This is the second in a series of blog posts that highlight how decarbonization can create value and how consumer goods companies can formulate—and then implement—viable plans to reach their decarbonization targets across the full range of emissions.
As the first article in this series examined, although 39 percent of consumer goods players worldwide have publicly pledged to reduce their greenhouse-gas emissions in the near term, most companies are not on track to meet those targets. Delays are generally driven by challenges such as complex consumer-goods value chains, limited collaboration between stakeholders, and the challenging and uncertain macroeconomic situation.
Decarbonization initiatives can create value in multiple ways, including through cost savings, green growth and premiums, and the ability to build new green businesses—as well as through a reduced environmental footprint. Businesses that can build have a broadly shared internal understanding that decarbonization can create value; those businesses will be better able to accelerate—and benefit from—the decarbonization process.
Understanding the total value of decarbonization
A decarbonization pathway is a set of abatement levers that, when rolled out in a specific sequence and along a set timeline, allow a company to reach its decarbonization targets. There can be more than one possible pathway for a company to take to achieve its goals.
Some levers to achieve decarbonization goals require significant investments, such as modernizing capital-expenditure-heavy infrastructure through transitioning to a carbon-free fleet. Other levers can offer savings, such as by increasing operational efficiency through reduced energy consumption. However, the overall decarbonization plan should consider more than just the individual cost-saving potential of each lever; the chosen pathway should connect to a detailed and broadly understood calculation of the total value at stake.
Thinking in terms of aggregate value at stake will often involve a significant shift in mindset because business leaders often perceive decarbonization as a cost rather than an investment, particularly when the macroeconomic environment is difficult. Instead, companies should take a holistic, long-term perspective in evaluating the significance of decarbonization initiatives.
The multiple sources of value creation from decarbonization
In addition to the positive impact on the environment, decarbonization efforts can create value for a company through cost savings, green growth and premiums, and opportunities to create new green businesses or service lines (exhibit). In addition, judicious decarbonization initiatives can increase company valuations.
Companies that do not act may see an increase in their cost of capital because of increased market understanding of the benefits of climate action, may see their costs rise if carbon taxes rise, and may lose market share as consumer preferences shift.
1. Cost savings from green operations
As we have seen above, some decarbonization levers can offer direct cost savings, in terms of both capital and operating expenditures.
Many initiatives may also enable companies to avoid the financial impact of potential carbon taxes or other climate regulations. An increasing number of countries are committing to net-zero pledges, including 19 members of the G-20 that together account for more than 90 percent of global GDP and more than 80 percent of global CO2 emissions. As a result, carbon prices and emissions regulations—both current and future—are an important consideration for the operational cost of decarbonization levers and other investments.
Companies are already moving to reduce their exposure to potential changes in policy. More than a third of consumer companies have begun experimenting with—or plan to adopt—internal carbon pricing to gauge how their emissions could affect their bottom line and investment choices.
2. Green growth and green premiums
Demand for sustainable and circular consumer goods has been accelerating in recent years, and consumers are increasingly willing to pay more for low-carbon or sustainable products. More than two-thirds of consumers say they are changing their consumption habits to decrease their environmental impact, with younger generations’ behavior, in particular, being increasingly affected by sustainability considerations.
These shifts present companies with opportunities to play offense to capture growth opportunities within their current market; increasing demand for net-zero products and services could result in more than $12 trillion of yearly sales by 2030 in eleven different value pools. Market leadership will be determined, in part, by each company’s ability to capture these new value pools during the transition to net-zero emissions.
3. Green business building
The growing demand for sustainable products and services will also provide opportunities for new low-carbon businesses or for existing companies to branch out beyond their current core activities and capabilities. More than 90 percent of executives say they aim to build new businesses that address sustainability to some extent, and more than 40 percent expect to put sustainability at the center of their new businesses’ value propositions. To enter new markets and achieve significant long-term growth, green business builders will need to plan, scale, and accelerate their own transitions to net-zero emissions.
The value at stake is substantial
The aggregate value creation from decarbonization initiatives can be substantial. For example, an analysis of value at stake revealed that a large European luxury brand had the potential to increase its EBITDA by about 20 percent by 2030 via the adoption of seven critical decarbonization initiatives. A European grocery delivery company identified a potential 15 percent increase in EBITDA by 2024 through the introduction of short- and midterm initiatives, including introducing reusable bags, monetizing food waste, and offering CO2 offsets at checkout.
Consumer goods companies have a window of opportunity to create more-resilient and forward-looking businesses by developing and implementing holistic decarbonization strategies. Those that succeed will be able to reduce emissions, differentiate their offerings, command price premiums, expand their share of existing markets, and develop new and innovative green businesses.
The next two articles in this series will delve deeper into the main drivers of Scope 1, Scope 2, and Scope 3 emissions and discuss how to identify—and implement—appropriate decarbonization levers for each.
Charlotte Bricheux and Jonas Lehr are consultants in McKinsey’s Zurich office, where Lucas Ponbauer is a partner; Sebastian Gatzer is a partner in the Cologne office.
The authors wish to thank Rens Gerrits, Sebastian Kahlert, and Szimonetta Rasky for their contributions to this article.