The move to a decarbonized world will create significant opportunities to generate value. In the conversation around climate change, these opportunities are not always considered. That’s not surprising, given the urgency of the crisis we’re all facing. And in the business context, there’s the added decelerator that people usually think of climate and carbon as problems that create risks, not opportunities to create value.
This has to change. Our study shows that 29% of pacesetting companies have not created new products and services that have low or no emissions. And even among this leading pack, only 60% have established entirely new lines of business to capture market opportunities. Few Observers have yet to act in these areas. What’s getting in the way?
The prejudice in favor of financial value and against long-term value can be unwittingly baked into the tools and models people use to make decisions, causing perverse results.
It’s often difficult for companies to estimate the return on investment (ROI) on transition opportunities with the level of certainty that their traditional decision gates require. You can get stuck and lose time trying to provide evidence that doesn’t exist. This is understandable as the variables involved are often completely new, such as the measurable reduction in carbon emissions. Even though they are understood by environmental, social and governance (ESG) specialists, they might not be understood by finance people, or the ROI models they use.
Nevertheless, our study shows that, on average, 37% of initiatives will have a positive return over their lifetime, while only 19% will have a negative return. This should motivate companies to increase their investments in climate initiatives.
Another way to overcome this barrier is to turn the problem on its head: Justify the value of action by demonstrating the cost of inaction. Once you determine a real carbon price for your business – not a generic measure or a benchmark against your peers – low-carbon activities and assets become relatively more attractive by default.
By including the real cost of carbon in your decision-making you can also release internal funds for investment. Putting an end-date on business activities that depend on unsustainable levels of carbon, as suggested above, also forces the business to find new ways of deploying its capital.