Can the Valley influence climate culture?

Photo courtesy of Millen Paschich

Matthew Kropp–Managing Director and Partner at Boston Consulting Group–discuss his firm’s work studying 48 technology companies and their role in climate change action.

Gridium: Hello everyone, and welcome to this conversation with Matt Kropp, Managing Director and Partner at Boston Consulting Group. Matt’s experience includes work as a CEO, at the intersection of the trucking, transportation and technologies sectors, and over ten years advising leading companies in Silicon Valley at the Boston Consulting Group. 

My name is Millen and I am with Gridium. Buildings use our technology for data-driven and sustainable operations. 

It’s sort of a thrill to have Matt join us today, as we originally connected over some delicious BBQ at a UCLA Ventures meeting. However, it’s his study of 48 technology companies and their approach to climate change that brings us here today, and we’ll also cover some in-depth economic analysis by BCG, on the “Economic Case for Combating Climate Change.”

Matt: Great, great to be here. Thanks for having me. 

Gridium: Let’s jump in by talking about BCG’s macro-economic analysis of 7 major countries and their paths to 2ºC, which is the goal of the Paris Agreement, to keep the increase in global average temperature to less than 2ºC above preindustrial levels. That’s some impressive and useful work Matt. 

So, my question… one of the main frameworks in this report calculates three paths: there’s the current policies path, proven technologies and the full 2ºC path. That’s good news and bad news—good news, that proven technologies can take some major carbon emission countries most of the way to the Paris Agreement target. The bad news is there’s a gap that remains. What does this look like?

Matt: Yeah, so this is really interesting work. I think, you put it right—it is sort of a good news/bad news picture. But I think the biggest finding was actually really a positive thing, which was saying that, you know, it can seem quite overwhelming. How are we going to get to the Paris accord? How do we get to this 2ºC or even the 1.5ºC centigrade world? It seems a bit like an insurmountable challenge.

And so what we wanted to do was look at how hard was it going to be? So, we looked at 7countries in particular; so this is China, US, India, Russia, Brazil, Germany and South Africa. We asked the question: if we were to just use today’s available technology, how far could these countries get to that 2ºC world? And, the encouraging answer was that somewhere between 70 and 80%—actually 70 and 90% in the case of India—of the way there, they can achieve with existing technology. Now that’s not to say that they’ve achieved it.

Gridium: Right.

Matt: That’s not to say they are necessarily on that path, but the technology exists to get 70 to 90% of the way there. So, that’s encouraging. Had it been a much lower percentage, that would seem a bit more hopeless than it does today.

Gridium: For those of us not so close to the relative data, how do emissions per capita across these countries stack up? I reckon there’s some generally accepted sense that the US tops the list, but what’s the range?

Matt: Yeah, for sure. So, it depends on what you’re asking and how you measure it. So, US is the highest emissions per capita. So about twenty tons of CO2 per person, but if you look at carbon intensity of the economy—so that the tons of CO2 per dollar of GDP—India, China and Russia are significantly higher. So, they’re at about 1.5 tons CO2 per dollar; the US is only at .5 [tons]. And then if you look at just absolute emissions, China leads the way, or is the furthest behind in the stats. So, China is first, US is second, in terms of overall emissions.

Gridium: That path you mentioned about getting to the Paris Accord Agreement degrees. Each country’s path and the technology stack needed to get there is slightly different. What does that look like for the US? 

Matt: Yeah, so again here we’re looking at technologies that exist today, what would we need to implement in order to move to a carbon neutral future? And if we just look at the US, not surprisingly, the biggest sector that needs to change is power generation. And so, this is moving to, of course, wind and solar, nuclear hydro, biogas as a stopgap measure. And the amount of power that needs to be transferred into renewable energy is about 72, or sorry… 70,200 TWh. Just to give you a scale, right behind that—and this is maybe a bit surprising, or was surprising to me—is actually energy efficiency of buildings. So, 4,200 TWh of power moving to renewables and efficiency. So of course, this is heating, cooling and power for buildings.

Gridium: I see. Germany’s situation—it’s carefully considered in the report. And it was encouraging to see that the German Industry Association, which had commissioned the study, it united behind the core findings and demanded more systematic climate action by the government.

Matt: Yeah. So, we did a very deep dive on Germany, and what you see—and I’ll go through the elements here—but, there’s a lot that they need to do. It’s quite aggressive what they will need to do to achieve their goals. It’s also quite commendable that the Industry Association has signed on and is pushing for the government. And we’ve talked about why, but specifically in terms of what they are looking at: for power, they need to get to 80% of power generation with wind and solar, and basically need to completely move away from coal and lignite. All industries need to intensify efficiency efforts: they need to move from fossil fuels to biomass for process heat generation in industrials. In the building sector, 80% of their current building stock needs to be renovated—that’s quite significant. And then in transportation essentially, they’d need to move all cars, or most cars, and even a significant portion of trucks over to electric mobility. So, it’s quite ambitious and then… but maybe the interesting part of this is why is the Industry Association supporting this?

Gridium: Right.

Matt: Despite the fact that this will cost 1.6 trillion dollars through 2050, which is 1.1% of annual GDP for Germany. What we found is that actually much of this pays for itself.

So again, because this is the existing technologies that are already commercialized, the actual direct costs after you factor in all the savings that they get from efficiency, is only 20 billion dollars. And that, when you actually take care of the hardships that would happen in certain sectors of the economy, it would basically not slow down the Germany economy at all, as a whole.

Gridium: Brilliant. 

Matt: So, hence, the Industry Association signing on and saying, “This is not only good in terms of meeting our Paris Accord Agreement, but it actually will help the economy and it helps the industry, and so we’re behind it.” 

Gridium: I imagine and I reckon the cost of capital plays a role here, and at certain points—even for the German federal government, they can borrow at their nominal negative rates now. What role does the cost of capital play? 

Matt: Yeah, so that’s obviously quite important and when you look at different countries and their ability to move down this path, you know, without hurting the economy, the cost of capital is very important. So, obviously for Germany and US for example, you know, our economic cost of capital is 2% or lower. And so, low cost of capital combined with economies that have a high percentage of imports, it’s actually much more effective and has a much more positive impact on the economy to make these changes. 

So, you know, if my cost of energy is high, getting efficiencies that you get through these means actually is quite beneficial. If my cost of capital are low, I get a very strong return in the economy on that investment, because everything that I invest in actually drives economic activity, so it’s quite worth doing. 

The opposite is also true. So, in economies like Brazil where they have high cost of capital, it makes it much more difficult for the economics to pan out. 

Gridium: The good news/bad news situation: good news being such that the proven technologies gets us, you know, pretty close to where we need to be. The closing of the last 20% though, how does that stack up in terms of expense?

Matt: Yeah, so that’s probably the big bad news. (Laughs) It’s that, getting to that 70% of the 2% goal really can be done by economies, you know, without slowing down. In fact, you know, as we were just talking about it in an economy like Germany, in an economy like the US, in fact—it actually can be a positive to the economy, to get to that 70% mark. And that was really the key finding of our report, was countries don’t need to wait for global consensus; we can act unilaterally and it actually will help our economy. Which is really very good news: it means that, it sort of breaks the stalemate, right?

Gridium: Yeah.

Matt: The bad news is, that only gets us 70% of the way there and the rest of the way to the 2% path, will require global investments of 75 trillion dollars. That’s between 2-6% of country’s annual GDP. So, that’s obviously quite a big impact. And that’s because we don’t have the technologies yet—either invented or commercialized—to be able to close the rest of the gap.

Gridium: This is where your study comes in, your study of the 48 technology companies and their approach to climate change. How can US-based companies help to bridge this gap?

Matt: Yeah, so this is why we looked at Silicon Valley. And if you sort of take a step back and think about where is the most innovation happening? You know, who really does the innovation that changes the world? A lot of it comes out of Silicon Valley. And not only that, you know—not only are they creating new technologies, but they have a huge influence in the culture, in public opinion, etcetera. You’ll think Facebook, right? (Laughs) Think Twitter.

Gridium: Right.

Matt: So, we thought we would look at how can Silicon Valley be part of the solution to drive that other 20%. There’s another element to this too: Silicon Valley and technology as a whole actually consumes a lot of energy. If you just look at US data centres, they emit 100 million MT of CO2 per year, which is 50 coal-fired power plants. So, not only can they make a big influence; they also have a big impact, in terms of emissions. So, they sort of owe it to us to take a leadership role here. 

Gridium: For Gridium, I can say it was encouraging to see a number of our customer organizations on your report in the leading Stewards quadrant. What were your findings here?

Matt: So, the first thing that we did was we looked at about 40 Silicon Valley companies, so primarily technology, and ranked them or scored them on two dimensions. So, one is how much potential do they have to influence the discussion. So, this would be you know, say Facebook contributing to the conversation and the public.

Versus the other dimension was, how far are they in their participation in energy transition? And so there we had 4 categories: there are some that are doing nothing. There are some that have made commitments, but still have not acted. There are others that are acting—actually, that is where the bulk of the companies are. So, they’ve made commitments and are doing things actively to drive down their emissions—and then there’s a group that we called Stewards, which are really going above and beyond. So, they’ve already taken actions against their own emissions, and they are thinking about how can they be a very pro-active participant in trying to drive the industry and trying to drive the world as a whole toward a zero-carbon future. Maybe to point out a couple of the companies there, we can talk about it in more depth.

So, these are companies like; Apple, Cisco, Tesla, Alphabet, Salesforce. I’ll give you an example about HP, that are both very strongly taking action. They’ve set targets. They’re addressing their own emissions. They’re influencing the communities that they’re in and they’re using their platform as global brands to influence the conversation about climate.

Gridium: When I was reading your team’s report—BCG’s—on the situation in Germany, I was not surprised to see a reference to cost of capital. In your report on Silicon Valley and your study there, I can say it was a pleasant surprise to see the reference to cultural impact…

Matt: Mmhmm.

Gridium: …which I think is a dimension which is not always considered. I don’t know if this vector is often considered. Can you say more on why you included that? 

Matt: Yeah, I think you’re right to be surprised. I mean, it is not talked a lot about in the climate conversation. We thought it was quite important because Silicon Valley and tech companies have an outsized role today in our conversations, in culture. You know, just think about Twitter driving, you know, the Arab Spring.

Or you know, think about what Tesla has done. You know, Tesla… before Tesla, there were basically no electric cars, right? We had the EV1, which General Motors killed. 

Gridium: Right.

Matt: Tesla comes out and says we should have electric cars, and electric cars should be cool. And, you know, they didn’t try to build mass cars from the beginning. They built, you know, a very small number of high-end cars that were, you know, super-fast and super-cool and people thought they were great.

Gridium: Right.

Matt: They moved to a larger group of high-end cars. But if you listen to Elon Musk, you know, his goal was to get humans off of the internal combustion engine.

Gridium: Yeah.

Matt: Well, 10 years later, look at what’s happening: every car company has an electric car. You have car companies like Volkswagen saying they are going to move to 100% electric.

Gridium: Right.

Matt: It actually worked. So, you know, if you think from a Silicon Valley perspective, they think about, how do I change the world? And a big portion of that is how do they influence the rest of society. 

I can give you a couple of maybe smaller examples that are maybe less lofty than Tesla trying to get us off of gas cars. So, HP for example. They advocate for energy efficiency standards. They are one of the original signatories to the “We are still in” compact which committed companies to abide by the Paris Accord, when the US pulled out…

Another example is on Earth Day last year, Lyft offered free rides with its bike share operations in a few large cities to encourage carbon-free transport. You know, so that’s, maybe the other end of the scale from Tesla, but they’re creating awareness. They have a big audience and they have a voice, and they can be a part of the conversation changing basically public opinion.

Gridium: I can say I took at Lyft, battery-powered bike into the office today and it was a breeze. 

Let’s say that I’ve got a leadership responsibility for one of the companies, Matt, in your study that you’ve marked as a high potential to influence, but I’m not yet participating in the energy transition. What should I do?

Matt: So, we laid out 6 steps, or 6 key levers the company should think about. So, let me go through them. 

So, the first is and quite important is disclose. And this is somewhat surprising, that there were a number of Silicon Valley companies that have not yet disclosed their emissions. You can’t get a result until you measure it, and so it’s critical that you start by creating a baseline: what are my emissions today? What are my scope 2 and scope 3 emissions? You know, how am I playing within the supply chain and essentially what’s my footprint? And so, there are global regulators such as CDP, which can provide and audit environmental study that discloses what your emissions are. At this point, in 2020, there should be no excuse for any company not to have taken this first step. 

Second thing is, companies need to drive awareness. And so, we were talking just a minute ago about this social impact that Silicon Valley can have. They should use their platforms as global brands to bring consumers and customers along, and bring their suppliers along. Silicon Valley, you know, designs a lot here in California, but we build things overseas, as we know. And so, they have a huge footprint based on their supply chain. They should be driving awareness, they should be driving improvement within their suppliers. So, one example here was Netflix works with its service providers, so like Amazon AWS, to measure and report on their indirect energy use.

You don’t think necessarily about the energy that it takes to watch, you know, Game of Thrones. But actually, they’re big data centre costs and big data centre energy consumption. So, using that platform is important. 

The third thing we said is go big. So, it’s going to be… it’s an existential challenge for us as a plant to get to this 2º target. We’re not going to get there with weak goals. So, some examples. So, Apple has set a goal to transition the company and its suppliers to 100% renewable energy. It’s already achieved this; in fact, it achieved this a few years ago, and now they are moving that basically company-wide. Microsoft, as many of you may have heard, just announced that they will be going carbon-negative by 2030. Essentially, they are paying to remove all of the carbon they have emitted since they founded. That’s a pretty ambitious goal. And I would…

Gridium: Yeah.

Matt: …challenge the rest of Silicon Valley to take up goals like that.

Gridium: The challenge. Yeah.

Matt: Fourth, partner. So, there are great examples of these companies partnering with others to really drive change. So, Alphabet for example, achieved 100% renewable energy through PPAs. So, this is basically creating renewable energy partnerships. So, they’ve generated 3 gigawatts of renewable energy through these PPAs. Salesforce is doing the same kind of thing in the communities where they have data centres; they actually partner with the local community to create renewable energy. So, it’s not just creating renewable energy sources for themselves, but actually using their presence as sort of an anchor tenant to create much more renewable energy around that data centre. 

Gridium: That’s great.

Matt: The fifth is to be an influencer. So, we talked about HP on the, you know, Be Still In. We talked about Lyft offering free rides. This is, you know, again they have this platform, so they should be able to influence others, influence their consumers, influence their suppliers, influence their partners to participate. 

And then the sixth is take a lead in driving to a negative carbon world. And so, the Microsoft announcement is a great example of this. Stripe is another example. Where Stripe is actually setting aside a certain amount of money to pay for carbon reversals— so, putting carbon back in the ground—and their stated goal is that they will pay any price to do carbon reversals, with the thinking that if they—if Microsoft, if others join them—will drive down the cost carbon squassation. And therefore, by being a first mover and joining together with other first movers, we can actually drive down the costs and make that a viable option to start to reduce carbon by putting it back in the ground. 

Gridium: Well, that’s great work Matt. Thank you. When you think about extending this analysis or this research, what do you think might be next and what might you be working on the rest of this year?

Matt: So, BCG is very committed to a 1% C world, so, we are doing a bunch of work internally too. So, we’ve already gone carbon neutral. We’re looking at carbon reversals. We’re working with our clients to help our clients reduce their carbon footprint. So, this is a very big area for us, going forward. I’m personally quite interested in continuing to work with the tech community and Silicon Valley to try to drive to more action. I think we are very much at the beginning of this journey, and I will say it’s, you know in some… you read the news and hear about climate change, it can be quite daunting. But I’m actually very hopeful. I actually see that, you know, you start to see things like Microsoft’s announcement. And you really start to feel like there could be a, you know, a groundswell here and corporate action taking the place of government inaction. So, we very much want to be a part of helping these companies, you know, chart that course towards a carbon-neutral future.

Gridium: Well, I should say that there, that this conversation has been encouraging (Laughs), after a fashion. There is much work to do. And thanks for your help Matt. This is great, keep it up.

Matt: Absolutely, thank you very much for having me. I really enjoyed it.

About Millen Paschich

Millen began his career at Cambridge Associates, trained in finance at SMU, and has an MBA from UCLA. Talk to him about bicycling, business, and green chile burritos.

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