In 2020, the transport sector accounted for a significant 21 percent of global carbon dioxide emissions, with trucks, rail, and ocean freight driving a sizeable share. According to one study cited by McKinsey, if business as usual continues, freight will become the world's highest emitting sector by 2050.
Now estimates show as much as $50trn of assets are managed by investors prioritising environmental, social, and governance factors, with more capital expected to shift this way. In the wake of these drivers, industry leaders will have to rethink long-term infrastructure investments, embracing both sustainability and technology.
Navigating a stormy sea:
Ocean freight forwarding is the backbone of global trade, with 90 percent of all goods in the world today transported by sea. Today the total carbon-dioxide emissions from ocean shipping account for under 3 percent. However, if vessels continue to run on heavy fuel oil, by 2050 the shipping industry could be responsible for 17 percent of global carbon-dioxide emissions.
To address this sustainable marine fuels (SMFs) are being explored. For instance, Scan Global Logistics, a leader in the market, has signed a global pledge to use ocean biofuel. It provides its customers with the option of using 100 percent carbon neutral shipping for their containers.
The switch to SMFs from heavy fuel oil presents challenges. The purchase of new vessels that can run of SMFs presents enormous capital expenditures. Additionally, the International Maritime Organisations (IMOs) regulations are continually being updated, leading to newly built ships not meeting new standards. This causes a negative return on investment for companies, who expect the useful life of these investments to be around 25 years. Greater consistency in regulations is required for industry players to be confident in their investments.
Furthermore, sustainable alternatives in the shipping industry are far from reaching a cost parity. The demand for ships, with new technology allowing them to run off SMFs, such as hydrogen, has not got to the level where it makes financial sense for sellers to produce them at scale. The lack of infrastructure at most ports to support these technologically advanced ships create further issues for companies. Additionally, Hydrogen-based fuels, and other alternatives, can be priced as much as four times the price of heavy-fuel oil. Until production increases, prices will stay high and unattractive to investors.
These challenges must be navigated effectively enroute to achieving the IMOs pledge to reduce carbon emissions by 70 percent by 2050.
Flying high on SAFs:
Although air transport represents just 2.1 percent of global carbon emissions, its contribution to scope 3 emissions may deter businesses from including air freight logistics in their supply chain. This is often down to end-consumers believing it to be too polluting. However, ironically, these are the same consumers whose expectations of fast delivery can only be fulfilled by air freight forwarding.
With the air freight logistics industry expected to experience annual growth of 4.8 percent over the next 20 years, emissions need to be resolved. With electrically powered aircraft still far from ready, a viable solution, used by many aviation providers already, is sustainable aviation fuels (SAFs). These, according to IATA, can reduce emissions by up to 80 percent during their full lifecycle. Ideally these will be drop-in fuels, which do not require engines modified or specifically built, as these add significant capital expenditures.
Increasing environmental regulations are filtering down to air freight forwarding. By 2030, the European Commission proposes reducing net greenhouse gas emissions by at least 55 percent from 1990 levels. Included in these proposals are obligations for fuel suppliers to increase their share of SAFs over time. With the aim of furthering SAF uptake by airlines, thereby reducing aviation emissions.
The road to sustainable alternatives:
Road distribituion dominates the transport landscape, offering unparalleled accessibility and flexibility. The transition to electric vehicles (EVs) in the transportation sector is projected to be the fastest, primarily due to passenger EVs reaching cost parity with internal combustion engines (ICEs). Additionally, short-haul freight EVs are already moving towards cost parity, reducing emissions and operating costs effectively.
Long-haul trucking, however, presents its own distinct challenges, due to its unpredictable routes, high uptime requirements, and strict regulations. This has led to the need for further innovation to tackle high emissions. Hydrogen-powered fuel and hydrogen combustion are attractive alternatives to EVs. They enable extended range and faster refuelling, while allowing for heavier loads than heavy battery alternatives. These factors improve the significant KPI of trucks' total cost of ownership.
The first hydrogen-fuelled long-haul trucks have been rolled out, with Switzerland being one of the early adopters. However, hydrogen infrastructure is a bottleneck to further adoption and mass roll-out, since refuelling stations are not widely available. Hydrogen infrastructure is less costly to create, due to them not requiring grid upgrades and having lower emissions. These additional advantages of using hydrogen at scale makes investment in infrastructure attractive. Although, access to funding has proved difficult due to higher risk and lower, less certain returns, than alternative infrastructure and technological investments.
How data is driving sustainability:
Data analytics, enabled by digitalisation, can improve visibility along the value chain. Better visibility can help companies monitor their emissions more effectively. This can help with identifying processes where emissions can be reduced or removed. Therefore, data can allow logistics providers to make improvements in the design of their supply chain.
An EY survey from 2022 showed that visibility throughout the supply chain was the top priority for supply chain executives. Without the visibility of their emissions, executives cannot make informed decisions on investments and changes to become more sustainable. Which is why multinationals, such as Maersk and DHL, have digitalised most of their operations.
However, the survey revealed, many companies lack a business case to support expenditures and processes to track sustainability improvements. Although, further tightening on environmental regulations could be a decisive factor in investments into future initiatives. Additionally, companies should focus on the intangible assets that sustainable practices can garner, such as brand reputation.
A sustainable future?
This research suggests that there are technological innovations that will enable a more environmentally sustainable logistics industry. However, it is clear that the current costs are a barrier to sustainability. Further discussion between industry and regulators are needed to navigate these issues.
Investors across sectors are placing a growing emphasis on environmental considerations, compelling industry leaders to embrace sustainable practices. In this transformative landscape, M&A has emerged as a critical avenue for increasing ESG scores. A comprehensive study conducted by KPMG underscores this shift, revealing that nearly two-thirds of investors display a willingness to invest in enterprises that align with their ESG strategy. Moreover, the survey shows the extent to which companies have scrapped deals in response to material findings during the ESG-focussed due diligence process.
References:
‘Embracing technology and sustainability in freight transport.’ McKinsey, 2022.
‘A greener future for ocean freight.’ Economist Impact, 2021.
‘Global shipping is under pressure to stop its heavy fuel oil use fast – that’s not simple, but changes are coming.’ The conversation, 2023.
‘New routes to lower carbon emissions in air freight.’ Maersk, 2022.
‘Annual Report 2022.’ Scan Global Logistics.
‘Why data matters for sustainable supply chain optimisation.’ Maersk, 2022.
‘Cross-border M&A, supply chain and sustainability are top priorities for Asia-Pacific CEOs.’ EY, 2022.
‘How sustainable supply chains are driving business transformation.’ EY, 2022.
‘Over half of M&A dealmakers have cancelled deals on ESG due diligence findings: KPMG Survey.’ ESG Today, 2023.