I asked the question: “Who will pay these higher costs?”
The consensus reaction from my environmentally-concerned LinkedIn friends was: “We all should.” I agree. We all share the responsibility to address the climate challenge.
But now let’s imagine the following scenario.
You are the CEO of XYZ Automaker. You’ve recently pledged to become net-zero by 2050 and get halfway there by 2030. You’ve been encouraged to make this commitment by your employees, some important shareholders, environmentalists, and family members. XYZ’s marketing team advises that this move will please sustainability-minded customers too. You like the idea of XYZ being viewed as a leader in this important area.
Now it’s time to get to work. You’ve got an ambitious EV strategy underway and you’ve already taken the easy and low-cost steps to decarbonize. Now you ask your team to identify what’s next.
- The Procurement Department reports on the zero-carbon steel alternative, as well as the 30-60% higher price tag.
- The Operations Team presents some options on how to source more clean energy, but it too requires premium pricing.
- Your Sustainability Crew summarizes options for purchasing carbon removal credits, which XYZ will need, since you can’t lower emissions substantially overnight. Another hefty expense.
- And so on.
“Wait a minute,” you say to your team, “I was told this would be ‘win-win.’ If we can’t pass all of these additional costs on to customers — and I don’t see how we can while remaining competitive — profit margins will be hurt badly.”
“Maybe we can jam our steel suppliers a bit and get them to share the extra cost of low-carbon steel,” one team member suggests.
“Pressure tactics won’t work with purchases of carbon credits,” says your CFO.
“I wonder whether this will satisfy our ESG-minded shareholders?” asks your Head of Investor Relations.
You agree. “Right. Will those investors pay a higher multiple for our stock when we do what they say they want? Because if they don’t, and if our profitability goes down with these new costs, our stock price is headed down too.”
Your Chief of Staff suggests you discuss all of these challenges at your upcoming Board meeting. You remember that your own performance evaluation is based on Return on Equity targets that have been out of reach recently, even before these new costs.
The meeting adjourns, everybody leaves, you’re alone in your office and think, “It’s tough to be a CEO.”
It is lonely at the top. But this type of scenario — where the theoretical commitment to ESG conflicts with the harsh reality of the costs — plays out for everyone involved.