The climate transition’s ripple effects

In each year from 2018 to 2024, the number of companies setting targets to reduce their carbon emissions from direct operations (Scope 1) and purchased energy (Scope 2) went up, according to PwC’s analysis of data collected by the Carbon Disclosure Project. But something new took place in 2024: a shift towards smaller companies. Businesses reporting that they’d set targets that year had median annual revenues of US$1.3 billion—about one-third as much as the median in 2020.

What’s going on? PwC’s research shows that more large companies are working to bring down emissions from upstream and downstream activities in their value chains (Scope 3). Often, their efforts involve encouraging or requiring the suppliers to set reduction targets, too. This ripple effect is one signal that businesses haven’t stopped planning for the climate transition. 

Another ripple effect stood out from the research, too: companies say their key financial metrics will be ever more closely linked with the climate transition over the next five years. They report that 34% of their revenues, on average, will be associated with the climate transition in 2030—up from 27% in 2024 and an expected 29% in 2025. In line with this uptick, companies say they’ll devote more of their capital spending and operating expenses to climate-transition efforts over the same period. More than four in five report that they’re already making R&D investments in low-carbon products and services.

Experience suggests that decisions about climate-related business actions—whether related to a company’s own operations or to its value chain—often benefit from a more expansive approach to decision-making. Traditional processes for financial planning, by contrast, sometimes fail to account for how climate-related actions help companies avoid future costs and risks. That can make their payback period look too long, and can keep worthwhile projects from getting a green light. 

One solution is to use an internal cost of carbon: a notional charge for the emissions associated with a project. Some companies find that factoring an added cost into their analysis lets them better understand the returns on climate-related investments. Another approach is to plot potential decarbonisation projects on a marginal abatement cost curve. These curves help companies identify economical approaches to cutting emissions by comparing options in terms of the cost per ton of carbon avoided. Practices such as these give companies added perspective on climate-related investments, so they can make decisions that support their financial aims.