McKinsey Sustainability’s article – Decarbonize and create value: How incumbents can tackle the steep challenge – highlights the immense undertaking required to attain net-zero emissions by 2050. It involves a staggering estimated investment of $275 trillion in low-emissions assets spread over the next three decades, equivalent to an annual commitment of approximately 7.5 percent of global GDP during this period. These numbers are undeniably significant and underscore the vast scope of the challenge. To see it under another light, if you’re seeking a career in an industry with boundless opportunities, this is certainly a promising one to consider.
"The net-zero transition could lead to the largest transformation of the industrial sector since the beginning of the Industrial Revolution." - McKinsey Sustainability
The article further highlights the size of the Opportunities & Risks for companies today as transitioning to low-carbon operations and products represents an unprecedented opportunity for numerous companies, potentially unlocking annual sales between $9 trillion and $12 trillion by 2030. This surge in economic activity is driven by the shift in capital allocation and consumer demand towards a sustainable, low-carbon economy. Conversely, the failure to adopt decarbonization measures could jeopardize a substantial portion of economic profit for companies by 2030. This risk, averaging up to 20 percent, is influenced by factors such as stranded assets, rising capital costs, and market share erosion.
The key question is: "How can more incumbents decarbonize and create value?"
Leading companies that are a step ahead in their decarbonization transformation tend to take action in three key areas:
1) Decarbonize and Improve Cost Competitiveness: In the pursuit of sustainability and cost efficiency, businesses that manage to reduce both emissions and operational costs simultaneously gain a substantial advantage. This dual approach not only enhances their environmental responsibility but also helps them strengthen their market position. By targeting the initial 20 to 40 percent of their decarbonization journey, these forward-thinking companies not only reduce their carbon footprint but also realize significant cost savings. The additional cash generated serves as a valuable resource that can be reinvested in further decarbonization efforts. This strategic approach not only bolsters their environmental credentials but also leads to a tangible improvement in EBITDA, reflecting the positive impact of their environmentally conscious practices on financial performance.
2) Launch Net-Zero Offerings: Companies that swiftly introduce products and services with zero or minimal carbon impact seize a unique opportunity in burgeoning markets. The demand for sustainable alternatives creates inherent supply-demand gaps, enabling these businesses to not only fulfill environmental expectations but also leverage their offerings for value-based pricing strategies and price premiums. By embracing net-zero offerings, they not only contribute to reducing emissions but also unlock new revenue streams and enhance their brand reputation as environmentally responsible and innovative market leaders.
3) Enter New Value Pools: Businesses that diversify their operations by extending along the current value chain and tapping into adjacent value pools position themselves advantageously. This strategic move enables them to capture early demand for net-zero offerings and secure a substantial advantage in environmentally conscious markets. Additionally, it facilitates low-cost financing for their sustainability initiatives. By proactively venturing into new value pools, these companies create opportunities for long-term growth and strengthen their position as pioneers in the transition toward a low-carbon economy.
The Bottom Line?
Every journey toward achieving net-zero emissions begins with a clear understanding of your organization’s carbon footprint. If you haven’t already initiated the process of measuring your carbon emissions, now is the time to start!
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References:
Mckinsey 2023, Decarbonize and create value: How incumbents can tackle the steep challenge
