The recent backlash against sustainable investing has invited renewed scrutiny, although there is substantial historical evidence to the contrary. But what does the past portend for the future: if we’ve plucked the low-hanging fruit, are there more double bottom line gains to be achieved? And will all of this be sufficient to resolve our current planetary crisis? Today, over 96% of the world’s largest 250 companies report on sustainability – and yet global emissions are projected to rise 11% by 2030, at stark odds with calls by the IPCC to reduce emissions by 45% in that same period.
Galvanize is a climate-focused investment firm, backing corporations at every stage to scale climate solutions and implement robust decarbonization plans. We work with our companies to craft strategies to bring along their teams, customers and stakeholders, as well as to increase their overall climate impact.
From this perch, it is clear to us that focusing on “win-win” climate action remains a crucial framing for continued near-term progress – but is also not sufficient to meet the challenge at hand. To remain winners in this decade and the next, we believe leaders must use their stations to work collectively and exert influence on all stakeholders.
Value drivers of “win-win” climate action
Some might say “the path to heaven is paved with less virtuous intentions”: companies may initiate climate action to virtue-signal or demonstrate altruistic leadership, but it is the near-term business case that enables these programs to stick and scale. By pursuing sustainability, companies can stack many value drivers:
- Supply chain resilience: Supply chain vulnerability represents a growing business risk. Resilient suppliers and deeper relationships with vendors can mitigate volatility, and data-focused programs provide new insight for procurement teams to prepare for potential shortfalls.
- Growing demand for sustainable solutions: Products making sustainability-related claims have averaged 28% cumulative growth over the past 5 years relative to those that did not, and surveys reveal that the majority of US consumers are willing to pay a premium. Shifting consumer attitudes drive transformation upstream – in the last decade for example, recycled plastics have commanded as much as a 60% premium over virgin plastic.
- Increased operational efficiency: The act of measuring and reporting on emissions often reveals operational and supply chain interventions that yield efficiency gains.
- Mitigating the risk of asset repricing: Climate change poses risks to the financial system, and could trigger disorderly repricing of assets as climate risks are recognized. Companies that initiate strategies to decarbonize today protect themselves from these sudden transitions.
- Optimizing around regulatory sticks and carrots: A growing number of public programs in the US, the EU and across the globe incentivize the adoption of low-emissions practices. Organizations focused on decarbonization today are best positioned to take advantage of this pool of incentives – and to steer clear of new costs and penalties.
- Getting ahead of compliance with investor demands and impending regulations: The EU and UK have recently issued extensive sustainability reporting requirements for asset managers and public corporations, and the US SEC is expected to issue climate-related reporting guidance this year. Across sectors, professionals focused on corporate social responsibility and sustainability increasingly have a dotted or direct line to compliance.
Although no single driver is a panacea, these “win-win” tailwinds are growing in strength, and will increase the potential climate impact that market-driven action can enable. Regulations incentivizing and mandating decarbonization across sectors, increased flows of private and public capital, and growing pressure from consumers and investors will only strengthen the business case for climate action. In some corners, ecological repercussions are converging with the markets’ time horizons: the physical and transition risks of climate are apparent now, in line with the timescales on which corporations optimize.
Beyond near-term value: Tomorrow’s winners
At the same time, corporate climate action aligned to near-term value creation (and preservation) is insufficient to keep society collectively aligned to a 2 degree pathway. The evidence is apparent in the chasm between stated levels of climate ambition and reporting and environmental realities. Corporations representing some 90% of global GDP have set Net Zero targets – and yet we remain well off track.
This is driven by two realities: first, that not all aspects of the climate transition will be profitable in the immediate-term, and second, that individual corporate action has its limits. However, these instead present opportunities for corporations to create value over the long haul.
In hard-to-abate areas, many solutions will require both technological innovation and substantial cost-downs to be profitable. But these are exactly the opportunities where corporations can lead most: we should derive inspiration from the numerous companies who are reaping profitable growth today by monetizing capital that was committed years ago to areas that require a longer term business view.
Furthermore, corporations can lead by accelerating the curve for inevitable long-term solutions. Collective action can have a powerful impact, such as by coordinating a demand signal (such as Frontier’s advance market commitment for permanent carbon removal or Breakthrough Energy Catalyst’s demand signal for fuels, hydrogen, and other solutions), or through joint policy advocacy for clear price signals on emissions – which in turn will further cement the business case for climate action.
Just as climate change is a collective action problem, it is impossible for firms to fully decarbonize in isolation. By definition, only Scope 1 emissions are exclusive to a given company. Scope 2 emissions (resulting from the purchase of power) are beyond many companies’ direct control. Scope 3 emissions by definition require engagement with suppliers, vendors and partners and are far beyond a company’s operational control and sometimes beyond what can be reasonably traced – and Scope 3 emissions account for 75% of companies’ emissions on average.
New tools for granularly evaluating company’s supply chain emissions (from Watershed Supply Chain to Regrow’s supply chain tools to Higg’s product suite) may enable corporations to identify hotspots to exert joint pressure to decarbonize. And where current emissions accounting have limits, industry groups such as the AIM Platform are developing frameworks to incentivize and recognize value chain interventions, even where the impact of these efforts cannot be exactly tracked. Efforts such as SBTI’s Beyond Value Chain Mitigation guidance also reflect an important shift in expectations: corporations must not only decarbonize their own footprint, but also support decarbonization outside their value chains, recognizing firms’ collective obligation to maximize our chances of staying on a climate-aligned path. As Spencer Glendon of Probable Futures writes, “Civilization was built on a stable climate.”
In other words, today’s leaders on climate issues must do more than focus on near-term wins internally. Corporations who win tomorrow will pursue a “yes, and” approach. It is essential that we leverage the tools of the market to scale the solutions we need in the ensuing months and years – and equally important to look beyond.