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As featured on BusinessMirror: A dealmaker’s view on decarbonization

Many large companies, institutional investors, big banks, and insurance firms are adopting ambitious initiatives to reduce their carbon footprints, often before they are required to do so by governments or regulators. When looking to buy, sell or invest in other businesses, these global leaders increasingly consider whether their investment targets have a plan to reduce their carbon footprint.

If you have a clear decarbonization strategy and implementation-ready transition plan, you can differentiate yourself in the deals market.

The trends making waves

  • Global commitment to 2050: In October 2021 at the UN Conference on Climate Change (COP 26), approximately 5,200 businesses representing 40 percent of the world’s private capital mutually committed to reaching net-zero emissions by 2050. This collective goal now acts as the true north for many organizations and acts as the benchmark for ESG success.
  • The movement toward deglobalization: Recent geopolitical events have highlighted the acute risks of depending on foreign sources of natural resources. Many companies are seeing their decarbonization objectives inextricably linked to finding new investment opportunities closer to home.
    • Shifting talent priorities: Employees have become more value-driven than ever and are looking to join like-minded organizations with a plan to make an impact. Companies with clear decarbonization goals and strategies have an edge when it comes to attracting and retaining top-tier talent.
    • The need for data: Capturing, analyzing, and reporting on emissions data is both a challenge and an opportunity. Organizations that can effectively quantify their carbon footprint and decarbonization efforts will have an advantage.

Addressing the misconceptions

To reach net-zero targets, it’s not as simple as just divesting all “grey assets”—high emitters of carbon dioxide and other greenhouse gases. There is significant value to be generated in taking grey assets and making them greener.

One of the ways companies are “greening” grey assets is through the energy transition. Investors are seeking opportunities to have a direct impact by actively engaging with companies and sectors that are carbon intensive, rather than simply shunning them.

Investors’ commitment to net zero is also being operationalized by investing in new technologies, renewable power, batteries, alternative fuels, and other clean sources of energy. They are scrutinizing the energy consumed by their portfolio investments and making long-term commitments to switch to electric vehicles in their fleets.

Another misconception is that decarbonization only applies to greenhouse gases (GHGs), whereas, in reality, it’s about reducing the general pressure we place on the planet. That also involves a focus on resource intensity, biodiversity, and water consumption.

Finally, we see a misconception that only large companies need to have robust decarbonization strategies. As ESG principles become an increasingly integral part of the dealmaking conversation, companies of all sizes should view a sound decarbonization strategy as the cost of entry for doing business in the future.

Making decarbonization an imperative

Decarbonization has become a central focus of investment portfolio construction and engagement, and has moved:

  • past vague promises to an action-oriented mentality
  • from a focus on risk analysis alone to scrutiny of how decarbonization is being operationalized
    • from a consideration to a necessity, as GHG abatement capacity becomes part of the due diligence of any potential deal, large or small
    • toward truly envisioning how a potential transaction may help or hinder an investor’s net-zero goals
  • toward more transparency throughout global supply chains by requiring disclosures on a company’s carbon footprint.

As such, assessing decarbonization potential needs to be treated with the same rigor as every other component of a potential deal. It will increasingly be viewed as table stakes for attracting investor interest.

Recommendations for your decarbonization journey

Every path to “net zero” will be unique and based on each organization’s specific goals and circumstances. However, there are a few key recommendations that you can consider as you map your way forward:

Value creation

Companies interested in buying, selling, or investing will be looking for synergies in their portfolios to help reach net-zero goals. Companies that can demonstrate green value creation and measurable energy transition goals to potential investors or partners will have an advantage in the deals space.

Set tangible near-term and long-term targets

Reaching net zero by 2050 will require continual progress. Include clear, timely, and actionable science-based targets along your decarbonization plan to benchmark efforts and keep your business on track.

Impact assessment

Invest in data and analytics to help quantify your decarbonization efforts.

Talent attraction and retention

Create an actionable decarbonization strategy and leverage data to share your net-zero vision and progress with current and potential employees to bolster your talent attraction and retention efforts.

Embrace the movement

ESG is the framework investors are using for responsible investment, and climate change is the burning platform. Stay ahead of the curve or risk losing out to more proactive organizations.

The excerpt was taken from the KPMG Thought Leadership publication: https://home.kpmg/ca/en/home/insights/2022/12/decarbonization-in-deals.html