Decarbonization and profitability: A tough balancing act

ILLUSTRATION BY RUTH MACAPAGAL

Nearly eight years since the historic Paris Agreement was signed by 196 parties at the United Nations Climate Change Conference, the pressure on all industries to implement low-carbon initiatives remains high.

Corporations are definitely no exception to the commitment to keep Earth’s temperature at 1.5 degrees Celsius, especially as global carbon dioxide emissions stood high at 33.57 million kilotons in 2020.

However, investing in low-carbon businesses has proven to be a challenge globally as investment returns remain uncertain, as stated in management consulting firm Bain & Co.’s 2023 Energy and Natural Resources Report.

The company surveyed more than 600 executives across the energy and natural resource sector worldwide, putting a spotlight on their carbon emission reduction plans while exposing the challenges in reaching long-term climate goals.

“While concerns about climate change and extreme weather grow, and customers and shareholders call out for rapid decarbonization, these executives are tasked with changing the way the world produces energy, food and many critical materials—all while keeping their businesses viable,” the report says.

While only less than 20 percent of executives expressed significant concerns about accessing capital for low-carbon investment, many found that ensuring returns is a major barrier to their efforts.

According to Bain, 78 percent were “skeptical” that their customers were willing to pay more to support these new low-carbon businesses at scale.

As an example, the cost of building renewable energy facilities remains costly. This fact is supported by the International Energy Agency (IEA), which says that the cost of capital for a typical utility-scale solar project “can be two or three times higher” in key emerging economies than in advanced economies.

This ultimately translates into more spending both by businesses and their customers.

As a result, Bain points out that executives look to government policy support to incentivize their investments.

“Their concerns are based on customers’ unwillingness to pay—not universal but enough to make it hard to scale low-carbon investments. So they look to government policy and regulatory support to help bridge the gap,” it says.

However, more than 40 percent of executives cite government policy and regulations as among the “very significant” roadblocks to scaling their low-carbon businesses.

In Southeast Asia, an earlier report by Bain, Temasek, GenZero and Amazon Web Services found that the region remained highly dependent on fossil fuels and international funding, making it a challenge to effectively implement clean energy transition initiatives.

Addressing this and accelerating clean energy transition would require the region’s energy sector to streamline its permit process, accelerate grid modernization efforts to reduce congestion and increase financial incentives for renewables.

“Regional cooperation is key to unlocking the full potential of an effective green economy by crowding in necessary capital and expertise to fully develop opportunities in nature, technology and carbon markets. This will help advance the regional transition to a net-zero economy,” Frederick Teo, GenZero chief executive officer, had said.

The ‘greening’ of households

One path that businesses may take, according to Bain, is to anchor on consumers who are willing to pay the “green premium” associated with new energy sources. This is supported by some policies.

In the Philippines, for example, the Department of Energy’s retail competition and open access program allows customers with a 12-month average consumption of at least 500 kilowatts to choose their electricity suppliers.

The Energy Regulatory Commission is working on evaluating the market to gradually reduce the threshold level until it reaches the household demand level.

Bain also highlights the tension between energy supply and climate change as a “dual challenge” for businesses.

“The world needs more energy. Yet our largest primary energy sources, fossil fuels, are also the largest sources of anthropogenic greenhouse gas emissions,” it says.

According to Bain, fossil fuels account for around 80 percent of the world’s primary energy supply. This puts pressure on businesses to double their total energy investments by 2030 and sustain this until 2050 to achieve net-zero emissions.

At present, the IEA estimates that investments in clean energy need to increase to $4.6 trillion by 2030 from the actual $1.6 trillion to reach net zero by 2050.

For their part, executives “remain committed to steadily increasing capital deployment and playing their part in the world’s bumpy journey to net zero.”

“The cost of failure in either direction is high: a rapidly warming planet and the consequential environmental risks, or stifled economic progress and lingering quality-of-life concerns for the billions of people who lack access to sufficient energy,” Bain says.

“But the outcome is not predestined, and it will depend on the actions we take to address the challenge,” it adds.