Here is a killer wake-up call: The global carbon market may be worth over $2.0 trillion by 2020. (That’s almost larger than the entire UK economy.) Almost half of that wealth will reside in the US, meaning carbon could account for a staggering 7% of US GDP by 2020.
In short, climate change is big business. And PwC got the memo. When I spoke with Scott Gehsmann, a Partner with PwC’s Transaction Services, he stated the firm’s position on climate change succinctly: “Doing nothing right now is not an acceptable response.”
In the last two months, Gehsmann has seen a flurry of demand for carbon & climate change risk management, including in the deal making arena. That’s where Porsche and VW appear in the storyline…
For four years, Porsche attempted a heavily leveraged “David vs. Goliath” takeover of the much larger VW. While both sides cited synergy as the driving force, PwC’s new Capitalizing on Climate Change report illuminates a different incentive: carbon emissions.
Under new EU regulations, European cars must emit less CO2 per kilometer or face fines. Porsche, as a heavy emitter, “would have to pay a penalty of approximately ‚Ç¨400 million annually” according to PwC. For a company with just ‚Ç¨1 billion in operating profit, “synergy” started looking more like “necessity”.
Through the VW acquisition, “Porsche is able to offset its fleet’s high emissions with the more efficient and low-emissions VW line,” says PwC, while also leveraging VW’s engineering expertise.
This sounds a lot like the C-average student who grabs the straight-A kid to work on a capstone project. In the end, it should result in a B grade and some type of learning… But is the A student better off?
Especially in heavy-emitting sectors like power generation and manufacturing, companies need to find out quickly if they are A grade students. (And if not, they either need to start studying or find a good partner.) Likewise, acquisition targets need to be graded as well – nobody wants to pay top-dollar to have a slacker on his team.
While PwC has a range of carbon & climate change expertise, the firm approaches the carbon market in primarily two ways:
The first is inward-looking. Gehsmann describes it as “creating a point of view”. PwC helps companies develop a process for understanding, assessing, reporting, and comparing emissions from one period to the next. That process also includes emissions accounting and valuation. Firms can then compare themselves to others in their sector to see where they stand.
The second offering is outwardly-focused. Reporting and communicating an emissions agenda in a manner that enhances the brand is critical. When the firm is pursuing an acquisition target, the due-diligence process needs to address carbon & climate risk. Does it add value? Or diminish it? (Are you buying a member of the carbon A team or C team?)
In the diligence process, PwC presents a convincing case that firms need to ask if they have honestly assessed “climate change-related litigation, physical impacts of climate change, current greenhouse gas emissions” and even other considerations like environmentally-linked compensation structures.
PwC’s report also highlights how quickly the low-carbon economy is changing business. Among the key highlights:
- Almost half of the S&P 500 say they are disclosing their emissions to stakeholders.
- In 2008, 57 climate-related shareholder resolutions were proposed – most cited the need for management to measure emissions and commit to a reduction goal.
- The FASB and IASB are working jointly to develop accounting for carbon emissions allowances.
- The 2008 venture capital clean technology investments of $4.1 billion were a 54% increase over the previous year.
How is your company preparing for the low-carbon economy? Tell us what grade your company deserves in the comments box below!