Accelerating the Carbon Transition
Accelerating the Carbon Transition
We are crafting strategic and pragmatic approaches to help a broad range of industries and the nonprofit sector reduce carbon faster.
After temporarily dipping in the first half of 2020, carbon emissions have quickly rebounded. We remain far from the rate required to limit warming to 1.5 degrees Celsius—namely, a 45% reduction in greenhouse gas emissions by 2030 (from 2010 levels) and net-zero emissions by 2050, according to the Intergovernmental Panel on Climate Change. The climate crisis continues to worsen the severity, frequency, and cost of natural disasters, including droughts, floods, wildfires, and hurricanes, which affect tens of millions of people each year.
An approach that is both strategic and pragmatic is the most effective way to reduce carbon. The climate challenge is at its heart about preserving the value of all our assets—natural and manmade. We help our corporate clients, many of whom are targeting net-zero carbon emissions, stretch their ambitions, progress toward their goals, and build sustainability by systematically reducing the carbon intensity of their assets, operations, supply chain, and product mix. We also work with leading nonprofits to develop market-based solutions to climate change.
The best and fastest way to accelerate the carbon transition, in our view, is for businesses to embed it in their purpose, in how they create value. Many companies have treated carbon reduction as an additional cost of compliance, making it hard to rally the support and investment needed to bring about true change. But there is actually great value to unlock by doing the right thing for the planet.
Over the past two years, we have worked with our clients on more than 400 projects cultivating the economically positive effects of reducing carbon, not just in the energy industry but across the economy. Companies in manufacturing, consumer products, technology, retail, transportation, and financial services, among others, all play a critical role in reducing our collective impact on the environment, and market-based solutions provide the right mechanism to solve many of the challenges we face.
There is now a blurring of boundaries in the energy sector between oil and gas, renewables, and utilities. Across all categories, we are finding opportunities to work on carbon reduction.
One energy company, for example, is transitioning its portfolio toward a zero-carbon future by building new businesses—including a zero-carbon energy business (hydrogen) and a “negative carbon” offset business—alongside the existing hydrocarbon core. Done well, this could see the new businesses match the existing in terms of revenue and EBIT by the end of the decade, with accelerating growth beyond.
These are rapid-growth and fast-moving spaces, though. So how those businesses get there is as much a part of the secret sauce as what they’re building. The new businesses must face—and outpace—different competitors, test and learn with customers, rapidly deploy capital, and attract different talent and funding. Their operating model and capabilities are designed to do that at speed, while leveraging the advantages of the parent company, including certain technologies, partnerships, and customer relationships.
Winning companies play both offense and defense for a full-potential carbon transformation.
In a world moving toward increased electrification, utilities and renewable energy providers of course play a leading role in the energy transition. For many participants, capturing that potential requires a full-company transformation. Utilities, for example, have had to move from an engineering mindset, focused on building power supply at the lowest possible cost, to customer-centric capital planning geared to developing support among a broad group of stakeholders. Because policy determines the pace of energy transition and what it will look like, and policy is shaped by stakeholders, we have spent much of the last decade helping utilities across the US and in other parts of the world integrate stakeholder considerations into their operations, while also accelerating the pace of execution to meet the needs and opportunities of the energy transition.
Recently we worked with a number of partners to develop a detailed roadmap for decarbonizing the Danish economy by 70% by 2030. This can be done through a combination of phasing out coal, natural gas, and oil; capturing carbon; reducing plastics; cutting the carbon emissions of other industries, including transportation and manufacturing; accelerating the renewable energy production of wind, solar power, and biogas; and strengthening the power grid.
In addition, we worked with a range of industry leaders along the hydrogen value chain to design the basis of a national climate strategy. With the help of energy suppliers, distributors, and users, we identified 10 key levers to accelerate Denmark’s hydrogen market, a crucial element of meeting this ambitious goal.
Financial services companies have a critical role to play in accelerating the carbon transition through their lending and investing activities.
To meet its ambition to reduce carbon emissions in line with 2030 goals set out in the Paris Agreement, Dutch multinational Rabobank must decarbonize its loan portfolio. Bain analysis shows that higher sustainability correlates with fewer loan defaults and lower credit risk, even when controlling for company size, profitability, and riskiness, and even between companies starting from the exact same risk rating. Therefore, in addition to its environmental benefit, decarbonization could also increase financial stability for Rabobank’s customers and improve the credit risk of the bank’s portfolio.
Loan portfolio decarbonization is a complex undertaking. It requires determining the baseline of emissions today, effectively capturing sustainability data, setting the appropriate decarbonization pathway, and engaging clients in mitigation. At the scale of an organization like Rabobank, estimation is a necessary part of the process, and through our analytical work we have helped develop reliable approximation techniques for parts of the portfolio with the least carbon transparency. In addition, we provided evidence that customers with better sustainability performance have a substantially lower default rate, even when correcting for a number of potentially relevant factors. This promising analysis allows for further investigation and could trigger strategic portfolio decisions.
The investment portfolios of many private equity firms include companies in various industries with different decarbonization challenges and opportunities.
Customers, employees and limited partners are demanding more sustainable, socially conscious corporate behavior. PE firms that can deliver are reaping the rewards.
As a firm, Bain Capital is actively working to reduce the carbon footprint of its portfolio and recently evaluated two quite different portfolio companies: one a high-growth consumer product manufacturer and the other an industrial company. After assessing their current footprint, we helped, among other things, identify and quantify the changes in materials and production that would have the greatest impact for each. In the case of the industrial company, additional analysis has illustrated how making these changes could translate into a positive return on investment. Together, these assessments offer a roadmap for other portfolio companies to set their own carbon-reduction ambitions.
We work with consumer products companies looking to reduce their carbon emissions, often as part of establishing a broad sustainability strategy and transformation. One recent example: Puig, whose fourth-generation owners have made sustainability a top priority. The Barcelona- and Paris-based company, which has a portfolio of high-end beauty and fragrance brands, recently launched a full strategic sustainability review to set its 2030 agenda, of which climate and carbon are one fundamental pillar.
During the work, we helped Puig’s environmental team identify the key commitments and targets that would position the company as a sustainability leader within its industry. Recognizing that reducing greenhouse gas emissions is one of the areas of greatest potential impact, the group has begun a number of initiatives with that goal. Puig is in the process of committing to the Science Based Targets initiative (SBTi), which aims to catalyze climate action in the private sector by enabling companies to set science-based emissions-reduction targets. Along with other ambitious goals, Puig is working to reach net-zero emissions by 2050.
In California, wildfires have burned more than 7 million acres of forest in the past five years, taking hundreds of lives, and wildfire response has cost billions, exceeding $3 billion in 2020 alone. We are working on a pro bono basis with The Nature Conservancy (TNC) to build a commercially viable way to speed the pace and expand the scale of ecological restoration in order to reduce the fuel that contributes to the severity of wildfires. We engaged a broad group of stakeholders—including environmentalists, private business owners, and, crucially, landowners.
Ecological forest restoration in the state is limited by high cost and insufficient wood-processing infrastructure. We helped TNC create a plan that would address both: building wood-processing campuses that pay for themselves. Our work included assessing the market for small-diameter timber residue in order to encourage the harvesting of this wood, which burns easily and contributes to fire spread. We also evaluated alternative technologies such as bioenergy, modeled how the campuses would operate, and laid out a detailed economic model for breakeven, including an estimate of the state subsidy required. Stakeholder involvement was critical. We interviewed a diverse set of stakeholders as part of our fieldwork and organized a design-thinking workshop that brought together 50 stakeholders from academia, the nonprofit sector, private industry, government, and investors. Participants came to a consensus on the largest barriers to forest restoration and the relative attractiveness of different timber uses.
Stimulating a Forest-Restoration Economy and Rebuilding Resilience in California’s Fire-Adapted Forests
This work armed TNC with the market, economic, and technical analysis needed to develop state and federal policies and budget proposals designed to reduce the cost of forest restoration while maintaining environmental safeguards. We have already seen some positive outcomes. In April 2021, California governor Gavin Newsom approved more than $500 million for early action on wildfires and forest health, and by June, $50 million is expected to be allotted to the development of innovative wood-conversion businesses. TNC has a multiyear action plan and strong momentum.
In Georgia, we helped TNC set up a forestry-based carbon credit program, connecting forest owners interested in generating revenue from carbon credits with corporations looking to offset their carbon footprint. Building the case for economic viability was again essential, as was involving a broad set of stakeholders, including forestry associations, landowners, and potential corporate purchasers of credits. This project, when fully implemented, has the potential to protect 120,000 acres of forest.