How corporations are driving the low carbon transition

The climate change deal struck in 2015 at the COP21 meeting in Paris has set the world on an ambitious pathway of keeping the global average temperature increase to 2°C as compared to above pre-industrial levels, or to 1.5 °C if possible. Achieving this objective requires a significant reallocation of capital to low carbon technologies with a recent IEA report quoting that the 2°C pathway requires investments of circa $75 trillion by 2040 in both energy generation and energy efficiency measures. [1]

Given the scale of environmental challenges, it is natural that one of the key questions we ask is how can we mobilise the necessary capital to finance this transition? Well, one thing that has become evident is that government efforts alone are not sufficient to tackle these challenges.  In fact, one of the key messages in Paris was that tackling climate change requires an unprecedented collaboration between governments, the private sector and citizens, and that private businesses are expected to take a serious role given their pragmatic ability to find and scale solutions globally.

In this article, I intend to provide an overview of recent private business led initiatives in the field of sustainable energy as well as describe the rationale and the methods used by corporations to produce, procure, and consume sustainable energy. These trends have many implications for both corporate executives as well as investors, who are increasingly integrating sustainability criteria into their investment strategies and decisions. Lastly, the article provides some concluding remarks and general recommendations for corporate executives and asset owners with regards to corporate sustainability in the field of energy.

WHAT? – COMMITMENTS TO MORE SUSTAINABLE ENERGY

The commercial and industrial sector can be a major catalyst in the climate change fight by way of driving the demand for clean energy power as well as undertaking energy efficiency investments inside their organisations. Many global business players have become aware of the need to review the sustainability, or lack thereof, of their energy consumption. This represents a major shift in attitude in corporations from a passive energy consumer to a proactive prosumer[2] willing to review consumption trends, identify opportunities and make commitments to introduce more sustainable energy options.  

Over the past years, we have seen several coalitions and initiatives emerge, aiming at mobilising private sector interest in addressing climate change challenges within their organisations. Such initiatives have resulted in businesses setting climate related goals such as, actively reporting GHG emissions, promoting actions to reduce emissions and increasing renewable power consumption.

Energy related metrics, such as company carbon footprint, have become increasingly important to asset owners as a means of measuring carbon exposure related risks in their portfolios. However, while carbon footprint data provide an important snapshot of company operations, it does not fully reflect their dynamic commitment and long term view in sustainability. As such, it is important that investors include company forward-looking commitments in their investment analysis to get a better understanding of underlying risks and opportunities.

Among many global coalitions on the topic of sustainability referenced earlier, there are three initiatives that particularly concern private businesses. Each initiative is briefly descried below:

We Mean Business (www.wemeanbusinesscoalition.com) is a coalition of organizations working with the world’s most influential businesses and investors who recognise the importance of the transition to a low carbon economy. To date the coalition represents 494 companies with US$ 8 trillion in revenue and 183 investors with US$ 20.7 trillion AUM. Signatory companies are encouraged to commit to one or more of these initiatives:

  • Adopt a science based reduction target
  • Put a price on carbon
  • Commit to 100% renewable power
  • Corporate engagement on climate policy
  • Commit to improved energy productivity etc.

The RE100 organisation (www.theRE100.org) is a collaborative, global initiative of influential businesses committed to 100% renewable electricity, working to massively increase demand for – and delivery of – renewable energy. Signatories are encouraged to set a public commitment and report periodically on how the company is progressing towards achieving those goals.  

The rationale behind this initiative is that the private sector accounts for around 50% of the world’s electricity consumption, therefore, switching this demand to renewables will accelerate the transformation of the global energy market and aid the transition to a low carbon economy. As of today, 87 of the world’s leading companies are members of RE100, creating demand for around 107 Terawatt hours (TWh) of renewable electricity – around the same amount of power consumed by the United Arab Emirates or The Netherlands.[3]

Breakthrough Energy Ventures (BEV) is an investor-led fund made up of members of the Breakthrough Energy Coalition, which is a group of entrepreneurs, business leaders and institutional investors committed to help bring promising new zero-emissions energy technologies to market. The fund will invest more than $1 billion in scientific breakthroughs that have the potential to deliver cheap and reliable clean energy to the world.

BEV will collaborate with other investors, governments, research institutions and corporate partners, bringing to the table a fund with internal scientific expertise, a long-term horizon, and a tolerance and understanding of the investment risks required to transform energy markets.

WHY? – DRIVERS FOR CHANGE

There are many reasons why corporations are embracing the sustainable energy theme. However, some of the predominant reasons for engagement are listed below:

  • Ability to seal long term power offtake contracts thereby hedge against long term price volatile especially for fossil fuel-based generation.
  • The continuous decline in production costs for renewables, in particular solar, provides for a good investment opportunity.
  • Active engagement in sustainable energy adds on companies` goodwill and addresses the increasing public concern and awareness regarding climate change
  • Ability to reduce GHG emissions. This is especially important for companies that have set GHG reduction targets.
  • On site generation can secure reliable and stable energy generation. This is especially important for businesses that are exposed to power outage risks due to climate related instabilities or those that can utilise waste or biomass feedstock for power and heat generation.
  • Lastly, through such engagements, companies can benefit from favorable policies supporting deployment of renewable energy deployment

HOW? – OPTIONS

There are three main ways companies engage in promoting sustainable energy within their own corporations. Each method progresses to become more sophisticated and have a greater impact on delivering sustainable energy.

  1. The first option is to purchase Renewable Energy Certificates (REC) in the US or Guarantee of Origin (GO) in Europe, as a means of offsetting company carbon footprint. Through purchasing such REC credits, companies can claim the environmental “attributes” associated with renewable power whereby 1 REC equals one MWh. This is typically the easiest and fastest route to achieving immediate results though it has been often criticized as a form of “greenwashing” i.e. use of PR and marketing to promote the perception that an organization’s products are environmentally friendly. In addition, purchasing RECs does not necessarily contribute to additional new clean generation being brought online as companies buy such certificates from exiting clean energy projects. This aspect is often referred to as the condition of “additionality”.
  1. The second option is to enter into direct Power Purchasing Agreements (PPA) with renewable energy projects. Through such commitments, corporations are essentially committing that they will be purchasing up to 100% of the power output from that project. This approach is a much stronger commitment as corporations can directly link their power consumption with a specific renewable energy project. In addition, securing long term PPA with credible offtakers is of utmost important for project developers for the purpose of arranging financing. As such, through committing to such offtake via a long term PPA, companies are essentially contributing by adding and passing the “additionality” criteria. The benefit of this form of commitment is that it does not require significant capital investments into actual projects.
  1. Lastly, companies have the option of making a direct investment into projects, which requires companies to directly develop own renewable projects (or implement energy efficiency measures). This is the most impactful approach but, in the meantime, also the most demanding in terms of specialised expertise.

EXAMPLES

While there are numerous examples of such initiatives, some examples for illustration purposes are highlighted below.[4] The RE100 annual report presents more details for each of their signatories.

Company

100% Goal

Progress against 100% goal (2015)

Approach

Google

Data not publicly available

–          Solar PV self-generation

–          Direct purchase from specific generators – PPAs

IKEA

2020

53%

–          Self-generation from solar PV, wind and biomass CHP

–          Contract with suppliers

J Safra Sarasin

–          Solar PV installed in Switzerland

–          Unbundled renewable energy attribute certificates

Swiss Re

2020

87%

–          Solar PV installed at site in Italy

–          Unbundled renewable energy attribute certificates

UBS

2020

53%

–          Solar PV installed at sites in Switzerland

–          Contract with suppliers


CONCLUSIONS & RECOMMENDATIONS

It is evident that global transition to a low carbon economy requires private corporations to play a more prominent role. We are already seeing a number of companies embrace sustainability in terms how they procure, consume and produce their energy with many of them setting ambitious sustainable goals to be met by a certain date.  Such commitments come in various shapes and sizes ranging from purchasing of RECs all the way to implementation of full scale renewable energy projects. While these commitments demonstrate a great deal of goodwill, there is a solid economic rationale motivating such companies to be proactive

These trends have an important bearing for both corporate executives and asset owners.

Corporate executives:

Corporate executives should stay informed by tracking developments in the field of corporate engagement in sustainable energy. While active participation for some companies may not be timely, they should at least undertake a diagnostic exercise whereby they assess the organisational status in their energy consumption and procurement. Furthermore, they should also follow up with a high level plan of action highlighting opportunities and possible challenges. The latter would come in handy should action be demanded by shareholders.

Asset owners:

From an investment point of view, sustainable energy is an integral element of sustainable finance strategies. Apart from the traditional carbon footprint assessment, investors should be able to look into whether companies have made any formal commitments such as becoming signatories to any of the initiatives mentioned above.

Furthermore, investors should be able to look into the type of commitment that companies are making to get a better picture of the plan ahead such as RECs, PPAs or Project Implementation. This commitment can be translated into forward looking metrics that are then integrated into their decision making processes.

Lastly, as more investors integrate such information, this has the potential to push the demand from the top driving more companies to actively participate and report such commitments, thereby yielding in more sustainable energy investments.

 

[1] International Energy Agency – World Energy Outlook 2016

[2] A term coined for entities or citizen that produce and consume energy

[3] THE RE100 Annual Report 2017

[4] The RE100 2017 annual report

SFG & Blog // Qendresa Rugova // 01.02.17

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