are you that the emission measurements that you are reporting to the government authorities are correct? Can you actually provide evidence of low emission measurement variance? Operational Excellence and Variance Based Thinking, paired with effective strategy execution will probable have a much higher impact on EBIT than basic panic decisions such as cutting budgets and laying people off.

Variance Based Thinking
I believe that times of economic and environmental difficulties should be seen as an opportunity to transform organizational processes. Anti-cyclical investment in performance improvement makes your organization fit and flexible. Variance Based Thinking can truly help your organization in counteracting these environmental challenges. It ensures that you meet requirements, whilst improving your own profit margins.

Lo Huls is Business Process Consultant of R&G Global Consultants in Germany.