Firms Still Risk Underestimating The Speed Of Transition Ahead For Climate Goals

More expensive than earlier

As pressure ratchets up on countries and firms to do more to combat climate change, the results are beginning to show. And firms still playing it conservatively risk missing out in a big way.  This was the key take away from the report from the World Economic Forum and The Boston Consulting Group (BCG).

For instance, in 2019 only 29 countries representing 10% of global emissions had made net-zero pledges, while today, 92 countries representing 78% of global emissions have done so. On the corporate side, commitments from companies are growing exponentially, with more than 2,000 companies worldwide setting targets validated by the Science Based Targets initiative (SBTi), up from only 116 in 2015—a growth of 65% per year.

Acting too conservatively  risks being stuck with stranded assets and obsolete business models as a result. Winning the Race to Net Zero: The CEO Guide to Climate Advantage, details the ways that early-mover companies are changing the game for their sectors and beyond while securing sources of business advantage.

“Change is happening much faster than most people—and companies—realize. For example, forecasts for solar PV capacity in 2030 increased by a factor of 36 between 2002 and 2020, while projected unit costs dropped by a factor of three,” said Patrick Herhold, managing director and partner at BCG’s Center for Climate and Sustainability. “Companies that underestimate the pace and magnitude of changes like these are at risk of grossly misjudging the impact that climate transformation can have on business models, products, and company value.”

The transition may come with risks, but it’s an unprecedented opportunity. Based on quantitative and qualitative evidence including interviews with nearly two dozen CEOs and senior executives of leading companies across regions and industries, the report details the key benefits in stepping up to the challenge, and the ways climate leaders can gain competitive advantage, including through:

• Attracting more talent: Half of job seekers prioritize sustainability.
• Playing in higher growth segments: Up to 25pp higher growth for green alternatives to traditional products.
• Saving cash and carbon: Almost all companies can realize at least a third of required emission reduction at no net cost to their business. Some even manage to almost fully decarbonize at no net cost (average of 50% emissions reduction at no net cost across key sectors).
• Reducing risk exposure: 2-12pp EBIT margin improvement from reduced carbon tax liability.
• Accessing cheaper financing: Averaging 100bp lower cost of capital for sustainability leaders.
• Achieving higher shareholder value: Averaging +3pp total shareholder return for sustainability leaders (2016-2020).

The report also found that the greatest progress in recent years has often come not from collective action, but from competitive action triggered by a single company boldly moving ahead of its sector. These early movers raise the bar for their industries, reshape their market context, disrupt their own business models, show that emission reduction can work economically, and provide customers with a sustainable choice.

One example is Tesla. It introduced the first mass produced 100% electric vehicle in 2008, when that technology was still widely regarded with skepticism. Another is Mercedes, and the eyebrows it raised in 2019 when it announced that it would aim for a carbon-neutral vehicle fleet by 2039. Today, only three years later, not only have new all-electric players emerged, but virtually all major automakers have set ambitious electrification targets, and many of them plan to exit sales of internal combustion engines entirely within the next decade or two. Early movers are not only creating more value—they are changing the game as they compel others to follow.

“Leadership by the private sector is critical to accelerate climate action in tandem with bold steps taken by government leaders,” said Antonia Gawel, head of the Climate Action Platform at the World Economic Forum. “We are seeing new momentum. COP26 pushed climate issues further in the global spotlight with significant commitments made. At the Davos Agenda 2022, we hope business leaders continue to increase their commitments, recognize emerging climate risks as core to their business and importantly, translate commitments into near-term business transformation and investments. This report outlines how leaders can grow green and accelerate the action we need to protect the planet.”

A copy of the report can be downloaded here.