Balancing short-term priorities with long-term vision is a dilemma as old as the hills, but it has been thrust into sharp relief by the shift to green energy.
A gut-feeling that costly investment in clean technology to cut emissions tomorrow jeopardizes a company’s competitive position today can be a powerful disincentive to act, not least given growing post-pandemic competition.
This dilemma has become pronounced in Europe at a pivotal moment as the region steps up efforts to become zero-carbon by 2050 – and may be holding back many businesses from investing in renewables.
Yet fears of a trade-off between costly green investment with no immediate payoff that depletes funds seen as a buffer in today’s uncertain market is a false dilemma, because when it comes to climate change the biggest risk is inaction.
A failure to act right now does not just multiply the future threat posed to businesses by global warming, it also threatens to blunt their competitive edge.
Our research suggests taking smart investment in cutting-edge technology now can offer a cost-effective way to achieve future zero-carbon targets while also ensuring long-term growth.
Europe’s pivotal moment
Pressure on businesses to invest in clean energy is growing as the European Union steps up its world-beating ambitions to slash carbon emissions.
In 2020, policymakers approved a €750 billion ($880bn) pandemic recovery plan to stimulate the economy that ties funding to the goal of making the region climate-neutral by 2050.
Industry will play a key role, not least because manufacturing generates a third of the continent’s carbon emissions.
Many European companies have already been investing to cut these, putting about 10% of capital expenditure toward energy efficiency measures. The 882 biggest companies, for example, invested €124bn to cut their carbon footprint in 2019, capturing 2.4 gigatons of lifetime emissions savings.
Yet this won’t be enough – in order to achieve climate goals European companies will have to accelerate the switch from fossil fuels to renewables.
It is a daunting task, requiring them both to invest heavily yet ensure doing so does not make their current costs uncompetitive.
The biggest challenge will be balance and timing, requiring them to devise a balanced portfolio of emissions reduction investments that combine short-term, “no-regret” measures with longer-term “next-horizon” solutions.
It seems like a mountain to climb – yet there is huge scope for both investments in emissions reductions that deliver value today and those that position businesses for growth in tomorrow’s markets for low-carbon solutions.
The largest driver of value across the board would be the switch by energy-intensive industries to renewables as prices for wind and solar power plummet, and substituting natural gas for coal offers massive benefits to the steel industry.
In established sectors, huge potential also remains for short-term energy efficiency improvements, especially in chemical production, promising to unlock €2.6bn in business value.
In emerging sectors such as battery, pharma, and data centers, energy efficiency moves today could help add €2bn to business value and cut emissions by 7 Mt in 2025.
And longer term “next-horizon” solutions to deepen decarbonization – from carbon capture and storage to hydrogen production – could help European industries capture significant shares of emerging markets worth hundreds of billions of euros from 2030 onwards.
This will be critically important for emerging sectors, such as the continent’s nascent lithium-ion battery manufacturing industry.
Coordinated investment and policy initiatives offer European battery makers a chance to raise their 3% share of the global cell market in 2018 to 25% by 2028.
Steps to green heaven
There are practical steps companies can take to achieve a balanced investment strategy, all of them energized by new technologies.
First, they need to measure and monitor their carbon footprint, mapping energy use to identify opportunities to make cuts, optimize processes and create value.
Internet of things tech combined with advanced analytics enable detailed and forward-looking understanding of wasted energy and unnecessary emissions.
Smart moves, therefore, include embedding IoT and AI in assets and processes to gain real-time insight into footprints, setting targets, and weaving energy use and emissions criteria into decision making.
Companies also need to scan the low-carbon frontier constantly to monitor the cost and maturity of developing technology in order to anticipate the best moment to invest.
Technologies to cut emissions are developing at light speed, and smart moves include creating dedicated teams to understand trends, sharing insights with experts and partners, and integrating scenarios into strategy to anticipate demand for sustainability solutions.
Danish power company Ørsted has refined this to an art. It anticipated the rise of renewables and after 2009 shifted business models by flipping its portfolio from 85% coal, oil and gas to 75% renewables by 2018 – toasting that year with $4bn operating profit (EBITDA).
The value chain is a key asset in the energy transition, and industry consortia working with regulators and government can maximize emission reductions while unlocking value by finding a home among suppliers and partners for waste energy and materials.
Collaboration is a green virtue, enabling the pooling of resources to commercialize game-changing solutions that reduce emissions, such as hydrogen power.
Smart moves that companies can make, therefore, include establishing industry consortia to test and scale new technology, and using innovations such as blockchain to trace resource use.
Swedish battery manufacturer Northvolt and engineering giant Siemens, for example, have forged a win-win partnership to optimize low-carbon battery production. Northvolt will use the Siemens Digital Enterprise portfolio to plan manufacturing and design automation and cloud solutions to produce its batteries – and Siemens will then buy them.
Finally, action to cut emissions really starts to drive competitive advantage when it informs product design to improve customer experience.
Embedding low-carbon criteria to improve the longevity, safety, and quality of products and services helps customers meet their own climate ambitions.
Smart steps businesses can take include integrating energy footprints into products supported by digital twin technology and blockchain to ensure resource transparency.
Swiss multinational LafargeHolcim, for example, launched a digital tool to optimize road design, cutting the carbon footprint of road projects by up to 50%, lowering project costs by up to a third, and tripling road lifespans.
Instinct is a powerful tool of survival, and business leaders are right to be cautious about long-term investments with no immediate return in today’s fragile markets.
But achieving net-zero emissions doesn’t have to be at the cost of business competitiveness.
When it comes to the energy transition, the opportunities to create new value by integrating technology investment with sustainable ambition are vast – and growing.
Executives able to develop a smart approach combining “no-regret” and “next-horizon” investments stand to unlock billions in value, on the path towards achieving the EU 55% emissions reduction target by 2030.
As a recent report by the World Economic Forum noted, the energy transition requires mobilizing all sections of society in a cohesive response, beginning now, as the next decade is crucial to delivering on climate goals.
The true mark of leadership, therefore, will be resilience: an ability to overcome the instinct to be cautious – and find a smart strategic balance between short- and long-term priorities.