As the scientific community made clear in last month’s IPCC Report, climate change is not just coming - it’s here. As a warming climate’s consequences become more visible and the urgency of action more unequivocal, resolve is hardening to make dramatic changes.
The change required is massive. PwC’s 2021 Net Zero Economy Index shows that we need a 12.7% annual reduction in carbon intensity to have a chance of keeping to the objectives of the Paris Agreement. To put this number in context, the world achieved only a 2.5% drop in 2020, a year that a global pandemic shuttered huge swathes of the economy. Public pressure for change is increasing sharply, with investors, consumers, and workers signaling more visibly that they expect action to move the world more quickly toward net zero emissions.
Business leaders urgently need to understand and manage the risks and opportunities brought by climate change itself and the world’s growing efforts to combat it. Doing so can prepare businesses to survive and thrive amid turbulent change, protecting and building shareholder value.
Start with the risks. Businesses face climate-driven threats such as customer defection, unpredictable shifts in the cost and availability of capital and resources, or even the displacement of entire industries. Leaders need a thorough picture of their risk landscape with a depth of analysis that reveals risks’ size, scope, and urgency. With this understanding, business leaders can better anticipate and mitigate threats, protecting shareholder value.
The flip side of risk is opportunity. Averting the worst effects of climate change requires what The Economist calls ‘a rewiring of the entire global economy.’ Coming years can expect to see the creation of vast new industries. New winners will emerge as all companies adapt to changing public expectations, shifting policy, and evolving resource availability. Some companies are seizing the opportunity for reinvention, reimagining their businesses and transforming their operations.
Growing recognition of the need for a broader concept of stakeholder value is changing the shape of the global economy. The strength of our economy, society and planet depends on hardwiring the needs of a broad set of stakeholders into the incentives and institutions that power business decisions. This rise of ‘Stakeholder capitalism’ is not just about climate - digitisation, social polarisation and the effects of the pandemic are also accelerating the shift.
However, the case for businesses to act on climate does not hinge on the completion of this shift in the dominant conception of value. Even with a narrow conception of shareholder value, there are powerful reasons for companies to act decisively and quickly. There is a need to take a hard-headed look at how the business can survive and thrive in a net zero future. The more businesses do so, the faster net zero can become a reality.
Let’s look at some specific ways shareholder value can be affected. Every company has its own set of value erosion risks and value creation opportunities - even if some are, as yet, unrecognized or unquantified. Business leaders need a clear picture of their own potential value impacts across at least these areas.
Quantifying the value impacts
A robust analysis of risks and opportunities will do more than identify them - it will quantify them so business leaders are better equipped to grapple with questions like these:
- How do we weigh the size, scope, and urgency of opportunities and risks?
- What are our most pressing vulnerabilities throughout the value chain?
- What business transformation/reinvention should we prioritize to thrive in coming years?
- How can we analyze cost-benefit, build the business case, and secure buy-in and funding?
No easy answers: Managing tensions and tradeoffs
As leaders gain a clearer picture of their business’s imperatives to avert risk or seize opportunity, tensions and tradeoffs will become clearer. For example, developing new product propositions can risk alienating an existing consumer base. Investing in clean energy technology can reduce long-term operating expenses but may come at the cost of high upfront capital expenditure.
A robust picture of value impacts can help companies to analyse these tensions and tradeoffs in an informed way. For example, SSE, a major energy company, sought to build a new 220km power line to transmit green energy across Scotland. However, constructing the line would also have some negative environmental effects. For instance, plans called for building tall towers in areas of natural beauty. To analyze these tradeoffs, SSE worked with PwC to value (in pounds and pence) the economic, environmental, and social impacts of the proposed project. This analysis enabled SSE to weigh the tradeoffs, plan mitigation measures, and quantify the value of mitigation (between £2.90 and £3.70 of value to UK society and stakeholders for every £1 of cost).
We are seeing more companies put this total impact valuation method into practice to evaluate tradeoffs in their capital infrastructure and other key projects.
The future will bring many decisions that involve complex tradeoffs. Leaders must be ready to rigorously analyze the costs and benefits of their options.
The facts to act
We have so little time to prevent the worst effects of climate change. We can’t achieve net zero fast enough without business taking action to decarbonize its existing activities and to develop new technologies and industries to get us to carbon neutrality.
Business runs on evidence. Business leaders need a robust, quantified picture of how their actions in light of climate pressures can create or destroy value, with all the tradeoffs that this entails. With this evidence in hand, businesses will be better equipped to perceive opportunities and risks, secure stakeholder support, and act with confidence to move us faster toward a net zero future.
PwC is proud to sponsor Climate Week. With offices in 155 countries, PwC is among the leading professional services networks in the world. Building on our existing expertise in ESG, net zero transformation and reporting, we will invest $12bn and create 100,000 new jobs over the next five years to expand capabilities for clients, including in the area of ESG. In September 2020, we made a commitment to reach net zero by 2030. With global reach, broad industry coverage, and 284,000 people supporting clients around the world – from reshaping strategy to deals, reporting, audit, and tax – we have a huge opportunity to accelerate the transition to a net zero future together.