Written by: Todd Bowie, Michael Donatti, Kathleen Malloch
GreenBiz23 brought together nearly 2,000 attendees from a range of companies to discuss topics related to sustainable business. There was widespread agreement that businesses need to move beyond accounting, disclosure, and planning low- or zero-carbon operations and towards action on financing and energy. Without acting, said one participant, “The world is going to be burning down around us, and we’re going to still be working on ESG reporting.”
A major challenge for many companies remains addressing their indirect Scope 3 emissions, particularly as regulations in both the European Union and the United States evolve to require emissions calculation, disclosure, and reporting. With continued uncertainty over exactly how proposed Securities and Exchange Commission (SEC) rules will land in the United States, a range of service companies are developing ways to help large corporations measure their Scope 3 footprints. But this space is crowded, inconsistent, and immensely confusing to corporates facing the disclosure burden.
However, decarbonization requires shifting to zero emission technologies – whether they be traditional renewables, like solar or wind, or others like gas combined with carbon capture utilization and storage (CCUS). In the US, while the Inflation Reduction Act (IRA) has production and investment tax credits which can help facilitate zero emission power generation, risks remain – such as effectively upgrading and expanding electric transmission. Without significant expansion of increased transition and energy storage, many companies may not be able to achieve their sustainability goals.
Some companies are proactively taking on these challenges, and as a result, are driving the wider conversation and setting the pace of change. These companies embed environmental, social, and governance (ESG) responsibilities throughout their business practices, and their CEOs and CFOs are the most prominent cheerleaders for decarbonization. As such, they have shifted from a mindset where acting on sustainability is a risk to one in which it is an opportunity.
Others still have moved beyond greenhouse gas emissions to focus on their dependence and impact on nature more broadly. Some aim to be “nature-positive” — via commitments to contribute to reforestation, biodiversity, and the protection of water sources, among other actions. While greenhouse gases are relatively easy to measure — “carbon dioxide equivalent” has become the standard —commitments to nature require a wider range of metrics, and they often have far more local impacts. One group developing tools for such measurement, the Taskforce on Nature-related Financial Disclosures (TNFD), plans to release its final framework in September 2023.
GreenBiz23 showed the ways in which climate action applies to several industries. Here are some highlights:
Energy and natural resources
Decarbonization requires a shift in our energy sources. These are often well-known — especially in fields related to transportation — if not widely available: electrification via renewables, plus a prominent role for biofuels through at least 2050.
Aviation will be almost entirely dependent on sustainable aviation fuel (SAF) to reduce emissions in the near and even the long term. Airlines are still figuring out the right way to promote the SAF market in cooperation with their customers and investors.
While Shipping and logistics companies are gradually transitioning some of their ground fleets to natural gas and battery electric vehicles, the fastest way for them to reduce emissions is to use a drop-in biofuel such as renewable diesel. This applies particularly to companies constrained by vehicle retirement horizons or by the limited scalability (to high-power, long-range heavy-duty trucks) of technologies such as electric batteries. However, even many shipping and logistics companies with large ground fleets generate most of their current emissions from aviation.
Maritime transport is the most recent to face pressure to transition away from the heavy fuel oil. Beyond the carbon dioxide this emits, fuel oil leads to heavy pollution in the areas around ports, contributing to environmental injustice in nearby communities. Corporations and port cities are using their leverage (buying power and regulation, respectively) to combat the problem, and public awareness of the environmental impact of shipping is higher than ever. To promote collaboration and engagement, cargo owners (the companies that ship goods) have formed the Zero Emission Maritime Buyers Alliance (ZEMBA) to identify green solutions. Remedies may include greater shipping efficiency, or in the longer-term, the use of ammonia (a hydrogen carrier) as a fuel. Biofuels offer a nearer-term solution, especially given the distant retirement horizon for many shipping fleets, though some at the conference expressed concern about maritime’s ability to compete with aviation and ground transportation for a limited (though rapidly growing) supply of biofuels.
Across industries, investing in renewable power generation will be required to achieve sustainability goals, like net zero. Without corporations taking action to identify paths forward to mitigate cost, infrastructure, and storage issues for their own emissions, the intent of bills like the IRA, and grid decarbonization at large, will continue to face challenges and slow collective action. Other tools will be needed, as well, such as carbon capture and sequestration, which will lead to emerging offerings like “carbon capture as a service.” This is the pivotal time for companies to double down investments in the energy transition.
Simply financing the building of new assets and the retirement of old will not be enough to achieve net zero targets. The financial services sector is increasingly moving forward into delivery and change via approaches outlined in the recent documents from Glasgow Financial Alliance for Net Zero (GFANZ), which include frameworks for financial institution transition plans, decarbonization pathways, and more.
One way to do this is through sustainability-linked debt. This links investment to a company’s sustainability strategy and decarbonization activities and tracks impact through meaningful metrics, such as carbon emissions. Sustainability-linked debt is not limited to companies that are divesting from carbon-emitting assets: It can also finance companies that are shifting more generally in the right direction. Without sustainability-linked debt, holders of emissions-intensive assets might just seek out other sources of capital with fewer restrictions.
That said, investment is still driven by return on investment (ROI), as asset managers have a fiduciary duty to generate returns. ROI in decarbonizing activities is being improved by better financial terms (such as interest rates) and regulatory incentives from the Inflation Reduction Act (IRA) for both lenders (financial services firms) and borrowers (corporations in the real economy). These incentives include production tax credits, investment tax credits for wind, solar, geothermal, electric charging stations, and other incentives for carbon capture, clean hydrogen, and some manufacturing.
Corporations shared at GreenBiz that, in general, they do not see a meaningful “greenium” (green premium) from investors for investing in decarbonization: The differences in interest rate they are charged are often very small and not enough to change the overall allocation of resources. However, other strategies exist for lenders – for instance when corporations are financed through sustainability-linked loans, the repayment details can be tied to certain metrics.
Equally important, however, was the relative lack of discussion on climate risk and insurance. Climate risk has become a form of financial and credit risk: A company’s credibility and consistency attract investors, while lacking these qualities make it harder to access financing. While the recent changes from the SEC and National Association of Insurance Commissioners (NAIC) were highlighted for corporations, the far-reaching impact for insurers was not highlighted. There is significant opportunity to profitably transition to a low-carbon future – and a necessary one. Retooling insurance to support this transition is key. Without insurance, financial institutions cannot lend money to projects, which fuel the energy transition.
Health and life sciences
Health and life-science companies were both present at GreenBiz and spoke about some of the unique challenges and opportunities these corporations face. Climate change is likely to impact multiple aspects of their underlying businesses, due to shifting patterns of disease transmission, exacerbated social inequalities, and disrupted supply chains. However, health and life science companies are also uniquely positioned to lead on ESG, as they have a longstanding commitment to improving health.
Shifting regulation on climate disclosures, particularly in the EU, where many life science companies are headquartered or accrue revenues, is evolving from voluntary to mandatory reporting. In the United States too, there is general agreement that political pushback is a speedbump and will not change the trajectory of climate disclosure and action. There even seems to be a regulatory “race to the top” developing between the US and the EU, though the EU has traditionally been a bit ahead.
However, a clear opportunity exists in preparing for this risk and taking long-term action via the C-suite. Climate — and broader ESG strategy — must be embedded throughout the business. The CEO and board have a responsibility to develop resilient corporate strategies that include net-zero commitments and protects shareholder value. Simultaneously, the CFO has an opportunity to finance and invest in green solutions. Other roles, like the CMO, have an opportunity to update manufacturing processes to ensure new molecules are produced in greener ways. And the company should set itself up to attract talent by engaging in ESG themes, defining, and aligning with a mission, and improving brand equity.
There is an opportunity to be part of the solution to the climate challenge rather than be left behind. Continued investments in biotechnology may also provide to have dividends in new markets – such as regenerative agriculture and biodegradable plastics.