The EBITDA of decarbonization

You can either fight the industrial revolution, or you can invest in it

Climate change, and the energy transition that is being driven by it, are both the greatest challenge and the greatest opportunity of our lifetime. When you consider how the implementation of the energy transition will actually take place, what is required is nothing short of the decarbonization of the global economy. The incredible scale and breadth of this decarbonization offers companies and investors an unprecedented opportunity to drive a sustainable transformation of their business that will both lower costs and improve returns on investment, directly benefitting their bottom line.

For companies to successfully integrate sustainability across their business model, they must go well beyond appeasing stakeholder demand with a flurry of climate emissions targets and pledges. Instead, the ultimate goal will be achieved by highlighting how a sustainable decarbonization strategy leads to true value creation that can fuel long-term revenue and EBITDA growth. Some of the initial fears over the potential trade-offs between sustainability and earnings growth are being debunked in real time: 69% of corporate sustainability leaders across all industries and countries say that the financial value created from climate change initiatives have proven to exceed expectations.[1]​

While more than 4,000 businesses and financial institutions are already working to reduce their emissions in line with a science-based target[2], the operational challenges of achieving this are just beginning. The strategic business transformation needed to reach net-zero requires outcome-oriented roadmaps that identify greenhouse gas emission (GHG) hotspots. For most companies, the largest source of risk and opportunity are Scope 3 emissions, which include upstream and downstream emissions that span across a company’s value chain. These can only be reduced through collaboration with customers and suppliers, and despite the challenges, many companies are already producing detailed decarbonization and transition plans. These plans articulate how capital spending will simultaneously allow them to achieve their emissions targets and reduce operating costs. According to Honeywell’s newly launched Environmental Sustainability Index, 97% of the 650 professionals surveyed said they were planning to increase their sustainability budget over the next year despite a looming recession. This is a strong endorsement of a sustainable decarbonization strategy being not only recession-proof, but also a direct driver of business value creation. 

For most companies, energy costs are a major component of their fixed operating costs. However, this misses a key opportunity to reduce costs/increase profitability by creating a transformational plan to improve energy efficiency. By doing so, energy can actually become one of the largest controllable components of operating expenditures. Embracing the energy transition, in part by converting to cheaper renewable energy sources, enables companies to simultaneously achieve decarbonization goals and direct cost savings/return on investment.

The watershed $370 billion Inflation Reduction Act (IRA) is the most significant and groundbreaking investment in energy transition in history.[3] While the amount in and of itself is massive, the knock-on/multiplier effects of investment leverage, tax credits and incentives are staggering. Private capital is seizing upon this investment opportunity, with asset managers around the world launching new climate, energy transition and decarbonization funds. US companies are tapping into this as well, driving decarbonization of both their own operations and their supply chains, and investing in renewable energy infrastructure and electric mobility. But for best-in-class organizations, decarbonization initiatives are already core to their business strategy:

• Walmart’s Project Gigaton initiative aims to reduce or avoid supply chain emissions by 1 billion metric tons by 2030 and has already reduced or avoided 574 million metric tons cumulatively since 2017.[4] They are also partnering with companies like Ørsted and Schneider Electric to put together a renewable energy power purchasing agreement program that provides suppliers with options they can buy into to internally decarbonize.[5]​

• Philips has been performing full life cycle GHG emissions assessments since 1990, and they apply this methodology to their annual Environmental Profit & Loss (EP&L) statement. In their 2021 EP&L, they found energy consumption from the use of their products (80.5%) followed by their materials and component supply chain (13.4%) to be the most dominant factors in their environmental impact. Consequently, they continue to re-think their product portfolio and have grown their Green/EcoDesigned revenues to 70.5% of sales in 2021.[6]​

• Apple has announced that they will be calling on their global suppliers to decarbonize operations and report on progress towards emissions reduction related to Apple production.[7]​

• Microsoft’s unmatched global reach, driven through the power of data, AI, and digital technology, has allowed them to seize a massive leadership position around addressing climate change. They have set aggressive 2030 targets of being carbon negative, water positive and zero waste, and are also creating solutions such as the Microsoft Cloud for Sustainability to advance the measurement of carbon emissions worldwide and to aid in the decarbonization of their own supply chain.[8]​

• Chemical companies like Dow Chemical who have “greener” product portfolios and exposure to sustainability tailwinds are also seeing a higher performance and improved total shareholder return.[9] Dow has valued their total addressable market opportunity at more than $800 billion as they seek to expand their market verticals of packaging, infrastructure, consumer, and mobility to deliver solutions designed for recyclability, enhanced plastics circularity and sustainability for key markets.[10]​

• Nestlé has implemented a variety of net-zero strategies such as securing a 97.2% deforestation-free status for five of their major raw materials. Roughly 22% of global GHG emissions come from Agriculture, Forestry and Other Land Use, primarily through deforestation when stored carbon is released into the atmosphere.[11]​

• BlackRock and Temasek have partnered and committed $600 million through the establishment of Decarbonization Partners, in an effort to advance technologies that will reduce and eliminate carbon emissions.[12] Blackstone and Apollo are also seizing the opportunity by allocating $100 billion of investments to energy transition and climate change solutions over the next decade.[13]​

• Solvay CEO Ilham Kadri describes the “Solvay One Planet” sustainability roadmap “as a way to differentiate the company and increase its price / earnings multiple.”[14] Solvay has recently seen a record 23.3% EBITDA margin up-lift as a result of its G.R.O.W. strategy, which is driving accelerated and sustainable innovation and profitability across batteries, thermoplastic composites and green hydrogen.[15]​

Enlightened global executives now view decarbonization as a value-creation strategy, through which they can increase their operational efficiency and cost competitiveness, thereby delivering greater value for their shareholders. As renewable energy prices continue to come down, alternative energy sources will offer a cheaper alternative to traditional fixed energy costs, a trend which will be exacerbated by the tax and credit incentives of the IRA. As a result of these incentives, companies are now able to deploy climate-focused initiatives more economically, which will spur innovation and drive demand by allocating more funds towards research and development of clean technology and low-carbon materials. Forward-thinking companies can also improve the resiliency of their supply chains through increased focus on domestic production, which the Act is intended to stimulate.[16] Senior executive leadership can now focus on the revenue and EBITDA growth they can achieve in advancing decarbonization, rather than the costs incurred, in a win-win scenario benefitting both their companies and the planet.

References

[1] https://www.ey.com/en_gl/sustainability/how-can-slowing-climate-change-accelerate-your-financial-performance​

[2] https://sciencebasedtargets.org/companies-taking-action *As of January 3rd, 2023: 4,237 companies are taking action towards a science-based target, 2,080 have approved science-based targets and 1,562 have net-zero commitments.

[3] https://www.energy.gov/lpo/inflation-reduction-act-2022​

[4] https://corporate.walmart.com/esgreport/media-library/document/walmart-fy2022-esg-summary/_proxyDocument?id=00000182-21ec-d591-afe2-2bfcb4df0000​

[5] https://corporate.walmart.com/newsroom/2022/10/18/gigaton-ppa-walmart-%C3%B8rsted-and-schneider-electric-announce-first-cohort-for-renewable-energy-supply-chain-program​

[6] https://www.results.philips.com/publications/ar21​

[7] https://www.apple.com/newsroom/2022/10/apple-calls-on-global-supply-chain-to-decarbonize-by-2030/​

[8] https://query.prod.cms.rt.microsoft.com/cms/api/am/binary/RE4RwfV​

[9] https://www.mckinsey.com/industries/chemicals/our-insights/chemicals-and-capital-markets-growing-sustainably​

[10] https://corporate.dow.com/content/dam/corp/documents/about/066-00397-01-2021-esg-report.pdf​

[11] https://report.ipcc.ch/ar6wg3/pdf/IPCC_AR6_WGIII_SummaryForPolicymakers.pdf​

[12] https://www.blackrock.com/corporate/sustainability/blackrock-temasek​

[13] https://www.blackstone.com/news/press/blackstone-launches-sustainable-resources-credit-platform/​

[14] Serafeim, George. Purpose + Profit: How Business Can Uplift the World. HarperCollins Leadership, 2022, pp. 54-55.

[15] https://www.solvay.com/en/press-release/solvay-announces-its-grow-strategy-to-drive-growth-cash-and-returns​

[16] https://www.pwc.com/us/en/services/esg/library/inflation-reduction-act-climate-considerations.html​

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.