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Why leaders see climate action as the future of competitive advantage

July 18, 2022, 6:00 PM UTC
As climate leaders chart a path forward, there are some factors that play to their advantage.
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Business leaders today face a host of complex and difficult challenges. The war in Ukraine has wrought tremendous suffering and created significant geopolitical uncertainty. Supply chains, already strained by the pandemic, have been further disrupted. Meanwhile, inflation has surged. Such events may lead some business leaders to deem climate action a lower priority for now.

But that is not true for all CEOs. Forward-looking leaders do not view climate action as a burden but as a potential source of competitive advantage. They look past the short term and see the opportunity to transform their business for sustainability. For them, climate and sustainability is no longer one of many topics to manage, but is now at the core of their strategy and value creation—with benefits for their brand, consumer demand, recruiting, and, ultimately, market valuations. Research and analysis by BCG have revealed clear evidence of these benefits:

  • Topline growth: Green products have a compound annual growth rate that is four to 25 percentage points higher than non-green products. 
  • Cost savings: In key sectors, 50% of required emissions reductions to reach net zero will save money or break even.
  • Value creation: Total shareholder return (TSR) for sustainability leaders is three percentage points higher than TSR for sustainability laggards, according to our research.

A true sustainability transformation, of course, may seem like a tall order. And, yes, it is ambitious. But the leaders show how it can be done.

3 elements of a successful sustainability transformation 

So, what is the secret to the success of leaders in sustainability? We see three critical elements.

First, they think about how to redefine their value proposition for customers. And they seek not only to make their existing products and services more sustainable but also to deliver new offerings that are in sync with a sustainable world. Consider agriculture player John Deere. The company’s CEO, John May, said at the recent investor day presentation, at John Deere’s technology headquarters in Des Moines, that the company is focusing on technology that “helps the world do more with less.”

For example, the company is leveraging its innovative technologies such as “See & Spray,” launched in the market in 2021, which enables targeted application of herbicides, to reduce overall input intensity to farming. That tight linkage between sustainability and better outcomes for customers has allowed the company to break the traditional view of sustainability as just another priority and embed it into their business strategy.

Second, the sustainability leaders find ways to generate quick wins that can build real momentum. A global consumer company we work with has taken this approach to decarbonizing its business. Rather than gradually reducing emissions in the supply chain for all their brands, they have focused on fully decarbonizing a few brands quickly. This approach will deliver the same amount of total emissions reduction. And, just as important, it will allow the company to communicate the low-emissions profile of these brands to consumers, building engagement, brand equity, and even price premiums. This improved business value can then help fund the decarbonization of other elements of the portfolio.

Third, leading companies look for ways to support players across their value chain—including customers and suppliers—in their own sustainability journeys. Financial institutions, for example, are engaging with clients, both large and small, on the business case for climate action.  This is particularly valuable for their mid-sized clients that supply large companies with net-zero targets extending into their supply chains. Banks can be a vital resource, deploying expertise and solutions for companies as they navigate their decarbonization journeys.  

The technology advantage

As climate leaders chart a path forward, there are some factors that play to their advantage. A critical one is technology. Business almost without fail underestimates the pace at which technology will progress. Solar photovoltaic capacity in 2030, for example, is now expected to be 36 times higher than the 2030 projections made back in 2002. And the cost of solar photovoltaic (PV) in 2030 is now projected to be one-third of what we expected in 2002. This same trend holds for other green energy technologies, including wind and battery storage.

Leading companies seem to understand this, often committing to a path for decarbonization that may not be supported currently by a solid business case. Already, new A.I. technology is being leveraged to help companies track and reduce their emissions. And if some nascent technologies, such as green hydrogen or direct-air-carbon-capture systems, accelerate faster than expected, these players will be poised to leverage them.

Ultimately, the ability to make that leap reflects not only a drive for advantage but a deep connection to the company’s purpose. Climate change remains an existential threat, and the pace of decarbonization progress to date is far short of what is required to limit warming to the 1.5 degrees Celsius set out in the Paris Agreement. As it becomes clear that business must play a crucial role in accelerating progress, many companies understand that climate action is directly linked to their purpose.

The future of the planet is in our hands—and what that future holds depends largely on what we do in the next decade. The good news is that a climate and sustainability transformation is not a cost driver for business. And it need not be motivated by altruism. It is a major opportunity to build a new and lasting source of competitive advantage.

Hubertus Meinecke is the managing director and senior partner as well as global leader of BCG’s climate and sustainability practice.

This story is part of The Path to Zero, a special series exploring how business can lead the fight against climate change.