Published: 20 May 2021
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.
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.
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.