In pre-pandemic times, progress towards transformational change remained remarkably slow, despite climate change and sustainability rising higher than ever before on large companies’ strategic agendas. Although Covid-19 temporarily pushed climate change off daily newsfeeds, 2020 was a year in which political ambitions to address climate change started becoming much more robust.
Yet overcoming the climate change crisis can never come to fruition through aspirations alone. Decisive action – driven by a plethora of actors working in sync – is the most prudent formula to deliver solutions that yield sustainable results in a timely and cost effective manner.
As nations pursue strategies to honour their climate change obligations, the main driver behind success in this direction will be governments, backed by policies and regulatory tools that can move the needle in significant ways. The European Green Deal and the Biden administration’s commitment towards a greener future provide a substantial boost towards the global community’s ultimate objective. More than 110 countries have pledged carbon neutrality by 2050, with China following suit by 2060. In 2020 alone, the European Union (EU) and 15 other countries published a Hydrogen roadmap to decarbonise the most difficult economic segments, such as heavy transport and energy intensive industries. Moreover, a shift towards legal mandates also transpired, with the UK a prominent example. The government introduced legislation for net zero by 2050, while a recent court ruling in The Hague mandated Royal Dutch Shell to cut its emissions.
The other critical driver are the capital investors, and a significant shift in attitude towards their allocations and attention to green initiatives has been observed. For example, last year saw the number of signatories aiming to work according to the Principle of Responsible Investments (PRI) grow by 28 percent year on year, with assets under management (AUM) amounting to $103 trillion – up from $60 trillion five years ago. Arthur D. Little’s pan-European research also indicates that 72 percent of fund managers surveyed considered the approach to ESG as the most important differentiating factor when choosing an investment team, while the allocation of funds for US state and local pensions to private equity was 3.6 percent in 2001, whereas in 2019 it had almost trebled to 9.1 percent.
A primary benefit of this increased private equity allocation is that large new funds are made available for investment opportunities considered as higher risk. This makes it much more likely that strong yet disruptive companies, such as those in the green-tech sector, can be properly funded. The rise of Special Purpose Acquisition Companies (SPACs) has created an avenue to monetise investments in new ventures by taking them public through an IPO. Energy and technology sectors dominated the SPAC landscape in 2020 and H1 2021, with the likes of Charge Point, Quantumscape, Lucid Motors, and many others raising capital through a SPAC merger.
This accelerated momentum towards greener future, driven by government policies and investors, has taken many corporates by surprise, propelling a newfound sense of urgency in board rooms and within senior management teams. On one hand, they need to respond to demands to reduce their carbon footprints, with pressure coming from new regulations and activist shareholders. On the other hand, they need to reorient themselves to leverage the trillions of dollars of opportunities that lie ahead in the green economy. Corporates play a critical role in not only developing new technologies and businesses capable of meeting these new demands, but also collaborating with broader ecosystem players – such as universities, R&D institutes, and startups – to scale-up promising technologies and harness their expertise in management and operational excellence.
“This accelerated momentum towards greener future, driven by government policies and investors, has taken many corporates by surprise.”
Adnan Merhaba
With the above considerations in mind, investing for corporate strategic advantage to leverage opportunities arising from green economy activities requires companies to focus on two imperatives as they strive to take advantage of greater volumes of better-connected investment funding. Firstly, they should adopt new approaches to nurturing disruptive ventures that may be outside the normal core business. Secondly, they should work to shift the entire business ecosystem, which is often needed to successfully deliver green initiatives. A starting point for a corporate would be to reflect upon the following key questions, answers to which will guide their approach towards this paradigm shift:
- What is the role of innovation in my organisation and how effective is innovation management? – Build within vs Build with?
- How does my company engage with disruptive startups? Here, the role of corporate venturing must be defined, and striking a balance between strategic and financial objectives must be achieved.
- How effectively does my company leverage new paradigms in green investments, such as SPACs, green funds, and capital?
- How does my company approach collaboration in the broader ecosystem and work with competitors and players from other industries?
- How well does the underlying culture within my organisation support my Green Gambit?
A strategic approach, rather than an opportunistic perspective, towards the green economy is a winning strategy and the right way forward for corporates.
Adnan Merhaba, partner and Energy practice lead at Arthur D. Little MEI