Rising energy and CO2 prices – An opportunity to act?

By David Frans, Yvonne Ruf and Daria Koroleva

Although companies are beginning to show some initiative on sustainability and climate action, pressure from various sides is intensifying. Learn how continued inaction will put a company's competitive position and profits at risk – and why the time to act is now.

While companies are indeed starting to take climate action more seriously, current targets are still insufficient to achieve the necessary impact. The combined targets set by the largest global public companies would reduce emissions only by an estimated 20% by 2030 – against the total reduction of 43% that is required. Clearly, many companies have yet to grasp the magnitude of this issue. Thankfully, however, compulsion to act is being stepped up by growing external pressure from all stakeholders and the recent surge in energy prices. A strong focus on decarbonization and climate action is increasingly important if companies are to meet regulatory requirements, attract talented employees, satisfy customer expectations, and secure continued shareholder interest and investment. On the other hand, inaction will put a significant share of corporate profits at risk.

The impact of climate regulation and carbon prices

Climate regulation is becoming stricter and will continue to do so. For example, pressure on corporates is growing in relation to Scope 3 emissions. The EU has adopted the Corporate Sustainability Reporting Directive (CSRD), and technical reporting details will be finalized by the end of 2022. At federal level in the US, the Securities Exchange Commission (SEC) too has proposed a rulemaking package detailing climate-related disclosures.

CO2 prices are another regulatory focus. In the coming decades, CO2 prices are expected to rise from below USD 100/t CO2e today to as much as USD 200/t CO2e in developed and selected developing economies. Yet even at today’s price, a significant amount of companies’ profits is already at risk, ranging from around 2% of EBITDA in financial services to roughly 35% of EBITDA in chemicals and more than 50% in transport. Coupled with the recent surge in energy prices, every ton of CO2 from fossil fuel combustion hits corporate profitability twice.

In addition, different carbon tariffs are expected to ensure that companies failing to reduce their emissions will be driven out of the market. Producers will be forced to comply with ever stricter domestic standards in their target markets if they do not want to lose their customer base:

• The EU announced its Carbon Border Adjustment mechanism in 2021, which is to be enforced by 2026.
• In the US, there are two initiatives in place: (1) the California Cap-and-Trade Program, and (2) the Regional Greenhouse Gas Initiative, covering 11 northern states.
• Canada is also interested in implementing a similar program.

Sustainability and climate action to attract and retain talent and win customers

While tighter climate regulation will affect companies’ profits, the ability to attract and retain talent will likewise decide their future. Some 75% of HR managers believe that corporate ESG performance has an impact on talent attraction and retention. Their assessment is borne out by employee surveys, which indicate that the perceived importance of sustainability and climate action has increased by more than 50% since 2020. Buoyed by younger generations, potential and existing employees alike will thus continue to drive the required cultural and organizational changes, establishing sustainability and climate action as a priority in all decision-making processes. Companies that do not adapt to the sustainability awareness of potential and current employees will therefore face an insoluble problem in the war for talent.

Along the same lines, consumers too seek – and champion – brands that commit to sustainability. Growing environmental awareness, paired with an intensifying desire to participate in community causes, is rapidly filtering into empowered consumers’ purchase decisions. In the search for sustainable options, these shoppers scout information about everything from company values to manufacturing and supply chain practices: 68% of consumers already plan to step up their efforts to identify brands that mitigate environmental impact, and 61% seek out energy-efficient labels when making purchases. Roughly half (49%) of consumers globally say they pay a premium for products branded as sustainable or socially responsible, signaling that consumers are willing to support sustainability with their wallets.

An unprecedented crisis – And an opportunity to act

The climate crisis constitutes one of the greatest challenges to our societies and economies. Increasing CO2 and energy prices, upcoming carbon border adjustment mechanisms, and greater employee and customer awareness of sustainability all point in the same direction: toward decarbonization. Companies are experiencing external and internal pressure from all sides, and the only way to respond to this situation is to act now. Those that do not rise to this challenge risk not being able to keep pace with those that have already started to invest in climate action. As a result, they will lose profitability, the ability to attract and retain talent, and their customers' favor. Although the regulations and demands imposed on companies can at times seem overwhelming, decarbonization – and leading the way toward a low-carbon economy – also creates opportunities for companies to transform and grow their business: On the one hand, we see a greater willingness to pay for sustainable products. And at the same time, being a sustainability leader clearly presents a highly attractive competitive advantage.

In conclusion, the coming months and years will give companies an opportunity to put lasting changes into action. Setting up supplier engagement programs for joint decarbonization, investing in energy-saving technologies, securing access to renewable energy sources, and embedding sustainability and climate action in every facet of a company's strategy: These are only some examples of potential initiatives that companies can take to become more independent of fossil fuels and foster their commitment to a net-zero economy. If companies do not start to act now, even in these tumultuous times, they risk being left behind by those that have already started to invest in climate action. Companies can convert risks into opportunities by not squandering money on CO2 tariffs while gaining more clients that value their partners’ decarbonization efforts.

Roland Berger supports companies in the development of sustainability strategies and the identification of potential emissions savings along the entire supply chain. Go here to learn how we can help your company develop future-proof climate actions. Alternatively, find out more in our study " Accelerating Decarbonization ", or simply stop by and see us at COP27. Together, let us start to think green and act clean.

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