By: Zula Luvsandorj
Businesses in the power, transport, and manufacturing sectors, which are the biggest contributors to global carbon emissions, are increasingly choosing (and in some areas are required) to adopt more sustainable practices. However, the time for questioning “why should we care about green premiums now?” has long past. We need to ask, “what can we do to make up for the fact that we haven’t been incorporating green premiums all along?”
With multiple major world economies already committed to 2050 NetZero commitments, green premium adoption is unavoidable. The arrival of a new US administration, and the upcoming United Nations Climate Change Conference (COP26) in October, means that there will be a higher pressure on the world’s economies to push for net zero commitments.
Notably, there has been a growing number of pledges to the net zero by 2050 initiative in the past year – covering approximately 68% of the global GDP, according to a report from Oxford Netzero and ECIU (Energy and Climate Intelligence Unit). Though the financial cost of this undertaking has been criticised by detractors, the total cost, provided by the Climate Change Committee (CCC) is estimated to be £49.1bln annually. This sounds to be a big number, but at the percentage of the GBP, it actually only represents just 1.3% of total UK GBP per annum.
The faster the world moves to NetZero the better it will be for the economies and businesses. The continued governmental pledges and interest from likeminded investors are attracting a huge amount of capital to support the ‘right’ businesses. There are attractive opportunities for the green businesses to raise funding, at the cost of sustainability lens improvements and innovative ideas.
For example, in the renewable energy sector, Feed in Tariffs (policy used to serve as catalyst to investment in renewable energy technologies by offering long-term contracts to renewable energy producers) has helped enormously to increase the percent of renewable energies in major EU economies. Norway, for example, sources nearly 100% of its electricity from renewable energy sources. Additionally, the cost for the technologies bolstered by these Feed in Tariffs only continues to decrease as new innovation is made, meaning the price for consumers slides down as well.
The UK has the potential to implement similar green initiatives in its infrastructure planning in another way. Around half of the country’s £600bn infrastructure pipeline is financed by the private sector. This is supported by a range of established tools, such as Contracts for Difference, the Regulated Asset Base Model, and the UK Guarantees Scheme from the government. On top of attracting finances largely from the private sector this is about a close collaborative work between governments, private sector, and end consumers. This sizable working relationship has the potential to be a powerhouse in the UK’s fight against climate change.
Businesses planning to adopt green premiums must also be prepared to adopt a new level of transparency when it comes to providing consumers with exactly where those extra dollars are going, and what the company is doing with them. For example, the recent Food Labelling bill discussed in UK Parliament in late 2020 and early 2021, would bring a huge consumer behaviour change too, where consumers will be able to check the environmental processing of, for example, their Aberdeen steaks purchased at the supermarket. It may be a pound more expensive, but consumers may be more willing to pay for the steaks because they are also receiving more transparency on whether the farmers have been using any harmful fertilisers and medicines. Enshrining NetZero initiatives in law in this way can help guide or mandate businesses in a way that allows them to participate in the fight more fully, but for that to happen we need a parallel conversation about what green premiums mean for everyone from the company stakeholder to the consumer.
SMEs and startups may also receive better funding opportunities to develop their sustainability related businesses. Governments should be leading the incentives and catalysing private investments into the innovative areas to increase NetZero commitments through funding tools and guarantee schemes. If governments are committed to NetZero pledges, they should create opportunities to bolster these efforts in the private sector.
Though green may seem to be ‘in’ right now, being sustainable can still provide a competitive advantage. The right attitude can create huge opportunities for the businesses, as major investors such as pension funds and commercial banks formalize their ESG standard lens filters for partners. All major investors, such as pension funds and commercial banks are formalising their ESG standard lens filters. Entrepreneurs need to start their green businesses while the money is still hot.
Though governmental and business adoption is crucial, the most important player in the sustainability of green premiums will be wider consumer acceptance. Without this key component, it will be difficult for governments to ask the consumers to pay for it as they attempt to push the initiative.
In the next five years, consumer behaviour will be the driving force for the businesses to change towards sustainability. In all ways, the consumers are king and as such, stakeholders’ first priority should be to create a positive culture of understanding for why we should be paying the premium and using sustainable products. This does not come overnight; it may take years to get consumers used to the green premium. Creating a wider debate and understanding about the need for and granular details of what green premium adoption would look like is an important step.
