Leaders of transportation and logistics (T&L) companies need to transition from defense to offense in their approach to climate action. Typically, T&L executives have viewed sustainability efforts as a compliance burden or a potential source of cost savings. In addition to considering these issues, they need to recognize that climate action offers them a broader opportunity to create tangible value by tapping into new markets and meeting new types of demand for low-carbon services. By taking the right approach, companies can increase their resilience to a known and imminent threat.
Transitioning to playing offense in sustainability will not be easy for T&L companies. Fortunately, they can draw on best practices developed in other industries. Adoption of new fuel technologies will be essential to completing the journey to zero carbon emissions, as will partnering with governments to fund the efforts and reduce the risk. Companies that get it right will create financial value as well as help save the planet.
T&L companies have a significant role to play in changing the current trajectory of GHG emissions. Heavy-duty transportation (aviation, heavy road transport, and shipping) is among the harder-to-abate sectors. It accounts for roughly 95% of all freight emissions, exceeding 4 gigatons of carbon dioxide (Gt CO2) in 2019. If nothing is done, emissions are likely to hit 7 Gt CO2 by 2050.
THE COSTS AND BENEFITS OF CLIMATE ACTION IN T&L
To be sure, decarbonizing the T&L sector requires a significant financial investment. Abatement costs are especially high for heavy road freight, air freight, and shipping—they typically range from $180 to $230 per ton of CO2, above and beyond the cost of fuel efficiency measures. But if T&L players act too late, the price tag will continue to grow over time. Given projected emissions, full decarbonization of heavy-duty transportation by 2030 would cost in excess of $1 trillion, assuming the technology exists to make it happen. The outlay will increase by $400 billion by 2050. Considering the long asset cycles in T&L, it is vital that players start taking action now. Indeed, the industry is experiencing mounting pressure from customers, employees, regulators, and investors to act on emissions.
The imperative for climate action amplifies a perfect storm of challenges that already existed in the T&L sector, including stagnating revenue and declining profitability as well as ongoing disruption from digital technology and innovative business models. To ensure their long-term survival, T&L players should launch a transformation with climate action at the center.
Unfortunately, most companies are not taking action, and those that have started have not yet been ambitious enough. BCG research reveals that among 872 transport companies, 70% do not disclose, or only partially disclose, their emissions and only 23% have set emissions targets. Of those setting targets, less than half (9% of the total) have reduced CO2 emissions versus last year. But the few goals that companies have established are too low: transportation companies are targeting, on average, a 30% emissions reduction by 2030, whereas the 1.5°C scenario requires a 50% drop across the industry by that year and a 100% decrease by 2050.
T&L companies that are pursuing tangible plans to reduce emissions have generated superior total shareholder return (TSR), according to BCG’s analysis. From 2017 to 2020, the average annual TSR of T&L companies that demonstrated a high commitment to environmental, social, and corporate governance (ESG) standards was 10 percentage points higher than that of industry peers. Although it is difficult to prove causality between ESG commitments and TSR, the correlation is striking.
It is clear that climate initiatives enable T&L companies to create significant shareholder returns by promoting three important sustainability levers:
- Top-Line Growth. A sustainable T&L company gains access to new markets and customer segments. Many T&L customers now ask for emissions data as part of their request for tenders. Customers’ willingness to pay more for sustainable transportation and services has enabled companies with a proven reputation for providing climate-friendly transportation to charge premium prices. BCG research shows that 70% of end-consumers are willing to pay a 5% premium for green products, which eventually results in an increase in green offerings throughout the industry. In addition, sustainable companies’ employees are more motivated and engaged in their work, enhancing their effectiveness.
- Bottom-Line Improvements. By investing in more sustainable operations, companies can achieve significant cost reductions relating to resources (for example, fuel and utilities) and operations (such as through fleet optimization). Firms with a sustainable brand also incur lower costs to acquire and retain high-caliber employees—many job applicants say that they consider a company’s sustainability when evaluating job offers. And, when on the job, employees’ higher satisfaction and engagement boost their productivity. Moreover, these companies gain preferential access to attractive financing and funding that are linked to sustainability metrics, reducing the cost of debt. Many banks have incorporated sustainability standards into the loan approval process.
- Valuation-Multiple Expansion. By investing in a sustainable brand and improving operational resilience, companies reduce strategic and operational risks. Moreover, by communicating to investors about their climate initiatives, they strengthen expectations for growth and profitability and boost confidence in their management practices.
