Gartner Research

Quick Answer: Using Green Premium Calculations to Assess Investment in Clean Technology

Published: 20 May 2021

Summary

The green premium is a calculation that assesses the costs or savings associated with selecting a clean technology over one that emits greenhouse gases. Executives and investors can use green premium calculations to make a high-level assessment of the pitfalls or benefits from an investment.

More Detail

There is significant capital and investment associated with clean technologies and sustainable solutions:

  • Clean technology and sustainability innovation represents a rapidly growing investment opportunity. Governments, corporations and other groups raised $490 billion in 2019 through green, social and sustainability bonds.

  • According to the 2020 Gartner Sustainability Survey, 66% of executives are including the future cost of carbon emissions in their financial planning. A majority (51%) of those who include the future cost of carbon emissions in their financial planning believe that their organization will be paying for carbon emissions in the form of taxation and pricing in the next five years.

The conundrum for executives is to know which technologies to invest in. Green premium calculations give executives a balanced approach to assessing their investments so that they can cut through the hype quickly.

The enterprise should first draw up a methodology to calculate the “green premium,” ensuring consistency when cross-comparing technologies. This calculation will include assumptions about:

  • Contextual factors: How market dynamics, subsidies and taxation mechanisms may change over time. Scenario data can be used from the International Energy Agency (IEA) to model the speed of transition toward a low-carbon economy in different territories.

  • Price variance: Factor in the variance of current costs. For example, low fossil fuel prices may mean that investment in clean technologies becomes less favorable. However, if the economy rapidly decarbonizes, enterprises may be left with the risk of stranded assets that are subject to premature write-downs.

  • Consumer preferences: A segment of consumers may have a preference for clean technologies, but enterprises need to understand the cost differential and consumers’ abilities to purchase these technologies. Where the cost differential is too high, consumer preference is irrelevant, as they simply cannot afford to purchase the technology.

  • Speed: The calculation assumptions should also include an assessment of technology maturity and likely speed to market, in addition to technology uptake.

The calculation framework provides a method for consistent evaluation of projects. However, executives and investors need to have a decision-making framework to set the threshold for investment. This framework could be based on the following factors:

  • Risk appetite: The enterprise needs to assess its risk appetite for all investments and take into consideration if that appetite is different for specifically clean technology. Technologies in their infancy have a higher probability of failure, but also a higher reward if successfully commercialized.

  • Return on investment: The enterprise needs to be clear on the type of ROI that it is seeking and over what time horizon. Assess the barrier to commercialization of the technology and if there are any interdependencies. For example, for some technologies to scale, there may need to be a change in infrastructure.

  • Commercialization risks: Assess the risks associated with commercialization of the technology. For example, technologies that are dependent on constrained supply of raw materials will face barriers to commercialization and wide adoption.

  • Intellectual property: Check that the technology has been patented and assess the competitive landscape for alternative technologies that can lead to the same outcome.

Figure 1 provides a summary of the considerations and outcomes when calculating the green premium.

Figure 1: Green Premium Summary

Evidence

Gartner’s 2020 Sustainability Research

This study was conducted to understand how stakeholder (customers, employees, investors, regulators and partners) pressure for more aggressive economic, social and environmental sustainability action is growing and identify best practices from early adopters to provide sustainability advice to the Gartner clients. The study explores different sustainability goals/targets set by organizations and how the level of investment in the sustainability programs has changed over time. It also focuses on the value and benefits derived from the sustainability programs.

The research was conducted online during November and December 2020, among 183 respondents from North America, Europe, Asia/Pacific (APAC), across all industries except energy and utilities. Companies had $250 million or more in annual revenue.

Respondents were screened for director level or above and their level of involvement in their organization’s sustainability. Any respondents whose organization did not engage in sustainability activities at all, or was limited to achieving compliance, were screened out.

The study was developed collaboratively by Gartner Analysts and the Research and Data Analytics Team.

Access Research

Already a Gartner client?

To view this research and much more, become a client.

Speak with a Gartner specialist to learn how you can access peer and practitioner research backed by proprietary data, insights, advice and tools to help you achieve stronger performance.

By clicking the "Continue" button, you are agreeing to the Gartner Terms of Use and Privacy Policy.

Gartner research: Trusted insight for executives and their teams

What is Gartner research?

Gartner research, which includes in-depth proprietary studies, peer and industry best practices, trend analysis and quantitative modeling, enables us to offer innovative approaches that can help you drive stronger, more sustainable business performance.

Gartner research is unique, thanks to:

Independence and objectivity

Our independence as a research firm enables our experts to provide unbiased advice you can trust.

Actionable insights

Not only is Gartner research unbiased, it also contains key take-aways and recommendations for impactful next steps.

Proprietary methodologies

Our research practices and procedures distill large volumes of data into clear, precise recommendations.

Gartner research is just one of our many offerings.

We provide actionable, objective insight to help organizations make smarter, faster decisions to stay ahead of disruption and accelerate growth.

Tap into our experts

We offer one-on-one guidance tailored to your mission-critical priorities.

Pick the right tools and providers

We work with you to select the best-fit providers and tools, so you avoid the costly repercussions of a poor decision.

Create a network

Connect directly with peers to discuss common issues and initiatives and accelerate, validate and solidify your strategy.

Experience Gartner Conferences

Join your peers for the unveiling of the latest insights at Gartner conferences.

©2022 Gartner, Inc. and/or its affiliates. All rights reserved. Gartner is a registered trademark of Gartner, Inc. and its affiliates. This publication may not be reproduced or distributed in any form without Gartner’s prior written permission. It consists of the opinions of Gartner’s research organization, which should not be construed as statements of fact. While the information contained in this publication has been obtained from sources believed to be reliable, Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartner research may address legal and financial issues, Gartner does not provide legal or investment advice and its research should not be construed or used as such. Your access and use of this publication are governed by Gartner’s Usage Policy. Gartner prides itself on its reputation for independence and objectivity. Its research is produced independently by its research organization without input or influence from any third party. For further information, see Guiding Principles on Independence and Objectivity.