Decarbonization is the new business imperative

Growing Canada’s clean economy could be the greatest economic opportunity of our time. Increasingly, investors, corporations and the next generation of policymakers alike are adopting this mindset. Companies that enable or accelerate these objectives will unlock new markets and revenues. Those that drag their feet or stand in the way are at serious risk of value erosion.

In an effort to gain first-mover advantage, industries and governments are taking steps to spur the clean energy transition in their local economies. Strategies include funds targeting new products and services, and significant green incentives that encourage corporations to invest in clean technologies such as hydrogen production, energy storage and carbon capture.

Despite this clear opportunity, many economic and technological challenges are preventing action.

“It is going to take tremendous public and private investment to successfully transition to a clean energy economy, particularly in Canada where natural resources and heavy industry are central to our economic output,” says Andrew McHardy, partner and National Decarbonization Hub leader at KPMG in Canada. “What critics are missing is that businesses can’t continue operating as they are today and expect to see the same profit and growth returns in perpetuity.”

He notes the seismic shifts in the operating environment that will unfold over the next quarter century and beyond. A 2022 study from the Institute for Sustainable Finance estimates that under a business-as-usual scenario, the physical damages of climate change will cost the Canadian economy $5.5-trillion by the end of the twenty-first century.

“Climate change manifests itself economically through decreasing resource availability, rising prices for raw materials, and increasing costs for doing business in severe-weather or natural-disaster-prone regions,” Mr. McHardy says.

On the heels of the worst wildfire season in Canadian history, Canadian businesses are already feeling this pressure. According to a recent KPMG poll, more than half of small-to-medium sized Canadian businesses said their costs due to extreme weather rose significantly over the past year. Six in ten were directly impacted by severe weather events, and had to make difficult decisions such as shutting down operations to prepare or recover.

While climate change is a strong impetus for action, a number of other considerations will drive how a company responds. Emerging policies and regulations, as well as increasing consumer demand for low-carbon products and services, are set to affect a company’s bottom line.

Mr. McHardy says that companies need to be thinking now about revising their business models to adapt to their changing operating environment, and devise plans to decarbonize their operations at scale.

Companies can start by taking stock of what internal and external pressures will have the most impact on their operations, says Rupert Crilly, partner, Deal Advisory and Decarbonization at KPMG in Canada.

“Heavy emitters and resource users will want to pay particular attention to external pressures such as increasing carbon prices, as they will be more exposed to such changes,” he says. “Understanding the impacts of these external pressures will inform what big-ticket, internal strategic changes a company needs to make. That can include revisiting their business model, entering new markets, reprioritizing service offerings, and even pivoting from existing revenue streams that won’t be viable down the line.”

Making progress on such large-scale changes will require companies to invest in and prioritize innovation in unprecedented ways.

“When it comes to decarbonization, executives seem to be banking on the emergence of new technology solutions to achieve their emission reduction targets,” says Mr. McHardy.

He is concerned this could lead them to underestimate the degree of internal innovation required to successfully integrate and deploy these new technologies. The decarbonization process is more transformative than many companies realize. Organizations must adapt their internal structures, systems and processes and business functions, and deploy the right expertise and skills, to be able to capitalize on opportunities.

“And I’m not just referring to technical skills,” adds Mr. McHardy. “This includes transforming business functions such as strategy, capital planning, research and development, and operations management. Enterprises have to account for decarbonization initiatives and expenditures that have a broad reaching impact on them.”

Indeed, many leaders are recognizing the importance of embedding decarbonization into their organization’s capital planning and financial strategy. This will ensure they are prioritizing and funding initiatives that help achieve their decarbonization ambitions, and improve transparency by integrating environmental considerations into financial reporting.

CEOs are probably still a few years away from seeing a return on their investment in ESG and decarbonization. To navigate the uncertainty in the meantime, Mr. Crilly says companies should be doing two things.

“Leaders would be wise to consider the range of likely scenarios, and keep themselves open to being able to embrace whatever actually comes to pass.”

Second, companies should embrace an agile approach.

“This requires preparation, including becoming clear on your organization’s thresholds for acting across a wide range of scenarios,” says Mr. Crilly.

He mentions developments like carbon prices hitting a predetermined level, tax incentives that provide funding for a certain type of initiative, or new regulations governing a specific requirement. When it’s time to act, he says organizations can be opportunistic. With the importance of decarbonization to their bottom line and to stakeholders, that’s a new business imperative.