Managing Director & Senior Partner
Related Expertise: Shipping Industry, Logistics, 気候変動・サステナビリティ
Leaders of transportation and logistics (T&L) companies need to transition from defense to offense in their approach to climate action. Typically, T&L executives have viewed sustainability efforts as a compliance burden or a potential source of cost savings. In addition to considering these issues, they need to recognize that climate action offers them a broader opportunity to create tangible value by tapping into new markets and meeting new types of demand for low-carbon services. By taking the right approach, companies can increase their resilience to a known and imminent threat.
The imperative for T&L companies to embrace environmental sustainability is clear. Transportation activities (aviation, rail, shipping, heavy and light trucking) are responsible for approximately 17% of global greenhouse gas (GHG) emissions. Without the industry’s participation, countries will not be able to meet their goals for limiting the global temperature increase over the remainder of this century. (See “The Case for Climate Action.”) Rather than distracting from this effort, the COVID-19 crisis should be seen as creating an opportunity and obligation to accelerate action. Indeed, climate change exploits many of the same vulnerabilities exposed by the pandemic—but even more severely and over a longer time frame.
Transitioning to playing offense in sustainability will not be easy for T&L companies. Fortunately, they can draw on best practices developed in other industries. Adoption of new fuel technologies will be essential to completing the journey to zero carbon emissions, as will partnering with governments to fund the efforts and reduce the risk. Companies that get it right will create financial value as well as help save the planet. In other words, we believe that “doing well by doing good” is indeed possible.
T&L companies have a significant role to play in changing the current trajectory of GHG emissions. Heavy-duty transportation (aviation, heavy road transport, and shipping) is among the harder-to-abate sectors. It accounts for roughly 95% of all freight emissions, exceeding 4 gigatons of carbon dioxide (Gt CO2) in 2019. If nothing is done, emissions are likely to hit 7 Gt CO2 by 2050.
To be sure, decarbonizing the T&L sector requires a significant financial investment. Abatement costs are especially high for heavy road freight, air freight, and shipping—they typically range from $180 to $230 per ton of CO2, above and beyond the cost of fuel efficiency measures. But if T&L players act too late, the price tag will continue to grow over time. Given projected emissions, full decarbonization of heavy-duty transportation by 2030 would cost in excess of $1 trillion, assuming the technology exists to make it happen. The outlay will increase by $400 billion by 2050. Considering the long asset cycles in T&L, it is vital that players start taking action now. Indeed, the industry is experiencing mounting pressure from customers, employees, regulators, and investors to act on emissions.
The imperative for climate action amplifies a perfect storm of challenges that already existed in the T&L sector, including stagnating revenue and declining profitability as well as ongoing disruption from digital technology and innovative business models. To ensure their long-term survival, T&L players should launch a transformation with climate action at the center.
Unfortunately, most companies are not taking action, and those that have started have not yet been ambitious enough. BCG research reveals that among 872 transport companies, 70% do not disclose, or only partially disclose, their emissions and only 23% have set emissions targets. Of those setting targets, less than half (9% of the total) have reduced CO2 emissions versus last year. But the few goals that companies have established are too low: transportation companies are targeting, on average, a 30% emissions reduction by 2030, whereas the 1.5°C scenario requires a 50% drop across the industry by that year and a 100% decrease by 2050.
T&L companies that are pursuing tangible plans to reduce emissions have generated superior total shareholder return (TSR), according to our analysis. From 2017 to 2020, the average annual TSR of T&L companies that demonstrated a high commitment to environmental, social, and corporate governance (ESG) standards was 10 percentage points higher than that of industry peers. (See Exhibit 1.) Although it is difficult to prove causality between ESG commitments and TSR, the correlation is striking.
From our experience, we have found that climate initiatives enable T&L companies to create significant TSR by promoting three important sustainability levers:
Exhibit 2 provides concrete examples from leading T&L players.
Some of the most prominent T&L incumbents, such as Maersk, FedEx, and DB Schenker, are leading the way. They have already reduced CO2 emissions by up to 40% compared with 2008 levels and have ambitious plans to be climate neutral by 2050.
To transform and decarbonize their business while creating TSR, T&L companies should take three overarching actions:
Each action comprises several concrete initiatives. (See Exhibit 3.)
For a concrete example of how the levers are applied, we take a closer look at climate-proofing operations in shipping—specifically initiatives related to emissions reductions and offsets. Ship operators have a significant opportunity to create value through these initiatives, as the shipping sector is a major source of emissions and faces high abatement costs. Moreover, the relevant concepts are applicable to other hard-to-abate T&L sectors, especially air freight and heavy road transportation.
These initiatives involve the use of four key levers for transportation activities, each relevant to shipping:
Industrywide collaboration is essential for implementing these levers. For example, a group of major industry players, led by Maersk, has established a research institute in Denmark to pursue the goal of zero-carbon shipping. A global, cross-disciplinary team of specialists will collaborate to accelerate the development of alternative fuels and emerging technologies.
Since 2008, a few large shipping incumbents have reduced their carbon intensity by approximately 20%. (See Exhibit 4.) To decrease it by an additional 80% by 2050, companies will need to implement other measures. Continued efficiency improvements within the existing fuel platform (using marine gasoil [MGO]) are projected to cut carbon intensity by only an additional 15% to 20%. To reach zero carbon emissions, companies need to adopt alternative fuels and emerging technologies. Below, we take a closer look at the options.
For long-distance shipping, several options are available that combine alternative fuels and emerging technologies. These include a wide variety of fuel types, each of which is different with respect to technical and commercial maturity and viability. We believe it is too early to meaningfully project the best possible solution. Candidates include the following:
As a result, LNG is regarded as an interim means of reducing emissions until other alternative fuels are commercially ready; only a fraction of vessels use LNG today. Considering these limitations, as well as the 30-year-plus asset cycles in shipping, LNG seems unlikely to provide the fuel platform needed to decarbonize shipping before 2050.
Unlocking the potential of alternative fuels requires significant action, collaboration, and commitment from all value chain participants: engine suppliers, ship builders, green-energy vendors, ship owners and operators, and freight customers. Each participant should define a strategy for achieving decarbonization. Additionally, the public sector will likely need to provide funding in order to support investments.
T&L companies should embark on a climate action transformation journey today. From our experience supporting hundreds of decarbonization efforts around the world and across industries, we believe that T&L companies should act on six crucial imperatives:
A company’s initial focus depends on its current progress in the sustainability journey. A rapid “health check” is often a good first step to assess where the company stands today, which provides the basis for defining the path and initiatives to move forward. This will uncover whether a company can target specific areas or needs to embark on a full climate transformation.
BCG CENTER FOR CLIMATE & SUSTAINABILITY
We partner with clients across the public, private, and social sectors to align their strategy, operations, and stakeholder engagement with a low-carbon world. Our work is supported by BCG’s range of consulting experience across all industries and capabilities, as well as by our expanding reach of brands.