As world leaders met at the 21st Session of the Conference of the Parties to United Nations Framework Convention on Climate Change in Paris last month to hammer out a deal to prevent global warming, one thing became clear. The private sector, with its financial clout and penchant for innovation, must play a leading role in the struggle for a greener future.
The private sector was more visible and active at COP21 than in any of the previous COPs. CEOs from industries as diverse as manufacturing, mining, technology, and renewables stepped up their collective efforts to address climate change, readily pledging to decrease their carbon footprint, use more renewable energy, and adhere to sustainable resource management. Meanwhile, global financial institutions pledged to release hundreds of billions of dollars in new investment over the next fifteen years in clean energy and energy efficiency. Most prominently of all, the private sector called on governments to put in place stable long-term regulatory regimes, including a price on carbon, that they can use to guide their companies through the transition to a low-carbon economy.
Developing countries will need about $100 billion of new investments each year over the next four decades to bolster economic resilience to the effects of climate change. Mitigation costs are expected to balloon to anywhere between $140 and $175 billion annually by 2030. This enormous burden cannot be carried by national governments alone. Many are already struggling to make ends meet and will need the buy-in and participation of the private sector in order to comply with the agreement reached in Paris.
But why should businesses, whose main fiduciary responsibility is to their shareholders, care about climate change? The answer is simple: a growing number of studies show that climate change is disastrous to their bottom line. If global temperatures jump four degrees by 2100 – the direction we’re heading in now – droughts, flooding, and ferocious storms will wreak financial havoc, upending small shops and large conglomerates alike.
A study by CitiGroup found that excessive warming could shave up to $72 trillion off the world’s gross domestic product. Another report, this one published in the journal Nature, concluded that global warming may reduce average global incomes by nearly a quarter. A four-degree (C) jump would also batter sectors such as agriculture, real estate, timber, amongst a host of others. Emerging market equities would suffer as well. All told, that would produce a toxic environment for businesses of all sizes.
Investors wouldn’t remain immune either. A report by Cambridge University suggests equity portfolios could tumble by up to 45 percent as climate-related fears ripple across global markets. Some companies are already starting to feel the pinch. Earlier this year, the CEO of Unilever – which had $52 billion in 2014 sales – turned heads when he said natural disasters linked to climate change cost his company about $330 million a year.
For years, companies around the world bristled at the idea of going green. Their argument: we just can’t afford it. However, a dramatic plunge in the price of eco-friendly technologies – especially renewable energy – and the rise of carbon pricing – which charges firms for releasing greenhouse gases – has changed that calculus. Companies are now flocking to climate-smart investments, not only because it’s morally the right thing to do, but because it adds to the bottom line.
A recent study that looked at a sample of 1,700 leading international firms found that the money they put into reducing greenhouse gas emissions saw an internal rate of return of 27 percent – a clear indication that those investments are paying off. Other studies, like one from Harvard, have shown that companies with a reverence for environmental and social sustainability outperform firms that treat those issues with disdain.
In September 2014, more than a thousand companies joined forces to speak out in support of carbon pricing. Six major oil companies petitioned governments, and the United Nations, to take stronger action on carbon pricing in an open letter published in June.
This adds to the growing corporate support for progressive climate action.
Dimitris Tsitsiragos is vice-president of Global Client Services at the International Finance Corp., a member of the World Bank Group.
EDITOR’S NOTE: This is the first of a two-part series. The commentary, made available at the request of The Energy Times, was published in the Capital Finance International magazine on January 6. Next week: “$700 Billion a Year to Green the Globe.”