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INPHO 2022 – What’s next in ESG?

ESG in the value chain : the Schneider Electric Case.

Among the leaders in the digital transformation of energy management and automation, Schneider Electric, has also been one of the industrial companies showing the way towards strong sustainability programs, confirming more than a decade of focus on strong ESG commitments. Jean-Pascal Tricoire, Schneider Electric’s charismatic CEO incarnates this sustainable ambition for the company and for its ecosystem.

During the INPHO Cath&Do “What’s next to invest in ESG” Nicolas Leterrier, Customers Innovation & ONE Labs global VP at Schneider Electric accepted to share with us the lessons learned, and the challenges arisen from this strong commitment.

How is ESG addressed in Schneider Electric Value Chain?

The decision to implement ESG criteria in the management of Schneider Electric’s value chain was made in the early 2000’s. We had setup social and environmental barometers which have been used initially   to drive the internal change towards a more sustainable production. We decided to publish those barometers 5 years ago so that our commitments can be visible and accessible also by external stakeholders.

This commitment with ESG criteria was a very important decision for us and for the industrial community. We can sometimes have the feeling that what we are doing is still not enough for the planet but when you look at the Fortune 500 companies, only 16% of those companies have committed themselves to such sustainability strategies. This is not that much. Furthermore, if you look at those 16% that have adopted such strategies, you can see that only 7% of them have been able to deliver what they had committed themselves to through their sustainability plans.

It is important to acknowledge that being able to define, structure and achieve your sustainable objectives and get the appropriate ESG reporting method is a long journey. The assessment frameworks are complex. It takes time to navigate across the various reporting documents and to track the appropriate data. You need time to engage the full ecosystem in the sustainability plan. 

Our first commitment was to be a carbon neutral company in 2025. Today, all our operations on the various scopes are currently carbon neutral. In 2030 we want to be “net zero” in CO2 for all our operations. This means a reduction of 25% of emissions compare to what we were doing in 2021. Then in 2040 our objective is to be carbon neutral across all the value chain and all our products. In 2050, we will reach “net zero emission” on all our value chain and products and on all the scopes. Our objective is at least to be aligned with the 1.5° scenario. And we believe that this is not enough! So if we can do more and quicker, for sure will do it. This is an important commitment that has been taken by our CEO years ago and this is what is expressed in our moto “we are your digital partner for sustainability and efficiency, to ensure that life is on, everywhere, for everyone, at any moment.

How did you address the challenge of data collection for the ESG reporting?

During the Covid19 pandemic, we decided to contact our top 1000 suppliers to explain them our climate pledge and our commitment for 2025 and to ask them if they were ready and willing to be with us in this journey in order to try to limit the heating of the planet.
For those top 1000 suppliers we were not necessarily among their most important clients and we were quite surprised that nearly 980 of them answered to us they were aligned with our commitment. This is very important because this impacts all the scope 3 of our carbon reporting. It was important to find out that our main suppliers were ready to contribute and that we would be learning together.
So in the wake of our commitment to be carbon neutral in 2025, our top1000 suppliers are going to reduce twofold their CO2 emissions. This has a lot of impact for us. We have set up a lot of measurement points to track everything we and our suppliers are currently consuming or the waste that we are all producing. Those measurements will ensure we are on track to achieve our 2025 commitment.

It is interesting to see to which extent, as a buyer, you can have an influence on your value chain and impulse or support some critical changes of habits, if not changes in business models.

Each time we start a new project and a new product we take care of assessing what will be the impact on the use of raw materials and in terms of CO2 emissions. We have a QR code on each of our product which points directly to the website where you can find the impact assessment of this product: the amount of copper, plastic, silver or steel and so on. We have also mapped our logistic flows in order to better manage our supply chain and minimise its impact. So, each time we are considering launching a new product, our internal rule is not only to consider the financial impact but to consider all the ESG parameters when taking our decisions.

Are those data publicly available for external people and how are they actionable?

Yes, they are. The full analysis is available from the Schneider website. That information aims at enabling our clients to identify the various flows they will need to recycle their product, to know exactly what is the value of extracting all the various pieces in their product and what they will need to build a new one or something new using all these recycled materials.

In terms of ESG goals, which are the criteria you find the easiest to achieve, which one is the hardest?

There are no real easy criteria to achieve but some are really critical and essential to start with. The first one is to change the mindset of all the employees so that the ESG strategy is really at the core of the whole company activities.
If you consider the various stakeholders who are directly impacted by the ESG strategy of the company, you have the employees, the investors the suppliers the customers and their partners in their respective local communities and institutions in the various countries where Schneider is operating.

If you set clear targets to your employees and explain your purpose, it is the best way to get people committed towards those objectives and have them moving in the right direction. Hence, the commitment towards a more sustainable company is not only a message from the CEO but becomes a commitment from all of us in the company. As an example, we have a decent percentage of our short-term incentive plan – known as the bonus – directly linked to the sustainability parameters. Those parameters are tracked on a quarterly basis.

Regarding the engagement of the suppliers, the question is also gaining traction, especially in Europe. This goes also with the increasing interest of the final customers. This is especially the case when the energy prices are increasing, when it is interesting to highlight that if we are able to avoid the emission of 800,000 tonnes of CO2 it means that we have been able to reduce our fossil energy consumption. And this is a very important signal that goes in the right direction and has a significant impact on the operational margins of the companies.

Regarding the engagement of the investors, this suppose that they stop looking on their Return on Investment on a strictly financial basis but that they take also into account the positive impact ESG can have on the long-term sustainability of our activities.

How do you ensure your suppliers who don’t have the ESG expertise internally can provide you with the right information?

What is really interesting in our case is that our suppliers are often also our customers. The semiconductor industrials for example are at the same time our clients and our suppliers. We are providing them with electrical, air cooling or management plant infrastructures. Hence, we are able to help them monitor their activities.

We also work as consultant and explore with our customers the full site management and how to measure and monitor their activities to be able to set clear and measurable objectives in the reduction of CO2 emissions for example. It might be stating the obvious but without proper measurements and assessment processes it’s very complex to monitor the progress and the impact of their efforts.

We also innovate with our suppliers and clients. One of our commitments is a 50%h increase of green materials in our products. We were the first company to get rid of the SF6 in our product. SF6 has much more greenhouse effect than CO2, it is then critical to find alternative to it. We found a solution and we committed to replace the former technologies with the new one which is not only more climate friendly, but which is also safer. This demonstrates, if necessary, that this quest to reduce the impact of the resources we are using is not a punishment but a real opportunity to engage into strong partnership with our customers and create value.

Scope 3 is considered as the most difficult CO2 footprint assessment: do you agree? How do you handle it?

 It’s true that scope 3 is difficult to measure. But entering into strong partnership and consulting with our customers and our suppliers is a real opportunity to have a clearer vision of your position into the value chain. So, it is right that scope 3 is complex to monitor but when you start working on it seriously, you learn by doing. After several evaluations and measurements, you refine your processes and your knowledge. It’s a pretty good way to set common and clear targets with your business partners. Our suppliers are really playing the game with us. It requires a high-level commitment of the C-level executives in all the companies. But beyond the commitment, it’s true that you need shared and proven methods and tools to measure your criteria.

When competing in a tender, how much does the ESG criteria weight? 

It really depends on the habit of the customers and their own strategy regarding the embedding of ESG criteria in their tender policies. You have five phases in a tender:

  • The design phase;
  • The building phase
  • The operation phase;
  • The maintenance phase – which is accounting for 30% of the cost by the way;
  • The recycling phase when it is time to reshuffle and dismantle.

Thanks to our software flow we have built a dataset that enables us to identify what we have to take care of and measure for each of the 5 phases. ESG criteria are now part of the tender analysis processes, but it depends of course on the countries, on the local level of demand regarding those criteria, on the field of activities and on the position of our client in the value chain. 

Let’s take the example of the building environment. Sometimes the building owner is not the final user of the building. If it is an investor or a land developer, they might not be so interested in reducing the environmental impact of the building and improve the user experience of living in that building if it means increased costs at the beginning of the project.

Tendering policies are relying on local trends, on the willingness to pay off the various people involved, on their commitment towards the environment and on the return on investment they are expecting.

The awareness regarding the positive impact of the ESG criteria is improving little by little but it is true that it’s not a Big Bang effect and they will not make you suddenly more profitable. We try to convince people that it might help them to be much more profitable than they think at first glance. As mentioned already, Schneider can proud itself to have a long story about measuring and avoiding CO2 emissions. The 800,000 tonnes avoided so far are already something significant and we are really committed to reduce again our emissions and be net zero by 2025. This track record is important to embed our customers in order to build a common story. 

We try to convince our business partners that this will bring them additional value in term of ESG criteria, it will change their image. We know that it is more and more important that people can identify clearly that you are serious with your environment commitments. Even to be competitive on the employment market. The social side of these ESG criteria is also gaining in importance. The trend we can see with jobs apps is that people are looking more and more for job opportunities in companies with a sense of purpose. Being able to demonstrate that you have a consistent ESG policy and that you are reducing your impact on the planet is a way to attract the best talents.

What we understand is that we are not there yet but that ESG criteria have demonstrated their potential to drive significant changes in the way we are doing business.

The 8 pillars of the EU Green Deal Strategy are also a very positive signal. They are contributing to bring more awareness on the importance of those ESG criteria in the tendering process and this should help to change the mindset of many stakeholders.

How much maintenance is required to guarantee an updated information ?

What we are aiming at currently is to get real time information which are really key to support the monitoring of a company’s performance. Regarding CO2 emissions, what we can see among the Fortune 500 is that from the yearly report that were required till now, they have slightly evolved towards quarterly update. We are now moving towards monthly monitoring of our performances.

However, for the companies that are just starting this exercise, a yearly report is the first step. Quarterly reports can be linked to the financial reports that are usually implemented in the governance of many companies – and mandatory for those of them who are listed.

Anyway, this is a good way to pilot the plants and the production units. Monitoring this information on a short term and aiming at real time information is also a way to educate people and quickly identify the possible waste as well as possible savings.

Does it mean that to have a proper reporting a company of a similar size need to have everything automated like in Schneider Headquarters in Grenoble?

It’s true that it is easier when most of your premises is automated. This does not mean that you won’t need to fine tune the data you are collecting but this helps. Indeed, thanks to our new solution Aveva, we are heading towards digital twin sites to follow the metrics of those sites. For example, for the last two years, we’ve been building the digital twin for the new building of our headquarters which is 104% efficient in energy – which means that it produces more energy than it consumes. So, during the construction phase of the real building, we had sensors in place for the wind exposure, the temperature, the humidity, energy consumption and a few other criteria. For two years we’ve gathered inputs from those sensors to build our digital twin. When the building was finally delivered and that we started to use it, we were able to check the differences between the simulation and the building itself. The results were consistent at 92% which is a pretty good. As those digital twins are getting more and more accurate, they will facilitate data collection to assess buildings life cycle.

Schneider has made a series of acquisition in the software industry in order to structure their processes for the 5 tender phases – design, build, operate, maintain and recycle. In this dynamic, Aveva solutions are keys in order to have all the projects planning, the have a proper simulation of the sites and the operations planned, to digitise the process. This enables us to optimise the processes and save energy and materials consumption.

Trust and transparency are important in ESG. Do you believe in Blockchain solutions for tracking information?

Trust is key. We have some audit controls, some quality audits with our suppliers to check whether their claim in new and more sustainable processes and manufacturing flows are legitimate.

In this process, Blockchain should be interesting in building trust in case of transaction. Nevertheless, the cost of this technology is still a barrier. We’ve tried to measure this cost because we’re considering using blockchain for small solar energy transaction between prosumers. When exploring the question of the energy costs of a blockchain transaction, we ended up with the fact that the blockchain transaction costing 2.6 kWh, it’s not worth it for small transactions.

ESG goals can lead to cost savings especially when energy and water consumption are concerned. What are the available solution? Is it worth the investment?

Our main objective is to become net zero emission by 2050. To achieve such an objective, you usually have 3 levers:

  • energy supply decarbonisation,
  • processes’ electrification provided that electricity is really a green energy and not produced through fossil energy.
  • demand optimisation (efficiency and circularity).

On this route to net zero by 2050, we need to concentrate about 45% of our efforts on our energy supply decarbonisation, about 30% is on the electrification of our processing and 25% is expected on demand optimization.

Regarding water management, thanks to real time monitoring solution you can have a very quick notification of water leakages. This is critical considering that in “old” water distribution system, the waste of water can be up to 25% of the total consumption.

This close monitoring of the flows is the solution we have integrated under the banner of Eco-Structure which is addressing six various application domains of expertise: power, IT, building, plants, grids and machines. Industrials which have a strong willingness to move towards a more sustainable production are usually people whose processes are energy intensive but also energy critical. This means that if you enable them to cut their energy consumption, you bring them more safety and availability in their processes, hence creating high value. Furthermore, most of the time this is improving the operational margin also. By bringing more efficiencies or more attractiveness on the investment market you create a virtuous circle which can really bring you to the next level. Studies shows that investing in process monitoring of the production flows is paying off in 1 or 2 years.

This means that when our client invests in their digitalisation processes, they are able to measure the impact of their investment very quickly and usually this is an incentive to go further in the optimisation of their processes. The challenge afterward is that the first 25 to 30% of savings are quite easy to get with the technologies we have today and then it becomes more challenging.

Schneider is a provider of solutions in many markets: building, IT, Grid, Plants Power. Which business is in the forefront? Which one is behind?

The building sector is where you find the more untapped energy efficiency opportunities. There has not been much improvement in the efficiency of the construction during the last century. This sector is clearly lagging behind.

Plants builders and owners are at the forefront of the quest for more efficiency as this is where the margins are. They have also started to measure their CO2 footprint as most of the time they are the property of big companies for which this reporting is mandatory.

The IT sector is also at the forefront of this quest for energy saving. The rising awareness on the challenge of big data centres’ energy consumption hindering the positive aspects of the digitisation is an important driver for change also in this industry which has been used to measure its impact from a long time now.

The situation in the grids supply is really contrasted depending on the countries and on the pre-existing infrastructures, whether there were pre-existing centralised distribution networks or not. The amount of investment required there can sometime be a constraint. However, decentralized and microgrid environments are developing more and more when the regulation allows it.

For the plants and the data centres, the digital twins are very helpful to help optimise the processes, identify the changes that will have the more impact.  

What is missing to get more ESG driven innovation? IoT, connectivity, AI, we already have a lot of building blocks available to collect data, visualise, compute and even emit recommendations. Can we do more than this?

There is no really missing technology actually but we need to do more with what we have. IoT are producing terabytes of data which are never used by anyone. 95% of the data produced are useless. Before trying to get more and more data, we should reflect on the balance between the amount of intelligence we put in the cloud and the amount of intelligence we put at the edge of the system. This is a real challenge for us all. We would like to think that cloud memory is infinite, that computing power is infinite, but we all know that this is not the case and that everything has a cost and an impact.

To drive efficiency, you need to select the data and their context that are the most useful to achieve your objectives. We need to be selective and demanding with simple building blocks. This is a 3 layers construction. The first level is what you have inside the IoT and the “reflex” actions hence enabled. The second level is the edge, the “engine” of the premises. And the third one is the reasoning level, the cloud. The challenge is to always use the most appropriate level and to use super-low power devices everywhere.

Energy efficiency equal emission savings. Are we doing well? How can we do better?

There again, it varies a lot from a country to another. At the European level, we’ve been able to reduce our footprint due to CO2 emissions by 35% for the last 10 years. We have the responsibility to work with the developing countries in order to prevent them from doing the same mistakes as we’ve done during the last centuries using fossil fuels thoughtlessly. We need also to work with the countries that are still working on fossil energies (because these are the only resources that they have) to try to reduce the impact of the CO2 emissions.

New technologies could be helpful but are opening other problems: nuclear, green electricity, storage technologies like batteries, hydrogen.

Yes, we can and we must do better in saving energy! When the technology is not the solution, the change can also come from our individual actions and the choice we can make in favour of energy sobriety (Transport, food, heating & cooling)

Do you expect new business model based on incentives?

The experience of the CO2 compensation market has not been really successful till now. However, new business models can be interesting to explore. To develop incentive business models and to incentivise behavioural changes, you need to have proper measurements solutions to be able to objectives the impact of the implemented changes.

INPHO

INPHO Venture Summit is a unique biennial where top-notch investors challenge deeptech investment opportunities to address today but especially tomorrow’s challenges in current tumultuous macro environment. INPHO is deeply appreciated by top decision makers looking to meet their peers, share knowledge and analysis, identify investment opportunities through intensive exchange of views in condensed and efficient sessions.

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SPEAKER

Nicolas Leterrier

Customers Innovation & ONE Labs global VP at Schneider Electric

Nicolas Leterrier Schneider