Realising the climate opportunity

While it is often discussed in boardrooms as a major risk, climate change is also a business opportunity. The low-carbon transition creates opportunities for efficiency, innovation, and growth that extend beyond high-carbon industries like energy and transport to all sectors.

Companies can save energy and materials costs, serve new customer needs, enhance their reputations, and better attract and retain talent — all as a consequence of working to reduce their emissions and those of their customers and suppliers.

Through their governance role, boards can help to ensure that climate opportunities are captured by reviewing corporate strategy and focussing on long-term value.

This is truer than ever before as companies navigate the fallout from COVID-19 and plan for recovery: executive teams are occupied with the “here and now” of operational and financial management and boards will need to keep the pressure on management teams to engage with the strategic questions of what comes next. As we show below, those that apply a “green” lens to recovery planning could uncover trillions of dollars in low-carbon opportunities.

Cost management

Green operations are lean operations, and companies with sufficient capital expenditure flexibility to make smart green investments can reduce their costs at a time when every dollar counts.

Research undertaken by Oliver Wyman and CDP, a nonprofit that runs the leading global climate-related disclosure system, found that European corporations are realising significant operating cost savings from comparably modest spending on emissions reductions. Investments last year in low-carbon projects such as renewables and energy efficiency were expected to net companies US$45 billion over the investments’ lifetimes — a savings of US$20 for every metric ton of carbon dioxide equivalent avoided.

The same is happening in the United States, where Fortune 500 companies were saving $24 per metric ton (in 2017). Last year, US corporations signed power purchase agreements with renewables developers that will bring 13.6 GW4 of clean energy into operation. This is equivalent to almost two thirds of the generation capacity added in the United States last year (20.7 GW5) — renewables, fossil fuels, and nuclear energy included.

Greener operations can also reduce capital costs. The rapid growth in green lending (where use of proceeds is tied to specific low-carbon projects) and sustainability-linked lending (where borrowing costs are linked to sustainability performance, but with flexibility as to how proceeds are used) provides new opportunities to access cheaper finance. US banks are targeting this new market for growth.

Capitalising on changes in behaviour

The pandemic has imposed changes in working arrangements and lifestyles that may create opportunities to increase green efficiency savings. For example, a shift to remote working may provide opportunities to reduce travel and cut office use and energy costs. However, more fundamental shifts in attitudes may also be underway.

Research firm IPSOS Mori found that more than half of Americans (59%) think that climate change is as serious a problem as COVID-19 and want to see it prioritised in recovery planning – a finding replicated across the world.

Companies that capitalize on these attitudes may be able to enhance brand loyalty and increase market share among concerned consumers. Research by New York University’s Stern Center for Sustainable Business has found that sustainable brands have increased their share of the US market during the pandemic — demonstrating this trend.

These dynamics are also relevant to workforces. Strong corporate environmental performance is associated with increased staff satisfaction and attractiveness to talent, with the most popular companies producing significantly lower emissions per dollar of revenues than their peers.

Put another way, companies with leading environmental credentials will be at an advantage when recovery takes off and the competition for talent heats up. The benefits will continue to increase well after the pandemic has waned, as the labour force becomes increasingly dominated by millennial and the Gen Z cohort who place a higher premium on employers’ climate credentials.

New revenue opportunities

The low-carbon transition is creating demand for new sustainable goods and services worth trillions of dollars across all sectors.

The transportation sector has seen rapid growth in zero-emission vehicles and the explosion of new mobility services. By 2030, electric vehicles may account for 28% of global passenger vehicle sales; this year, Tesla became the most valuable carmaker in the world, despite generating less than one-tenth of the revenues of the second-most-valuable company.

In the United States, the green economy is already worth US$1.3 trillion and it is growing at over 20% a year.

Even before the coronavirus hit, the multitrillion dollar scale of the low-carbon business opportunity was abundantly clear. In 2018, 225 of the world’s largest companies reported over US$2 trillion of climate-related opportunities from low-carbon goods and services, shifting consumer preferences, and the potential to gain new forms of competitive advantage. Last year, European companies alone identified US $1.4 trillion of opportunities — more than six times the cost to realise them.

Authors: 
Scott McDonald - CEO, Oliver Wyman

Rob Bailey - Advantage Director of Climate Resilience, Marsh and McLennan.

This is an extract from "Realising Climate Opportunity, an article in Climate Change: The Implications for Boards produced by Marsh & McLennon and the US National Association of Directors. 

The article is featured in the October/November issue of Boardroom magazine