Businesses face a Green Premium and we should talk about it

Sustainability advocates should acknowledge that businesses face a short-term cost not advantage in the pursuit of ‘green’ and advocate for its reduction to accelerate climate action.

Summary

Bill Gates’ ‘Green Premium’ provides a proxy for likely progress towards a decarbonised economy. It can be valuably applied to the private sector to highlight the current financial costs of decarbonisation for businesses. This would balance the growing narrative that sustainability is beneficial for business’s bottom line, which sits at odds with the reality that most businesses remain highly unsustainable. Acknowledging the Green Premium businesses face is an important first step in aligning business incentives towards sustainability.

Note that ‘sustainable’ and ‘green’ are used interchangeably throughout — see subsequent piece.

What is the Green Premium?

Bill Gates defines the Green Premium as the ‘difference in cost between a product that involves emitting carbon and an alternative that doesn’t’ and argues that reducing the green premium to zero (or negative) is crucial to successful, timely decarbonisation: if the green option is less expensive than the alternative, most people will choose it. An example of the Green Premium for an aviation company would be the difference in the average price of jet fuel compared with that of biofuel.

Green Premium calculations are valuable for two key reasons:

1. They help measure progress toward eliminating carbon emissions, in that the bigger a Green Premium is — especially for lower-income countries— the further the world is from a zero-carbon future.
2. They can guide action by revealing where changes in policies and investment into innovation are most required to close the price gap between the green and less green option.

Gates highlights three levers to be pulled to reduce Green Premiums:

• Government action (policies);
• Companies and investors (by committing to buying and using cleaner alternatives, investing in R&D, supporting clean-energy entrepreneurs and start-ups, and advocating for helpful government policies); and
• Individuals (purchasing green options).

Businesses should not be afraid to highlight the Green Premium when advocating for change

More transparent exploration and acknowledgement of the Green Premium in the business context will generate conversation about the financial costs and practical challenges for businesses pursuing ‘greener’ options. The dominant narrative among business sustainability advocates is that sustainability is good for business: claims abound that it helps improve risk management, fosters innovation, improves financial performance, builds customer loyalty and attracts and engages employees. One influential review of 200 studies found that 90% of businesses concluded that good ESG standards lower the cost of capital, 88% showed that good ESG practices resulted in better operational performance and 80% positively correlated sustainability practices with stock price performance. However, only 21% of the world’s 2,000 largest companies have committed to reach net zero targets. As such, there is a perceived Green Premium, and it’s backed up by research. The Climate Change Committee estimated costs of around £1 billion per year in 2030 and reaching £4 billion per year through the 2040s for the British manufacturing and construction sectors to support the transition to net zero.

Advocates for sustainable business must support transparent conversation about the reasons most companies are not seriously pursuing sustainability: it’s not the profitable option within the short-term timeframe which business decision-makers are driven by. The Green Premium requires a solution of how to make sustainability the profitable choice for business leaders within the time-frame they currently operate, as it acknowledges the competitive advantage which businesses not pursuing sustainability may have — at least in the short term, because of the Green Premium.

Concluding points

• Transparency about the Green Premiums businesses have absorbed or which have inhibited sustainability efforts, would foster constructive conversation about the challenges of pursuing sustainability.
• This would help build momentum for more ambitious government intervention to reduce the Green Premium.
• Businesses can accelerate such momentum by advocating for government intervention to reduce the Green Premium as part of their sustainability strategies.
• Businesses must think beyond ‘Green’ to ‘System’ Premium — as this subsequent piece explains.

The author’s approach to writing

Thanks for reading this far. I publish these thought pieces not because I adamantly believe in the argument, but because it’s where I’ve arrived based on current reasoning. I’d love to hear your response, make improvements and be part of our collective efforts to halt the climate emergency. Please leave a comment or email me at annamurphy41534@gmail.com. Thanks, Anna

Remaining questions

• The Green Premium does not problematise business short-termism: would government intervention to reduce the Green Premium to zero over a short time period reinforce short-termism, causing other negative impacts? That a PWC survey released in March 2021 revealed 27 per cent of the executives reported being “not concerned at all” or “not very concerned” about climate change is testament to the discrepancy between risks associated with short and long-term thinking. Therefore, how can government incentivise long-term financial thinking while reducing the green premium to drive the imminent pursuit of sustainability?
• Is it even right that business profits from the transition to a greener world — and who might lose out as a result?