Companies are coming to terms with what the ambitious Paris agreement means for the way they operate

The superlatives were flying freely at the close of the UN-sponsored climate change talks in Paris in December. After 21 years of negotiations, 195 countries forged an agreement to ensure that average global warming would remain “well below” 2°C, and they agreed that they may even look at capping warming at 1.5°C above pre-industrial temperatures.

It was, by any standards, a momentous agreement, a landmark deal in the history of multilateral negotiations. To put it in the words of many an observer: this changes everything. And it has obvious ramifications for the business community. The question of corporate social responsibility, or CSR, if it was not already part of mainstream decision making within a company, now must be so.

The seismic shift that will occur in the next few decades demands that this is the case. It is not just about seizing the myriad opportunities that the multi-trillion-dollar transition to a low carbon economy will offer, but it is also about self-preservation of those caught flat-footed in the face of progress.

Targets

First, though, to the agreement. The Paris deal calls for the world to reach temperature targets that many had thought would never be agreed. It will rely not on a top-down approach, but a bottom-up one. Pledges from more than 180 nations have already pushed the world away from business-as-usual, towards a temperature target of between 2.7C and 3.5C (depending on whether one has an optimistic or pessimistic view of the pledges’ effectiveness).

That ambition will be ratcheted up through a series of mechanisms – a system of reviews and renewed pledges that will take place every five years, beginning in 2018/2020. Backsliding is not permitted.

Much has been, and will be, written about the lack of “legally binding targets” for individual countries. This, though, misses the point. Such legally binding targets would have been impossible to enforce, and even impossible to agree.

This is not to underestimate the scale of what is required to implement the 2015 agreement. And there are plenty of analysts who question whether the targets can be met, and in the time-frame agreed.

But one of the reasons that the world’s governments were able to reach such an agreement is the plunging cost of renewable energy technologies such as solar and wind, which have fallen by more than 80% and 50% respectively since Copenhagen, where talks failed in 2009 because the task looked too hard and too expensive.

Now, most analysis suggests a transition can be achieved at no added cost beyond business-as-usual. Big money has already moved. In the past two years, investment in new renewable energy generation, for instance, has outstripped that of fossil fuels, even though fossil fuel subsidies outstrip renewable energy subsidies by a ratio of nearly 10 to 1 – or by a ratio of 100 to1 if you include, as did the International Monetary Fund, the environmental, health and social costs of fossil fuel generation.

Business leaders

So, in many ways, the agreement of 195 national governments simply reinforces the science and adds momentum to what is already taking place in the business community. Clive Hamilton, Australian researcher and board member of Australia's Climate Change Authority, said in Paris: “The most surprising revelation here has been the astonishing shift in the world of investors over the past 12 months.

“There is now unprecedented momentum towards participating in the transition to a low-carbon economy, and the view at the ‘big end’ of the conference is that a strong agreement will provide an extra shove.

“It’s not that investors and chief executives have had an ethical epiphany about climate change; it’s just that they can see where the world is headed, and it makes sense to be part of it rather than being stuck in the economy of the 20th century. It’s unstoppable now.”

  

This was a sentiment echoed by Howard Bamsey, a former head of delegation for the Australian government and now an academic at the ANU Crawford Business School, specialising in climate policy.  

Bamsey has been attending these conferences since they started, and he has noted a massive transformation, particularly in the past two years as it has become clear that government was catching up with business. Paris, says Bamsey, was more an international trade fair. “When this process started, governments were all important, whether they moved or not was the whole story. [In Paris], governments are only part of the picture. When we went to side events by business or environment groups 15 or 20 years ago it was all about the good ideas they might be able to do if they had the right policies. Now it’s about what they have already done.”

So, what does this mean for business, in practical terms? Forest Reinhardt, co-chair of the Harvard Business School’s Global Energy Seminar, says the main factor that has changed in the past 15 years is the urgency for those not already on board.

Reinhardt says companies need to think about:

• Can you benefit from resource constraints by creating a differentiated product that appeals to consumers who are willing and able to pay more for it? (He cites electric car manufacturer Tesla.)

• Can you change the rules of the game to tilt it in your favour, perhaps by affecting regulation?

• Can you cut costs by using resources more efficiently?

• Can a change to your business model – such as leasing instead of selling equipment – create advantage for a period, and ultimately change how your industry operates?

• How will you manage the risks that environmental change creates? (The risks are changing all the time – probably more than the other factors.)

Social purpose

Reinhardt says that when people talk about “corporate social responsibility” they could be talking about one of two things. “One is the purpose of the firm – is it strictly to serve shareholders, or something broader? This question sparks a lot of rhetoric and not much in the way of action.

“A second question is how business people, without rethinking their basic objective, can contribute to solving social problems and still make money.

“You don’t hear a lot of rhetoric about this one, but it’s having a very big impact on business behaviour. And while unilateral business initiatives are not a substitute for collective action, businesses can empower collective action by showing governments, credibly, what the technological and economic possibilities are. In fact this is a big part of the story of Paris.”

The world needs to internalise some social costs and get the prices right. Many companies already do that, and the business community has shown that it can be done. “A lot of the big sustainability issues (not just energy) come down to pricing – putting a price on natural resources that we used to see as free,” says Reinhardt.

Reinhardt cites the example of fishing in the vicinity of his university, off Cape Cod. “You used to be able to drop a net into the ocean and pull it up, filled with fish,” he says. “Nobody had put a price on the fish – it was free if you had the tools to get it.”

But as demand grew and fish became scarce, in similar locations across the globe, countries developed fisheries management systems that made the cost of the fish reflect their scarcity.

“Usually this means that the fishermen collectively have a ‘total allowable catch’ but that they can buy and sell quotas within that overall limit – and overall the system works pretty well.

“They make a decent living, the fish are coming back, and consumers are willing to pay the higher, unsubsidised prices for fish in restaurants or at the supermarket.”

But in contrast to the fishing sector, Reinhardt says, “We’re still subsidising the oil and gas industries and ourselves, their customers, are passing the costs for that to our children and grandchildren. But collectively we’ve just taken a big step toward addressing that.”

The implications of the Paris deal, and some of the fine-print around targets, are that the world’s energy systems will need to be decarbonised – most likely by 2050.

  

That means that within 35 years, all fossil fuel emissions that cannot be completely abated or captured have to be eliminated. That could include a push to carbon capture and/or nuclear, but is most likely to rely on widespread uptake of renewables. That is a rapid transition that needs a price signal, or at least a long-term policy signal. Hence the push for a global carbon market, something that the UN discusses, albeit in vague terms.

Investors

Much is happening in the area of investment and prudential supervision. At the Paris talks, Martin Skancke, chair of Principles for Responsible Investment (PRI), the world’s largest network of socially responsible investors, pointed out that in little over a year, the Montreal Carbon Pledge had been signed by 120 investors who control more than $10tn in assets. There is also a “quiet revolution” – meaning you won’t hear much about it in the mainstream media – in green investment, with issues of so-called “climate bonds” likely to top $1tn by 2020.

Shaun Tarbuck, head of the world’s biggest insurance federation, ICMIF, spoke of “a new paradigm” in the business world. A point underlined by the presence of Bank of England governor Mark Carney, who has led the push to recognise that climate change – unaddressed – represents a threat to the stability of the global financial system. 

   

In Paris, Carney listed the types of risk to which financial markets are exposed, including direct risks due to massive insurance payouts after climate disasters, and liability risks for directors should corporations be sued.

  

But, Carney put most stress on the exposure of capital providers to an abrupt transition to a low-energy economy, due to future sudden changes in policy or sentiment. He wants a market structure that will bring about an ordered transition to a zero-carbon economy.  

“The unmistakable message is that the world is changing: the major economies are beginning the transition to low-carbon energy systems, and if you are not planning for it you are not doing your job. It’s taken them a long time, but investors now get it. The issue is not whether they care about climate change, but whether they are properly managing risk in a changing world,” said Carney.

Andrew Petersen, CEO of Sustainable Business Australia says: “A substantial shift is taking place. Business focus on climate change is settling into core business strategy and out of the CSR function.”

This includes a focus on the way energy is used. Companies can realise multiple benefits including energy cost cuts, increased outputs, improvements in product quality and reliability, and reduced maintenance and labour costs.

“There are clear commercial advantages while driving emissions reductions,” Petersen says. “Businesses that integrate climate change considerations into their business strategy early will be well positioned ahead of increased global action on climate change.”

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