The cost to reach Net-Zero emissions and its surprising benefits

Strategic advice

International scientists believe that to prevent the worst effects of climate change, carbon dioxide (CO2) emissions must reach Net Zero by 2050. In other words, the amount of CO2 going into the atmosphere must be balanced by the amount being removed from the atmosphere.Disclosure 1

Achieving Net Zero by 2050 is necessary to keep global temperatures from rising more than 1.5 degrees Celsius above preindustrial levels, scientists say. More than 70 countries and 1,200 companies worldwide have put in place Net Zero targets in line with the United Nations campaign called Race to Zero.Disclosure 2

Carbon footprint awareness

Julie Bennett Bunuan, head of ESG Advisory and Intra Industry Coverage, Investment Banking-Truist Securities, says that considering the threats caused by climate change and the subsequent challenge to meet Net Zero, companies today need to be conscious of their carbon footprints and of reducing emissions. “Otherwise, companies could lose customers and investors, and their cost of capital could rise. This is a macro driver that influences both access to capital and its cost for businesses.”

While reaching Net Zero isn’t a formal requirement for U.S. businesses, Bennett Bunuan believes that it’s smart to make lowering carbon emissions a high priority. “Other companies across your value chain are making commitments to reduce their carbon footprint and want to do business with companies that are striving to reduce carbon emissions,” she says. “Stakeholders are focused on this, which makes it an important part of both customer and employee retention.”

The Net Zero challenge can be an opportunity

Many companies tend to think of carbon emissions reduction as a cost. “But it’s time to get away from this kind of thinking,” says Bennett Bunuan. “Instead, companies should reframe decarbonization as an opportunity to increase revenue, lower energy costs, boost energy efficiency, and lead to new growth opportunities.”

For example, the recently passed Inflation Reduction Act includes several tax incentives for companies that invest in clean energy power generation—electrification solutions that reduce the reliance on fossil fuels—as well as the development of technologies or equipment that generate lower emissions. These include:

doughnut graph showing 70%

Percentage of consumers who said they would pay an extra 5% for a green product if it met the same performance standards as a nongreen alternative.

Source: "Five ways ESG creates value,"
McKinsey Quarterly, November 2019.

  • Investment tax credits to build manufacturing facilities that have clean technology
  • Production tax credits to accelerate U.S. manufacturing of solar panels, wind turbines, batteries, and critical minerals processing
  • Tax credits and grants for clean sources of electricity and energy storage, clean fuels and clean commercial vehicles, emissions reduction in industrial manufacturing, and procurement of American-made clean technologies to create a stable market for clean products

Decarbonization to create business value

Decarbonization can create value for your business across several areas, as your company and stakeholders join in.

Top-line growth

A commitment to and progress toward decarbonization can position you to expand your customer base, including potentially tapping new markets, to grow revenue. For example, some governments are more likely to award access, approvals, and licenses to companies focused on carbon reduction, which can lead to fresh growth opportunities. Many customers are also willing to pay extra to go green. In a study conducted by McKinsey & Company, 70% of consumers said they would pay an extra 5% for a green product if it met the same performance standards as a nongreen alternative.Disclosure 3

Lowering costs

Reduced energy costs can be accomplished through improving energy efficiency and reducing energy use. Using resources efficiently and reducing waste can also combat rising operating expenses, such as raw material costs. According to McKinsey research, these can affect operating profits by up to 60%. The McKinsey study found a significant correlation between maximizing resource efficiency and improving financial performance.Disclosure 3

Retaining employees and enhancing productivity

Many employees today want to work for companies that are focused on being good environmental stewards. Decarbonization efforts can help companies attract and retain high-quality teammates, increase motivation, and boost overall productivity. Studies have shown that higher employee engagement correlates with higher shareholder returns.Disclosure 4

Generating stronger investment returns

Decarbonization efforts can boost investment returns by allocating capital to more promising and sustainable opportunities. It can also help companies avoid stranded investments that might not yield returns due to longer-term environmental issues or carbon use intensity.

According to McKinsey, even if the investments required to update your operations may be substantial, choosing to wait it out can be more expensive, as your competitors and the marketplace move ahead.

Growing sustainable finance markets offers the opportunity to tie a sustainability strategy, including decarbonization goals, into a company’s financing strategy. This has the potential to realize interest savings. For example, in a sustainability-linked loan, the interest margin is linked to predefined targets for ESG-related KPIs. If those targets are achieved, the margin will be reduced.

“It’s important for every business to be conscious of its carbon footprint and examine ways to reduce it,” says Bennett Bunuan. “The focus from customers, investors, employees, and other stakeholders makes this an imperative, as well as an opportunity. In the longer run, lagging companies may see the cost of capital become more expensive.”

"Companies should reframe decarbonization as an opportunity to increase revenue, lower energy costs, boost energy efficiency, and lead to new growth opportunities."

Julie Bennett Bunuan
Head of ESG Advisory and Intra Industry Coverage, Investment Banking-Truist Securities

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