Looking beyond the headlines of corporate decarbonization 

Many of today’s headlines about the state of corporate decarbonization paint a bleak picture, in which the world’s most influential companies are pulling back from their net zero ambitions (Harvard Business Review, Financial Times, Reuters). Alongside a broader backlash against ESG, companies who remain committed to decarbonization are also finding the process more difficult than anticipated, due in part to the capital required and the complexity of reducing scope 1 emissions. The Science Based Targets Initiative removed 230 companies from its net zero list because they failed to submit targets or have strong enough science-based targets. Big names like Unilever, BP, Nike, Tractor Supply, and Crocs have all walked back on sustainability initiatives in the last year.

However, these high-profile examples offer only a partial view of the larger corporate landscape. While the setbacks companies face in making progress toward their sustainability targets are real, the data shows that by and large companies are continuing to invest in sustainable solutions. For instance, a comprehensive analysis of over 6,500 companies found that 84% of companies are standing by their decarbonization commitments. In fact, 37% of the companies are increasing their ambitions, compared to the 16% that are decelerating their goals (PwC).

Companies continue to invest in sustainability because these solutions are supported by durable economic drivers and have widespread stakeholder support. This remains true regardless of the political winds. In the face of rising power prices and fierce competition for power, the value and need for energy efficiency is greater than ever. Investments in sustainability allow companies to make crucial infrastructure upgrades, reduce their energy spend, and reduce their energy consumption, while providing resilience benefits.

Corporate sustainability is not a passing phase 

Despite narratives to the contrary, corporate leaders increasingly embed sustainability in their governance strategies at the C-suite level. As natural disasters increase in frequency and scale, there is growing awareness of the real economic costs of not investing in resilience and decarbonization (Aon). These plans have widespread support from stakeholders: more than 75% of CFOs reported feeling pressure from at least three stakeholder groups to take more action on sustainability issues, with regulators, board members, and investors and shareholders leading the list (Accenture). 

Further, many corporates are still subject to a wide range of ESG reporting requirements. Though ESG regulations face backlash and scrutiny at the federal level in the U.S., many corporates are still subject to state-level or European regulations. These include the EU’s Corporate Sustainability Reporting Directive (CSRD); state climate disclosure laws, such as California SB 219; and standards developed by the International Sustainability Standards Board (ISSB) (Accenture).   

Economics are driving decarbonization  

In addition to regulatory drivers and stakeholder pressure, the C-suite increasingly recognizes the financial benefits of decarbonization. Corporates who want to expand their operations or update the aging infrastructure that plagues many U.S. companies face rising power prices stemming from surging U.S. power demand. These challenges make solutions such as energy efficiency upgrades and on-site renewables even more valuable; they modernize energy infrastructure at budget neutral or better prices, they offer longer-term cost savings from reduced energy use, and they improve energy reliability and resilience.  

About one quarter of companies realized significant value from their decarbonization efforts, including financial benefits equal to more than 7% of their revenues, for an average net benefit of $200 million a year, according to a recent survey from Boston Consulting Group and CO2 AI (link). Just under half of the leaders surveyed indicated that decarbonization results in lower operating costs for their companies. 

Reducing Scope 1 emissions is complex  

Despite the clear benefits of decarbonization, there are a few barriers preventing companies from achieving their goals. One key barrier is the complexity of reducing Scope 1 emissions. Scope 1 decarbonization is operationally intensive and often involves overhauling existing equipment and infrastructure to move away from using natural gas for steam and heat production. Upgrades to boilers, furnaces, cooling systems, and air compressors require detailed onsite engineering work, integration into the existing plant and equipment, as well as preventing construction from disrupting existing plant operations and production.  

More than 73% of companies reporting to the Carbon Disclosure Project identified as being “on-track” to achieving their Scope 2 decarbonization goals, while only 46% are keeping pace with their Scope 1 emission reduction targets. The reason for the difference is that companies have relied heavily on renewable energy procurement, specifically virtual power purchase agreements (VPPAs), to meet their Scope 2 targets. Generate’s customers have used this strategy because: 1) VPPAs are financial instruments that don’t require changes to the operational profile, and 2) a single, large VPPA can be used to offset non-renewable electricity usage at multiple facilities, making it a simple and scalable solution to meeting Scope 2 targets.  

In our own experience working in this space, we’ve found that an energy-as-a-service (EaaS) approach can overcome the challenges associated with Scope 1 reductions. Rather than focusing on a single technology, this approach bundles projects on a programmatic basis and guarantees their performance for the term of the customer agreement. Using this approach, Generate has successfully implemented a variety of projects including process heating, process cooling, electrification, compressed air, HVAC, lighting, fuel cells, controls, and central plant upgrades. 

Overcoming upfront financial constraints  

Beyond the complexity of emissions reduction, the financial commitment required for enterprise-level decarbonization is often the greatest barrier preventing companies and government entities alike from scaling their sustainability initiatives. Capturing the multitude of green financing and regulatory support mechanisms is crucial to reducing the costs of decarbonization action and accelerating change. But many companies lack sustainable financing frameworks to guide capital allocation for decarbonization projects, such as green loans and green bonds, or the ability to use innovative financing and contracting models, such as shifting financial responsibility to third parties via private equity, corporate debt, subsidies, etc.  

Here again, we’ve found the EaaS model can help alleviate these challenges. It does so primarily through shifting capital expenditures to operational expenditures, removing the need for upfront capital investment. This transformation allows companies to undertake extensive decarbonization projects without upfront investments, instead incorporating all project costs into a fixed monthly service fee.  

For instance, in a recent project Generate managed for a Fortune 500 company, we found that although the company had ambitious Scope 1 and Scope 2 sustainability targets, 1) its management couldn’t commit the financial resources needed to achieve decarbonization at scale, and 2) the company’s staff lacked the internal engineering and procurement expertise necessary to implement infrastructure solutions. Once we shifted the capital expenditure needed to the company’s operational budget and bundled the projects into an enterprise-wide portfolio, the company was able to incorporate the full suite of solutions and is set to see annual cost savings totaling about $10 million.  

This is one example of many we’ve observed as an infrastructure investor and operator. Time and again, we’ve found that companies’ drivers for adopting sustainable technologies are less subject to political swings than the headlines suggest: strong economics and stakeholder support.