How to think about Net Zero as a business case
Net Zero is an ambitious target that requires significant investment and effort from governments, businesses, and individuals. The associated costs, together with the skepticism over the efficacy of efforts, are key reasons for the resistance we see in this much-needed transformation process. We believe that when we look at Net Zero as both the goal and the means to get there, it becomes a natural part of business, lends more optimism to the process, and will drive even faster adoption.
The path to Net Zero is through innovation
There is growing consensus that we cannot continue to grow our economies at current levels of pollution and resource consumption. A fewer number believe that we need to change by reducing our consumption per capita if we want to contend with a growing population that is becoming wealthier. However, the opposite is true: a change to Net Zero cannot happen by doing less of anything. Consider the scenario of owning a 20-year-old car that pollutes. You could use it less, but it will still pollute. If the only options on the market are other “new” 20-year-old cars that pollute, there would be no reason to buy something new and we would never get to Net Zero. The existing stock of products will only change once we give customers something better to buy.
In other words, we can either produce and consume less or produce more efficient and sustainable things and consume those instead. In the first case the only way to achieve Net Zero would be by reaching a state of consuming nothing, which is impossible. The other approach is to produce better products as fast as we can – that everyone will buy – creating a new Net Zero system. It seems clear that we need to innovate our way out of this problem.
Net Zero as an investment thesis
While Net Zero sounds like a goal, it can also be seen as a design paradigm for growing businesses and bringing new products to market. When reframed in this way, it drives innovation for which access to money has never been easier. ESG-related funds amounted to around 40 Trillion in 2022 and continue to grow rapidly. It now simply makes business sense for many companies to align themselves with more sustainable practices than they did just ten years ago.
Implementing Net Zero strategies can help businesses reduce costs over the long term. By improving energy efficiency, adopting renewable energy sources, and reducing waste, businesses can lower their energy bills, avoid the costs of pollution and waste disposal, and minimize the risks of price volatility associated with fossil fuels. In addition, businesses may also qualify for tax credits, grants, and other incentives that can help offset some of the upfront costs. With Carbon prices at an all-time high now, for many energy-intensive producers or trans-jurisdictional operators, the business case for investment in efficiency has become even simpler.
Companies that embrace the Net Zero transition can gain a competitive advantage by differentiating themselves from their peers. Consumers and investors are increasingly interested in sustainable products (see below) and services and are more likely to do business with companies that prioritize sustainability. In addition, these companies may have an easier time attracting and retaining top talent, as younger generations are more likely to seek out companies that align with their values.
The Net Zero transition is an opportunity for businesses to manage the risks associated with climate change. Extreme weather events, water scarcity, and supply chain disruptions are just a few of the potential risks that can impact businesses. By adopting Net Zero strategies, businesses can reduce their exposure to these risks and create a more resilient business model. In addition, companies that act on climate change may be better positioned to comply with evolving regulations and avoid potential legal and reputational risks.
None of these propositions are new and sustainability specialists and evangelists have been touting these benefits for several years. What we find equally if not more compelling is to look at the flipside – the cost of inaction, which has become more apparent in recent years.
The business cost of inaction
The cost of the cleanup from environmental disasters and social inequality is already painful and obvious, and projections are that things are going to become a lot worse for a lot of us. The role companies play in this future will define their relationships with their customers, competitors, employees, regulators, investors, and ultimately, their chances of success.
Losing markets to regulations
With 100+ product regulations becoming active globally each day, some of them related to climate change, there is a growing risk that businesses will lose positioning if not lose access entirely to certain markets. This is particularly true for businesses that operate in industries with high Scope 3 greenhouse gas emissions, such as energy-consuming consumer goods, as well as Scope 1 and 2 emissions like manufacturing, energy, and transportation. In some cases, sustainability regulations could make it more difficult or expensive for these businesses to operate, making them less competitive in the global marketplace. In other cases, companies can be cut off entirely, like in public procurement in the building and construction industry. However, this risk can be mitigated by adopting a proactive approach to sustainability, such as investing in renewable energy and sustainable practices and engaging with stakeholders to promote sustainable business practices and creating transparency around these activities.
Losing market share to competitors
A recent study showed that over a third of global consumers are willing to pay up to 25% more for more sustainable products. As younger generations more conscious of the environment enter the economy, sustainability will become a dominant factor in consumer and business decision-making. Businesses will lose market share to competitors who are seen as more sustainable and produce more sustainable products. More importantly, they will lose market share in the high-end segments where profit margins are much higher. On the other hand, sustainable practices can also lead to cost savings and increased efficiency, giving sustainable businesses a competitive advantage in the long term. Adopting sustainable practices and communicating these efforts to consumers and stakeholders mitigates this risk. Being radical about producing new, more sustainable products will determine if that translates into revenue.
Losing revenue to supply chain disruptions
Any company can survive when markets and supply chains function perfectly. Great companies know how to deliver in rough times. Climate change poses a significant risk to global supply chains in the mid to long term, which would result in businesses losing revenue as they cannot deliver products, as has become abundantly clear in the recent past. Extreme weather events, such as hurricanes, floods, and droughts, can disrupt supply chains, causing an economic loss of assets, delays, and shortages of critical inputs. Rising temperatures and changing weather patterns can also impact the productivity and availability of crops and other natural resources, further exacerbating supply chain disruptions. In addition, sea-level rise and coastal erosion can threaten ports and other critical infrastructure, creating even more damage to how companies do business. While these may seem far off into the future, changes to supply chains for mass-produced products take several years. For other products, growing geopolitical threats, rebalancing of the east, and the resulting “glocalization” of supply chains are more near-term causes of disruption. Businesses will have to adapt quickly or fail. They can mitigate these risks by investing in transparency, diversifying their supply chains, investing in climate resilience, and adopting sustainable practices that reduce their exposure.
Is it worth it?
The future belongs to the young it is said, and as younger generations enter the economy, they will require a new breed of products that align better with their values. Sustainability is high on their agenda, and companies are racing to capture this growing segment. As we see in this article, Net Zero can create a virtuous cycle of investment, innovation, and cost savings, further driving economic growth. That makes a compelling case for investment.
By looking at Net Zero in the frame of an investment thesis, leading companies are escaping the cost-of-sustainability trap and innovating their way to success. It is time for the rest to follow.