Bill Gates, co-founder of Microsoft and co-chairman of the Bill & Melinda Gates Foundation, in a Financial Times guest comment for his book, How to Avoid a Climate Disaster: The Solutions We Have and the Breakthroughs We Need, sets out how corporations are at the nexus for the innovations required to tackle the climate change challenge.
Gates’s book provides a framework for working out what to be investing in. He uses so-called “green premiums — the differences in cost between a fossil-fuel-based way of doing something and the clean, non-emitting way of doing the same thing….
“The green premiums tell us how much it will cost to zero-out emissions in all the sectors of the economy where fossil fuels are involved — including producing electricity, manufacturing, agriculture, transportation, and heating and cooling. Armed with these green premiums, we can see which zero-carbon tools are practical now, and which ones we still need to improve or invent….
“For some products — like wind, solar and electric passenger cars — the green premiums are already low but will go down even further if more companies buy them. In other cases, such as low-carbon steel and fuels for shipping and aviation, the green premiums are prohibitively high. These are the sectors where we need to invest the most money and effort.
“In practice, this means companies need to be willing to finance innovative low-carbon solutions where the green premiums are highest. Investors, for instance, can lower the cost of capital for these technologies and make financing easier for them as they get to large-scale demonstration projects….
“By providing low-cost capital and other financial concessions along multiple stages of a technology’s development, you can help promising innovators navigate all the obstacles that keep them from getting their ideas out of the lab and into the market. You can also mentor clean energy entrepreneurs, sponsor pilot projects and put money into innovative funds that prioritise climate impact.”
It is a great call to arms for the power of corporate venturing to make strategic change happen for the parent. Already, the CEOs of large corporations see the strategic importance of being on the right side of climate change and how corporate venturing can help.
This will increasingly be recognised by the chief financial officers, too. The global adoption of a standardised accounting methodology for impact measurement — Impact-Weighted Accounting (IWA).
George Serafeim, professor at Harvard Business School, in his keynote at the GCV Digital Forum in September set out how, using publicly-available data, IWA translates social and environmental impact into the normal financial accounts.
As Alicia Rubí, partner at Attalea Partners, notes to the CFA Institute: “Let us compare the environmental impacts of the competing operations of Coca-Cola and PepsiCo using IWA. PepsiCo reported 2018 sales of $64bn and net income of $12bn, double those of Coca-Cola, which were reported at $31.8bn and $6bn, respectively.
“IWA monetizes the estimated negative environmental impacts of PepsiCo’s 2018 operations at $1.8bn, which is similar to Coca-Cola’s of $1.7bn. In both cases, these costs are almost entirely attributable to water-use inefficiency, according to IWA’s Corporate Environmental Impact: Data Supplement. If the negative environmental impact of Coca-Cola’s operations were an accounting line-item expense, the company’s 2018 net profit would fall by 28%.”
Energy is a $5tn-a-year business, and it is not accustomed to rapid change, Bill Gates observes. But change is happening. Already, the main independent oil companies are describing themselves as integrated energy groups and using venture-backed startups and corporate venturing to change their business lines and culture.
Gates concludes: “It will take time to achieve the scale of change we need, so we should get to work now on creating the policies, technologies and market structures that will make it possible. The good news is that there is a growing interest among the groups best suited to drive this change — corporations and governments.”
They have the tools through the financial statements and corporate venturing to bring the trillions of dollars on businesses’ books to bear on the sustainable development goals we need to be reaching. The GCV Symposium will be held in early November during COP26 and we will be working on a series of related initiatives to help support this transformation.
