- There is a transition underway to a greener, low-carbon economy. Businesses that successfully decarbonize their operations in line with global energy transition commitments may be more likely to protect their license to grow and avoid increased costs from carbon pricing.
- Current standard practice is to measure the financial return of project investments. Best practice during this transition, however, could be to prioritize investments that meet science-based targets (SBTs) and decarbonize operations.
- Companies could evaluate investments for financial and environmental performance to achieve carbon targets and mitigate risks associated with hidden future carbon prices.
- Reporting that is aligned with the recommendations of the Task Force on Climate-related Disclosures (TCFD) increases transparency with internal and external stakeholders for financially material climaterelated risks and opportunities.
- Trucost’s analysis of four publicly disclosed investments intended to deliver environmental and financial returns reveals that three of them could fail to meet either or both performance targets. For example, investment in coal storage, meant to improve the condition of the coal and reduce the amount purchased and combusted, was found to have significant hidden carbon emissions. The Green Transition Tool demonstrates that this supposedly green investment turns out to be brown.
- Trucost’s Green Transition Tool scenarios enable businesses to prioritize investments, consider environmental and financial performance, and report in line with TCFD recommendations.
There is a transition underway to a greener, low-carbon economy. As companies navigate the complexities of this shift, many could grapple with complex investment decisions—What to invest in? Where? How much to invest? Some may want to incorporate low-carbon technology in their operations or substitute greener materials in their products. Others may want to improve process and product designs, enhance management practices, or adopt different business models.
Conventional business practice considers the financial returns of capital investments, but does not typically factor in hidden financial and environmental benefits, such as reduced carbon taxes, penalties, and emissions. Better-informed investment decisions consider environmental and financial returns side by side.
Companies have many possible pathways to reduce energy consumption and transition to low-carbon business. Businesses must determine the optimal pathway that minimizes environmental impacts, while delivering acceptable financial returns. For most companies, this can be challenging because it requires robust environmental data at a local level.
Companies are under increased pressure to address climate-related issues. For example, customers want to understand how companies’ business practices are aligned with their climate goals. Investors want to understand how companies are managing material climate risks, and if they will be realized as financial costs. The TCFD recommends disclosing clear, comparable, and consistent information using scenario analysis as a tool for assessing those transition and physical risks and opportunities.1
As customers, investors, and policymakers impose new expectations about climate-related activities, it is vital for businesses to consider the climaterelated implications of their investments if they want to maintain carbon competitiveness.