Investments aimed to reduce carbon emissions - A Survey of the incumbent companies to analyse the drivers for such investments

Abstract

The Kyoto protocol was signed in 1997 and was a clear step towards finding a solution of the overhanging climate issue. Corporations emitting green house gases around the world are now facing challenges and need to find strategies that better align the company’s interest with the ones of the society. The carbon market, a sub-component of the Kyoto Protocol entered public consciousness with the launch of the European Union’s Trading Scheme (ETS) in 2005. The system should give companies an incentive to invest in measures to reduce carbon output by making their own processes more efficient. This study focuses on certain possible financial as well as non-financial drivers for such investments: EU-ETS as a mean of control, financial profitability of an investment and attained strategic advantage of an investment. The study aims to bring clarity to what extent these three components are drivers for carbon reducing investments. The purpose of this study is to bring clarity to the evaluation process prior to an investment deriving from the company’s compliance with the emission targets set by the National Allocation Plan (NAP). We wish to shed light on and gain a better understanding of Swedish companies’ behaviour and the rationale around carbon reducing investments. As EU-ETS has a financial impact on a company we have chosen to divide the stipulated components into financial and non-financial drivers. The financial components have therefore been analyzed in a climate policy model while the non-financial component has been analyzed in separate. Having analyzed the different components of EU-ETS, Financial Return and Strategic values we can conclude that the driving forces for a “green” investment can not be easily pointed out as one single factor but is rather a mixture of these elements. The different components are all to a various extent interdependent. The financial return is evidently the natural driving force in all investments and we conclude that this is also valid for “green” investment, yet the required return of “green” investments may be somewhat flexible as accepting slightly lower rate of return. EU-ETS can be viewed as a strong force encouraging both long-term investments and short-term investments. However the system still mainly functions as a driver to comply with the emission targets set for the particular company. Finally we can also conclude that the system could constitute an even more significant driver for investments if the system eventually will be applied globally. Further on our study show that strategic value gained along with improved environmental performance is not so much a driver for companies to realize investments but rather a hygiene factor. This implying that companies constantly consider the strategic implications of a green investment but they do not fulfil an important decision criterion for an investment. At this stage the highest concern within companies is rather to comply with current targets than to actually make “pro active” investments aimed to strengthen their long term profitability.