This article is a collaborative effort of Yves Hoffmann, Nicolas Magnette, Xavier Morin, Constance Piat, and Bram Smeets, representing views from McKinsey's Sustainability Practice. Contact online >>
This article is a collaborative effort of Yves Hoffmann, Nicolas Magnette, Xavier Morin, Constance Piat, and Bram Smeets, representing views from McKinsey''s Sustainability Practice.
The size and complexity of the challenge require actions addressing individual value chains in four of Luxembourg''s emission-heaviest sectors: financial services, retail, manufacturing, and construction. The following paragraphs outline some of the steps businesses in these sectors might consider to meet their emission-reduction goals and the opportunities they could unlock.
The three categories of emissions—Scopes 1, 2, and 3—are defined as follows, based on the GHG Protocol Corporate Standard of the World Business Council for Sustainable Development:
The EU''s ambitious targets, potential regulations, and consumer and investor preferences for sustainable products and services are leading Luxembourgish businesses to redouble their efforts to reduce emissions. Many companies are looking beyond direct and indirect emissions (Scope 1 and 2) to address those in their supply chains (Scope 3) (see sidebar, "Scoping emissions").
However, Scope 3 emissions typically constitute the lion''s share across industries and geographies, often exceeding 80 percent of the total.2Peter Spiller, "Making supply-chain decarbonization happen," McKinsey, June 14, 2021.
Since Luxembourg is tightly integrated into international supply chains and the European economy, its carbon footprint extends well beyond its own borders. Luxembourgish companies with ambitious decarbonization agendas will need to take broad action on all emission fronts.
These sectors vary in the amount of emissions that they generate in each scope. For example, the construction sector produces a large amount of Scope 3 emissions due, in part, to emissions associated with its raw materials. In contrast, the financial-services sector generates a smaller amount of Scope 3 emissions, mainly because calculations typically exclude those related to its investment portfolios.
Specific value chains within these sectors also vary in the emissions they generate per scope. For example, in the manufacturing sector, machinery firms generate Scope 3 emissions primarily via their downstream products, whereas steel companies'' smaller share of Scope 3 emissions is split between upstream and downstream sources. These variations in emissions'' scope and amount mean that only value-chain specific actions, can reduce emissions in Luxembourg''s major sectors (Exhibit 2).
Luxembourg''s most carbon-intensive sectors can take steps to begin curtailing emissions of any scope, beginning with setting science-based and accountable standards and targets. Depending on where they are in their decarbonization journey, companies may consider some or all of a variety of measures to raise their efforts from good to great.
Financial-services companies based in Luxembourg can pursue no-regret options such as adopting renewable energy sources, improving the energy efficiency of buildings, optimizing supplier choice for CO2 emissions, and offering incentives for employees to use sustainable commuting options. Additionally, they might:
Retail companies can start by identifying their subsector-specific abatement areas, as apparel retailers and grocers face very different challenges, such as managing shopping mall operations versus ensuring cold chain transportation of perishables.13Anamika Bhargava, Steve Hoffman, and Nikola Jakic, "Climate sustainability in retail: Who will pay?," McKinsey, May 4, 2022. They also might:
Manufacturing firms might better calibrate their operations, supply chains, and business models to promote a lower-carbon future.15"Reimagining industrial operations," McKinsey Quarterly, May 19, 2020. Specifically, they might:
Taking these steps will be costly. Reaching net-zero emissions in Europe by 2050 will require investing an estimated €28 trillion in clean technologies and techniques over the next 30 years. While new injections of cash will cover a substantial part of overall financing needs, reallocating planned investments in emission-heavy technologies (estimated at close to €800 million a year) is projected to provide most of the required funds.18"How the European Union could achieve net-zero emissions at net-zero cost," McKinsey, December 3, 2020.
Whether Luxembourgish companies can attract the required financing to advance toward their net-zero goals will depend greatly on the types of projects they undertake and the investment of effort and budget forthcoming from private and public institutions.
If Luxembourg''s major sectors assess, report, and mitigate their carbon footprint with attention to Scope 3 emissions, they can make significant progress toward meeting or even surpassing national goals for reducing emissions. At the same time, remaining competitive will require companies to capitalize on the opportunities offered by current and future sustainability efforts.
Success will require segmenting initiatives to reduce emissions by business model (portfolio change or capital investment, for example) and by their financial implications.
With concerted effort and a business community ready to make the most of sustainability opportunities, Luxembourg can go far toward achieving its ambitions for decarbonization.
Yves Hoffmann and Constance Piat are consultants in McKinsey’s Luxembourg office, where Nicolas Magnette is a partner, and Xavier Morin is a solution leader; Bram Smeets is a partner in the Amsterdam office.
The authors wish to thank Harry Bowcott, Morgane Janssens, Ekaterina Markina, Laura Mathy, Tomas Nauclér, Peter Spiller, and Tim Vroman for their contributions to this article.
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