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The Hopeful Environmentalist

Seven market signals that business needs before it embraces the Paris Climate Agreement

Will the Paris Agreement lead to real changes in where investment goes? petrick/flickr, CC BY

Historic! Landmark! Monumental! These are the words being used to describe the Paris climate accord, recently negotiated under the auspices of the United Nations. As an agreement, the words are apt.

But, as hard as this deal was to reach, now the real work begins of turning a negotiated set of aspirations into reality. And that task falls to the market. Without changes in multiple aspects of the market and the behavior of businesses in particular, no solutions will be found, no progress can be made, climate change will continue unabated.

In 2006, a survey of 100 companies on how and why they were considering climate change in their financial and operational strategies yielded two overriding points:

  1. most companies saw greenhouse gas controls as inevitable but were waiting for a market signal, and
  2. in the words of Kevin Leahy, then managing director of climate policy at the energy utility Cinergy (now Duke Energy): “The technologies will emerge when CO2 has a price signal, and that market signal will be created by regulation.”

With Paris, that signal is now emerging, but not yet realized. While voluntary reductions within the corporate sector are encouraging, business will step forward to the level necessary only if there is a clear and tangible market shift, one that will alter the global energy sector, and as a result create ripple effects through all sectors of the global economy.

A real market shift comes with both risks and opportunities, and, importantly, it will create both winners and losers. This will not be an easy shift, nor will it be painless.

How we will know things have changed

With nearly 20 years since the Kyoto Treaty to reduce greenhouse gases, the corporate sector has had plenty of time to anticipate and prepare for this day to arrive. Indeed, corporate representatives were present to an unprecedented level in Paris, and their support for action was a critical factor in making the Paris Agreement possible.

What people in business need now is a clear set of markers that will signal that the market shift is under way and that they must change operations, research and development, and strategy to both measure and reduce their direct and indirect emissions. How will they know that the Paris Agreement really means a change to business as usual? The answer is by observing market signals that could take form in any of the following ways, all of which are challenging despite the post-Paris euphoria.

  • Policy. While all signs suggest that a carbon price is unlikely at this time in the United States, President Obama has made it clear that he is willing to use other instruments, notably the Clean Power Plan, to limit carbon emissions from electricity generation and CAFÉ standards to set light-duty vehicle fuel efficiency at 54.5 miles per gallon by 2025. Other tools that will signal this market shift include turning subsidies and research dollars away from fossil fuels and toward renewable energy; appliance and building efficiency standards; policies to promote renewable energy, such as mandates for utilities and net metering rules; and policies that create a more predictable innovation future, such as stable production tax credits. These are all policies that have been fought over for years at the federal as well as state and city levels. Now, in the wake of Paris, a new battle must be fought to shift policy.

  • Investments. The global Socially Responsible Investment market – investors that seek environmental and social benefits in addition to financial return – is measured to be roughly US$21 trillion. But the market shift must include the entirety of professional managed assets, estimated at roughly $70 trillion. Are the billions of dollars from Bill Gates’ new private investment initiative going to a part of a broader market rush to new technologies? We must hope so if we are to reach the goals that were set.

  • Market valuation. Greenhouse gas emissions must start to figure into a company’s market value. For example, the value of coal companies has been dropping due to the increase in natural gas use. Will the Paris Agreement reduce demand even further, driving stock prices even lower? And what about oil and natural gas companies? Even though the divestment movement seeks to hasten a drop in their value, the truth is that the combined stock value of the world’s coal, oil and gas companies hovers around $5 trillion while the related stocks of the renewable energy sector are valued at about $300 billion. The primacy of these stocks within most investment portfolios, the number of people employed and the value of the fossil fuel assets in the ground mean that this will take time to realize and cannot be expected to turn around quickly.

  • Technology cost curve. Companies will adopt new technologies if they are cheaper than their incumbent choices. Therefore, innovation will need to drive the cost of clean energy technologies down if we are to see a real market shift. Already, we have seen tremendous reductions in the cost of battery storage, solar power, electric cars and wind power. But, we will need them to reach levels that disrupt major sectors such as energy and mobility in the same way that information technology has done to other industries, such as retail and banking. Apple CEO Tim Cook has already predicted major changes in the auto sector, but climate change must precipitate technology advancement and wholesale sector shifts that create the kinds of creative disruption that Joseph Schumpeter described.

  • Transparency and disclosure. To help spur this process along, companies and the government must be able to monitor and verify emission reduction progress. One option might be to include greenhouse gases in the US EPA’s Toxics Release Inventory. Absent that mandate, nonprofits like the World Resources Institute have created tools that track corporate emissions and reduction progress. At the same time, the topic of transparency has gained significant attention with the corporate sector. Recently, for example, Nestle took the highly unusual step of disclosing its own auditing results that showed that slavery and coercion were present in its seafood supply chain. But in the end, without a trusted form of monitoring and tracking, companies will be hesitant to fully engage emission reductions.

  • Lobbying efforts. Research by InfluenceMap, a nonprofit that tracks corporate influence on climate policy, and the Union of Concerned Scientists reports that half the world’s 100 largest companies are “obstructing climate change legislation” and 90% are members of trade associations that do the same. Encouragingly, both the electric utility AEP and oil company Shell have quit the American Legislative Exchange Council over its opposition to the deployment of renewable energy and action to address climate change. But disclosing lobbying efforts, much less reducing them, will be a challenge for many companies.

  • Market metrics and drivers. The list above is but a few of the market signals that drive corporate behavior and innovation. But the market shift to address climate change must be driven by standard business stakeholders, such as buyers, suppliers, customers, banks, insurance companies and others. In this way, climate change can be measured in standard business metrics such as consumer demand, cost of capital, operational efficiency and others. Once the language of climate change is infused within the language of the market, we can consider the shift fully under way.

Political divide

There is, of course, one last signal that will be necessary for this market shift to take place in full: that the Paris climate accord alter the political calculus over climate change in the United States.

Michael Bloomberg listens to Bank of England Governor Mark Carney at the Paris climate summit. Both have been outspoken on the need for businesses to address the risks and costs of climate change. Stephane Mahe/Reuters

Now, with the global community stepping forward, and many within the corporate sector playing a part, we can see increased pressure to break the link between a conservative worldview and disbelief in climate change.

In Paris and beyond, corporate CEOs are pressuring Republicans to shift their stance on the issue. And they are supporting their case with solid business concern.

CEOs of companies like Cargill and General Mills warn that unabated climate change is impacting corporate operations and could threaten food production in the short to medium term. Mark Carney, governor of the Bank of England, warns that global warming could become one of the biggest risks to economic stability in the future.

These are signs that corporate executives are now recalculating their strategic objectives in the face of what may be the market shift necessary to deal with the effects of climate change. But they can go only so far without the full-scale market shift that is necessary to redirect the energy sector as well as the overall economy toward greenhouse gas reductions. Only then can the Paris Climate Agreement be truly pronounced as historic, landmark or monumental.

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