17 August 2021

Businesses aren’t buying the myth of an unaffordable net zero

The idea that climate change is too expensive to address may be politically expedient, but for some companies reducing emissions is good for their bottom line.

By Nick Ferris

Solar power is now one of the cheapest sources of electricity. (Photo By Andreas Rentz / Getty Images)

As the UK prepares to host the UN climate change conference (COP26) in Glasgow in November, there are some in parliament who see the “cost” of reducing the UK’s carbon emissions to net zero as prohibitive. There is growing support for the idea – aided by some media outlets – that climate change, while important, is too expensive to deal with right now.

The theory that pollution and environmental damage are necessary side-effects of economic growth has long been bought into by some businesses. Tim Benton, the energy and environment lead at the think tank Chatham House, says it is “still the entrenched narrative… but that framing is rapidly declining”. For companies, a growing body of research shows that prioritising climate concerns is not a drain on resources, but good for business.

Investors increasingly recognise that prioritising environmental, social and governance (ESG) issues has a positive impact on returns. A meta-study of more than 2,000 studies by Deutsche Asset Management shows a strong correlation between ESG strategies and superior financial performance. The world’s largest asset manager, BlackRock, said in a January 2021 letter to clients that “sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors”.

Public concern around climate change is also linked to consumer demand. In a 2020 survey of 13,300 companies by the European Investment Bank (EIB), 27.8 per cent said reducing CO2 emissions had a positive impact on demand for their products. In 25 of the 29 countries surveyed, reducing emissions was found to be more likely to have a positive impact on sales. Across the 29 countries, 31.2 per cent of companies said reducing emissions had a positive effect on their reputation, versus 7.9 per cent who said it had a negative effect.

Reducing emissions is more likely to have a positive than negative impact on market demand

Company survey responses about impact of reducing CO2 on market demand. Top ten countries by most positive responses are shown

*Average response for all companies surveyed in EU27, UK and US

By September 2020, 1,541 major companies, with collective revenues of $11.4trn, had signed net-zero targets, up from 500 at the end of 2019.

One multinational transforming itself to meet pro-climate customer demand is the Italian power utility, Enel. The company is investing €190bn over the next ten years in green energy and electrification to become a green (rather than oil) “supermajor”.

Francesca Gostinelli, the company’s head of economics and scenario planning, says the company is following “a path of long-term sustainable growth” that aims to “seize the opportunities connected to the energy transition, [and] to act as an enabler”.

The world’s largest furniture retailer, Ikea, is also investing hundreds of millions of dollars in sustainability measures, with the aim of becoming a climate-positive business by 2030. This means only using renewable and recycled materials, and reducing the company’s climate footprint by an average of 70 per cent per product.

“At Ikea, our vision is to create a better everyday life for people,” says Andreas Ahrens, head of climate at the Inter Ikea Group, which connects Ikea franchisees with suppliers. “Climate change threatens this, for people today and for generations to come. As customer awareness and willingness to take action increase, [prioritising sustainability] is improving our brand.”

Reducing emissions is less beneficial to businesses in Poland than in climate-friendly countries

Companies citing positive impact of emissions reduction versus population motivated to tackle climate change (%)

Part of the benefit to businesses comes from the technological change required by net-zero targets. Renewable energy sources such as solar and wind are now the cheapest means of generating power in many parts of the world, and many companies are now heavily investing in these technologies to power their operations. Amazon, for example, operates 206 renewable energy projects worldwide and is on the way to using only renewable sources for electricity by 2025, while Google has powered its offices and data centres with renewables since 2017.

“Companies are moving to net zero because it is good climate policy, and is cheaper,” explains Tom Sanzillo, a director at the Institute for Energy Economics and Financial Analysis (IEEFA). “Lower-cost energy goes to business bottom lines”.

Myles McCarthy, a director at climate consultancy the Carbon Trust, adds that there are also economic benefits to decarbonising supply chains.

“Lots of companies have historically had a distant relationship with their suppliers,” says McCarthy. “Their main focus has been to seek lower prices from them. Companies are now realising that if you work more closely with suppliers over the long term, you can actually achieve a lot more.

“It is about developing a more comprehensive picture of what is going on. It is sitting down and saying: instead of using this plastic packaging, we can use this reusable container. It is also understanding how the concerns of consumers are changing, and how companies can meet those changing concerns through driving sustainability in their supply chains.”

Ikea’s Ahrens agrees that taking action on supply chains now can help ensure future profits, even if there are short-term costs: “The biggest gains are transforming our operations and supply chain to reduce future costs connected to climate change,” he says.

Growth in total economic losses from extreme weather events has outpaced growth in insured losses

Total losses versus insured losses from weather-related catastrophes, 1980–2019 ($bn, 2019 prices)

Companies are also investing in climate resilience to limit the high future costs related to extreme weather. Recent flooding in Western Europe has demonstrated the growing frequency of such events, but the creeping normality of drought across many places in Europe could be a bigger problem for many businesses.

Shipping on the Rhine in Germany was brought to a standstill in the summer of 2018 after an extreme heatwave dramatically lowered water levels. Industry was severely hampered, with German production of chemicals and pharmaceuticals falling 10 per cent in the third quarter. This contributed to a 0.2 per cent drop in German GDP in the same period.

“Coastal industries like tourism, infrastructure, agriculture and industries that rely on waterways – everything from oil and gas, coal, steel, to chemical industries that are along rivers, will be significantly affected,” says Michael Gloor, the climate change lead at reinsurers Swiss Re.

Data suggests that companies are not investing to adapt to such threats quickly enough. Swiss Re’s research shows that between 2010 and 2019, less than half ($601bn) of the $1.62trn in losses from weather events was insured.

Nevertheless, the tide appears to be changing. A 2020 Corporate Attitudes report from the Carbon Trust showed 74 per cent of companies are making sustainability a greater priority following the coronavirus pandemic. Sanzillo compares such planning to going on a diet: “No one who has lost weight, even only a few pounds, would say that the extra helping not eaten or the chocolate left on a grocery store shelf is a ‘cost’.”