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(2/3) Why must businesses commit to climate action?

Jun 17, 20243 min read

The ESG (Environmental, Social, and Governance) and CSR commitments of companies is becoming increasingly significant in defining their value. Nowadays, the analysis of non-financial performance criteria complements the assessment of financial performance.


In a series of three articles, we will explore how (i) stakeholders, (ii) opportunities for value creation, and (iii) regulatory constraints exert internal and external pressure on companies, encouraging them to make serious commitments to the environment and climate action.


Apolownia

II. VALUE CREATION


The previous article addressed stakeholder expectations. This article focuses on the creation of financial value within a company. These benefits can be directly measurable through cost reduction or increased revenue.


  • New market opportunities: The transition to a low-carbon economy can open new markets for green products and services, offering growth and revenue diversification opportunities for companies. For example, the U.S. plant-based meat market grew by 22% between 2016 and 2019, compared to 6% for animal meat.


  • Access to financing: In 2022, 36% of new loans granted in Europe were conditioned on non-financial performance measures. Companies with strong sustainability practices benefit from more favorable financing rates.


  • Physical and transition risks impact (cf. article on climate risks for businesses): By anticipating and mitigating risks related to climate impacts on its value chain and internal operations, a company can preserve its reputation, reduce financial losses, and maintain business continuity through:  


o   Infrastructure adaptation: companies can strengthen their infrastructure and facilities to withstand extreme weather conditions such as storms, floods, or heatwaves. A study by the World Economic Forum indicates that 50% of emission reductions necessary to achieve carbon neutrality have no net cost, thanks to energy savings.

o   Diversification of supply sources: companies can diversify their sources of raw materials and suppliers to reduce their vulnerability to disruptions caused by extreme weather events.

o   Operational risk management: companies can implement emergency plans and business continuity strategies to address potential interruptions caused by extreme weather events. This may include implementing data backup systems, securing critical infrastructure, and providing crisis management training for staff.


  • Supply chain risk assessment: companies can assess climate risks in their supply chain and collaborate with their suppliers to develop mitigation strategies.


  • Eco-design: adopting eco-design practices can reduce production costs and improve process efficiency while meeting the growing expectations of consumers regarding sustainability. The field of eco-design is an integral part of the product life cycle process, which will be the subject of a complementary article.


  • Integration of Carbon Pricing as a Key Performance Indicator (KPI): by incorporating carbon pricing into the corporate culture and raising employee awareness of its importance, the company can encourage better management of carbon emissions at all levels of the organization.


Integrating a decarbonization strategy makes a company economically more resilient by standardizing environmental risk management practices while also directly contributing to the planet.


According to the Stern Review "The Economics of Climate Change," each tonne of CO2 emitted today imposes damages with social costs that could amount to at least $85 per tonne of CO2.


This study also specifies that climate inaction would result in a potential loss of 5% to 20% of global GDP annually, compared to a cost of climate action of 1% of GDP.

Therefore, it can be inferred that every unit of currency invested in climate action today could avoid losses of multiple currency units in the future. Finally, it is important to measure the economic benefits of climate actions beyond just financial return on investment, with CSR benefits materializing in the long term. It is essential to track value creation through social return on investment.


Conclusion


The transition to a low-carbon economy is crucial for businesses in the face of the increasing risks of climate change. By investing in decarbonization, they can reduce costs, improve efficiency, and seize new business opportunities. In summary, decarbonization is not only an environmental necessity but also a winning strategy for companies aspiring to resilience and long-term success.


The next article will address regulatory constraints and their directions.

 


ABOUT APOLOWNIA


Apolownia is a mission-driven company committed to making a significant impact in the climate sector.   


We support businesses and funds willing to engage in long-term and impactful decarbonization strategies - within and beyond their own value chain - by designing, implementing and monitoring science-based carbon reduction projects that restore natural ecosystems.  


Through technology and innovative solutions, we aim at shaping a resilient and environmentally friendly world, by encouraging the decarbonization of the economy and supporting social and environmental initiatives.  


You can drive positive change for the climate, biodiversity and local communities.  


Contact us to engage or for more information. Find us on www.apolownia.com.

 

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