For Businesses, Decarbonization Unlocks Value Beyond Investment Dollars

Pressure on governments and organizations to set a net zero target is reaching a boiling point. Yet the task of reducing emissions across the business and reporting on progress made—whether shifting to solar and wind energies, adopting electric fleets, or swapping for greener vendors—can be a momentous, and costly, undertaking.

“There’s been a preconception among a lot of companies that decarbonization doesn’t pay back financially,” says Mark Golovcsenko, Advisory Partner and ESG and Climate Strategy Leader at KPMG LLP.

And like any major company initiative, decarbonization requires not only operational and financial planning, but consistent reporting to enable progress—a challenge given the evolving nature of greenhouse gas measurements standards, according to Maura Hodge, ESG audit leader at KPMG LLP.

“Because these standards continue to evolve, companies are still working to implement processes that are repeatable and can stand up to assurance” she adds.

Despite these challenges, there are financial advantages for businesses that provide meaningful reporting that clearly articulates tangible financial value to the business.

Emissions reporting drives revenue

Customers are increasingly looking to buy low-carbon products but measuring emissions can be an operational headache for companies, particularly when it comes to tracking carbon emissions outside of a company’s own operations—such as those created by a company’s supply chain. According to the Carbon Disclosure Project, 75% of businesses' carbon footprint comes from those scope 3 emissions.

In addition, suppliers that make it easy for companies to calculate their emissions by effectively measuring their own can automatically be more attractive to their own customers higher up in the supply chain.

“There’s a bit of a loop that you’re seeing, because in order for companies to get that entity-specific information, they need those downstream entities to be doing their own measurement calculations,” says Hodge.

KPMG has seen several examples of companies that have won contracts on the strength of their decarbonization efforts and on the availability of emissions data, including a consumer goods company that reduced emissions by altering their manufacturing process.

“Businesses choose to purchase their products based on the lower embodied carbon content of the product,” Golovcsenko says. “Where you are in terms of decarbonizing does have value implications.”

Tax incentives spur action

Another challenge for organizations is that the infrastructure needed to make their climate pledges a reality isn’t always there. While it’s all well and good for a company to commit to an all-electric fleet by 2030, it’s a difficult promise to fulfill without adequate charging stations.

“The technology actually doesn’t exist in some instances to be able to achieve the goals that companies have set out for themselves,” says Hodge.

The good news—due to certain tax incentives made available through the US Inflation Reduction Act (IRA), decarbonization efforts are becoming more affordable, and more profitable. The IRA directs billions in federal funding towards clean energy initiatives through a mix of tax incentives, grants and loan guarantees. By offering monetary incentives for innovation, research and development and other enhancements, the IRA helps balance out the cost-benefit analysis and often tips these investments in infrastructure and technology to become financially net positive.

How decarbonization impacts debt and capital

Both investors and governments—wary of greenwashing risks and companies not delivering on earlier climate pledges—are demanding more clarity into where businesses are on their decarbonization journeys. Increasingly, investors and creditors are making robust carbon reporting a prerequisite for acquiring debt or capital.

Creditors, for example, will offer loans with adjustable interest rates based on a company’s progress against meeting its emissions targets. Similarly, asset managers are required to monitor investees’ climate metrics to market funds as “green” or “sustainable.”

Not only do companies that prove out their net-zero commitments stand to obtain lower costs of capital, but they may also provide access to new investors. Golovcsenko says enterprises are increasingly factoring in organizations’ emissions-cutting efforts in their M&A decisions.

“In the private equity world, they’re saying they’ll pay more for a company that’s made progress on decarbonizing, and that’s translating to the corporate world, too.”

Carbon inaction is getting expensive

If the financial benefits aren’t incentive enough, companies that are not proactive in measuring and reducing their carbon emissions can face penalties in various forms.

According to the IMF, about 40 countries have a carbon-pricing initiative, whether in the form of a carbon tax, or a cap-and-trade system, whereby high-emitting companies need to purchase emissions allowances.

As the effects of climate change increase and reducing emissions becomes more urgent, the US could one day join other countries in rolling out carbon taxing, and companies that don’t measurably reduce emissions could stand to face a big tax bill.

At the end of the day, if companies don’t want to reduce emissions, they may ultimately have to deal with the dollar impact, whether indirectly or directly via taxes or carbon pricing.

Accurate reporting communicates value

In order to hold more businesses accountable to investors on their climate commitments, standard setters and regulatory bodies from the ISSB to the EU have released guidance that define reporting requirements to disclose climate risks, opportunities, strategies, governance, and metrics and targets in early 2025.

“There’s an argument to be made that these reporting regulations are a response to investors wanting better data, because they see climate risk as financial risk, and investors are trying to get their arms around this stuff. They can’t do that without high quality, comparable data,” says Golovcsenko.

While reporting may be a regulatory requirement, internal monitoring is equally important. Making the financial case for decarbonization and tracking real-time operational data allows an organization to monitor progress and make micro-adjustments that may be both more financially viable and operationally effective.

Regardless of the purpose of reporting, many stakeholders rely on climate-related information to make critical business decisions. Therefore, organizations must increase the rigor around the collection and disclosure of this information, even to the extent of preparing some of it for assurance. According to Hodge, organizations should start the process of voluntary compliance by formalizing their climate reporting strategy. With a formal strategy in place, they can establish repeatable processes and accelerate the collection of data, which will ultimately help them implement controls and prepare disclosures.

By prioritizing both financial and non-financial climate reporting, organizations will be better placed to communicate their long-term value to shareholders and investors alike. Creating that value story allows businesses to move the needle on both decarbonization and financial returns.