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Climate Goals Fuel Innovation and Profit

Trane Technologies’ CFO, Chris Kuehn, explains how replacing the company’s product portfolio with more energy-efficient and lower-emissions products is the cornerstone to achieving its sustainability commitments and delivering on its growth ambitions.

When Trane Technologies launched in early 2020, after separating its industrial segment, then-chair and CEO, Michael Lamach, dubbed the company a “pure-play climate innovation company.” The company has demonstrated strong commitment to its climate mission with a pledge to reduce one gigaton of its customers' greenhouse gas (GHG) emissions by 2030―powered by an innovation-centric strategy and investments to “accelerate the energy-efficiency evolution of our products,” says CFO Chris Kuehn. In this conversation with Scott Corwin, Deloitte LLP managing director and chief strategist of its ESG Strategic Growth Offering, Kuehn describes how Trane Technologies’ sustainability commitments have propelled the company to innovate electrified HVAC systems that reduce fossil fuel use and carbon emissions, and a refrigerated trailer system with zero direct carbon, both of which are helping to decarbonize buildings and food transport while driving growth and profitability. They also discuss what processes, leadership commitments, and governance are needed to make sustainability core to Trane Technologies’ mission and the business.

Corwin: How did you determine the climate- and other commitments in your 2030 sustainability goals and the strategy to achieve them?

Kuehn: We have two franchise brands: Trane®, which provides residential and commercial heating, cooling and ventilation systems and services, and Thermo King®, which makes refrigeration products for transporting critical goods, like food and medicine. Globally, heating and cooling buildings accounts for 15% of GHG emissions, and another 10% of carbon emissions come from food waste and loss. That means that, through our industry, we can affect a quarter of the world’s annual carbon emissions. After reaching our 2020 climate goals two years early, we developed our new 10-year commitment in 2019 with a focus on innovating our product portfolio to help bend the curve on global warming by 2030. Specifically, we’re aiming to eliminate one gigaton―a billion metric tons―of carbon emissions by 2030.

The main challenge is that we are still figuring out many of the details. We believe in setting stretch goals for ESG, aiming high to achieve the most impact, rather than setting goals that are easy to reach. While we have much of the strategy mapped out, our models contain a lot of dependencies to hit each one of our commitments, including the Gigaton Challenge, reducing environmental impact of our own footprint, as well as our diversity goals. What we’ve done is to set glidepaths and then break down the big targets into their components, with milestones: what does it mean by 2021 versus 2022 versus 2023, and what does it mean by month and by quarter? And we’re taking a science-based approach to measuring our progress. 

We don’t consider [sustainability] a tradeoff, because the returns generally look very strong. The megatrends in our industry suggest market growth well above GDP, so rather than worrying about tradeoffs, our mindset is, how can we go faster?

Chris Kuehn

Executive Vice President and Chief Financial Officer, Trane Technologies

Chris Kuehn

 

What other steps are you taking to tackle those challenges and deliver on your sustainability goals?

We assign ownership for the goals across the leadership team. As CFO, I need to make sure that we’re always putting the investment dollars behind the right initiatives. For instance, we’ve had our EcoWise® chiller portfolio in our commercial HVAC space for seven years, featuring greener refrigerant and lower energy intensity. The challenge is how to keep innovating that product portfolio to make it even more efficient and environmentally sustainable.

We have an investment review board to help guide the evaluation process. It looks at projects from across the enterprise and helps the leadership team evaluate their returns and determine which projects we should be funding. Our businesses are at a nexus of global megatrends that have above-market growth potential, such as climate change, urbanization, resource scarcity, demographic shifts, and digital connectivity. That means there’s no end of potentially good ideas to invest in. The investment ROI calculation has remained the same―revenue growth, margin expansion and free cash flow―but the lens has expanded. When we evaluate new investment opportunities, we also use ESG measures such as the diversity of the team executing this project. That wouldn’t have been part of the conversation in the past.

The Gigaton Challenge is about the energy-efficiency evolution of our products and systems, electrification, transitioning to lower global warming potential refrigerants, and reducing food loss in the global cold chain. When we evaluate developing a new product, we use metrics, such as the efficiency level it delivers versus the old product. Then, we assess how much we can change out in the installed base with the new product by 2030. Another critical component is measuring our progress year-over-year (YOY), in terms of the energy efficiency and emissions of products that we’re selling today versus the products we’re replacing, and by how much we are reducing our energy intensity and emissions impact.

One of our biggest advantages is that we have 100% alignment across the leadership team on the goals we set and how to get there. Our carbon emissions reduction strategy is managed at the enterprise level. Other senior leaders and I are directly involved in establishing YOY reduction goals and the longer-term strategy for how and when we will reach carbon neutrality. Our emissions reduction goals are then applied to each strategic business unit and location and monitored monthly through our electronic GHG dashboard.

How do you make those energy efficiency tradeoffs in your product portfolio?

We don’t consider it a tradeoff, because the returns generally look very strong. The megatrends in our industry suggest market growth well above GDP, so rather than worrying about tradeoffs, our mindset is, how can we go faster? How can we make sure that we go after the bigger improvements the market is seeking? That approach is reflected in our decision to invest more than $100 million over the next three years to deliver a fully electric product in every segment of the cold chain by 2023 in EMEA and 2025 in the Americas. We recently introduced a hybrid electric refrigeration unit for long-haul trucking in Europe that is 30% more fuel-efficient than the next most-efficient product on the market―which is also a Thermo King product, so we are effectively replacing existing products with more efficient and sustainable ones.

Central to our strategy is the understanding that manufacturers like us can replace their product portfolio with higher efficiency, lower-emissions products and still earn great returns. In our case we’re providing a better energy solution and a lower total cost of ownership for customers. It’s one of the reasons we’re seeing outsize growth in our European portfolio. Our new product line enables trucks to deliver food into European city centers that require clean energy transportation. We’re scaling that investment by bringing that electrified portfolio to the United States and Asia. Similarly, in our HVAC portfolio, we’re seeing growing demand in Europe for our electrified heating and cooling systems that can provide up to 350% greater energy efficiency than boiler systems―technology that can be adopted in other markets to significantly reduce customers’ carbon footprint.

How has your ESG commitment and the climate-centric mission transformed the way the organization operates, including your role?

I think one of the biggest changes for our organization is that, whether you’re in finance or in a factory, everyone in the company understands how our climate and other ESG goals are part of our purpose, which is all about driving change to achieve a more sustainable world. For instance, we also set several commitments for diversity and inclusion. We’re the first in our industry to join Paradigm for Parity, pledging that by 2030 half of our leadership roles will be held by women. To help ensure that we stay on track to achieving all of our ESG commitments, we’ve tied a portion of our executive and leader annual incentive plan to the 2030 commitments. Starting in 2021, every employee had to have an ESG goal as one of their four annual performance goals.

For me one of the biggest changes to come out of executing on the ESG commitments is that as CFO, I always want to know what steps 2, 3, 4, and 5 are before taking the first step. But that mindset doesn’t always work for ESG. Taking meaningful action on climate change is about setting really big goals even though you don’t know how exactly to get there. You have to be willing to make the commitment and get started, allowing yourself to get smarter as you work through the process. That’s been a big learning and a big change for how I view my role. And it’s the same, I think, for the entire leadership group, starting with our chair and CEO, Dave Regnery, and including our entire board. They have taken the lead on understanding the company’s key sustainability measures and making sure management is accountable for them.

We also get input on our sustainability strategy from the compensation committee and from the audit and finance committees. For example, when we renewed our $1 billion credit facility last year, we tied ESG metrics to it. So, the finance committee had to be aware of what those metrics are, how they’re being reported, and what how the internal control system works to ensure we’re reporting that information accurately.

All these organizational changes tying into our Gigaton Challenge and other ESG commitments are informed by the understanding that, from a product and customer outcome perspective, the environmental side of our mission couldn’t be of higher importance to our strategic competitive advantage. It’s the number one concern for our customers―and it’s not just a cost equation for them. They want to know what we are doing to make our planet healthier.

Hear more from Chris Kuehn in Deloitte’s C-suite insights report: How purpose delivers value in every function and for the enterprise.

 

This article originally appeared in Deloitte Insights in WSJ Pro Sustainable Business from The Wall Street Journal. The Wall Street Journal News Department was not involved in the creation of this content. It has been adapted for use here.

Thought Leaders

Dave Regnery

Chair and CEO, Trane Technologies

Rasha Hasaneen

Vice President, Innovation and Product Management Excellence, and Executive Director, Center for Healthy and Efficient Spaces, Trane Technologies

Scott Tew

Vice President, Sustainability and Managing Director, Center for Energy Efficiency and Sustainability, Trane Technologies

Keith Sultana

Senior Vice President, Supply Chain and Operational Services, Trane Technologies

Mairéad Magner

Senior Vice President and Chief Human Resources Officer, Trane Technologies

Deidra Parrish Williams

Global Corporate Citizenship Leader, Trane Technologies

Paul Camuti

Executive Vice President and Chief Technology and Strategy Officer, Trane Technologies

Steve Hagood

Senior Vice President and Chief Information Officer, Trane Technologies

Donny Simmons

President, Trane Commercial HVAC Americas

Chris Kuehn

Executive Vice President and Chief Financial Officer, Trane Technologies

Jose La Loggia

Jose La Loggia, President, Trane Commercial HVAC Europe, Middle East and Africa

Randal Newton

Vice President, Engineering, Trane Technologies