Financial Times
- Lucy Colback
The global pursuit of net-zero carbon emissions is a huge undertaking,
and only possible with the help of businesses
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© FT montage; Bloomberg; Getty Images
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In October the FT Future Forum assembled a panel to discuss the role of
business in tackling climate change. It featured Emmanuel Faber, chief
executive officer of Danone, the food company, and Huw van Steenis, group
managing director and chair of sustainable finance at UBS, the financial
services group. It was moderated by Pilita Clark, a business columnist at the
Financial Times.
The issue of climate change has been to the fore since the UN Paris Agreement
in 2015, which aimed to limit the average rise in global temperatures to 2C
above pre-industrial levels and to try to keep the increase below 1.5C. This
target has been adopted by almost every nation on earth.
The pace
of government activity has accelerated quickly. In 2019 the UK, New Zealand
and France made laws that commit them to achieving net-zero emissions by 2050.
Sweden has given itself a goal of 2045. This year China, Japan and South Korea
made similar promises, although their targets have yet to become law.
According to the
Energy and Climate Intelligence Unit, economies accounting for half of the global gross domestic product have
made a commitment of some sort.
Worldwide, policies are being put in place to deal with vehicle
emissions
Even the US, whose withdrawal from the Paris Agreement took effect in
November, is likely to return to the fold when president-elect Joe Biden
replaces Donald Trump on January 20. The “Biden Plan” promises to invest $2tn
in an “equitable green-energy future”. The urgency of the issue is shown by
how quickly thought has turned into action.
In November, Rishi
Sunak, the UK chancellor, followed countries such as Germany and Sweden when
he
announced
Britain’s first green government bonds to fund low carbon projects. He also
said that from 2025 disclosure of climate threats would be mandatory for
listed and large private companies under a framework created by the
Task Force on Climate-related Financial Disclosures
(TCFD). Disclosure is the first step but it is data that will allow companies
and their investors to appreciate the risk posed by climate change.
Matthew Bell, the Asia-Pacific climate change and sustainability services
leader for EY, the professional services consultancy, says: “Unlike a lot of
these other standards, which are kind of point-in-time reporting, TCFD says
what’s your business model and how is it impacted by these multi-decadal
changes to the climate.
“It gets organisations to think
about risk management and governance, setting metrics and targets and
establishing a strategy to deal with existential threats — and that’s new.”
The challengeThe challenge to reach net zero is huge, so practical action is a
priority. The
International Energy Agency
says that by 2030 emissions must fall by 45 per cent relative to 2010 to be on
track to reach net zero. Rapid progress, it says, is “crucial”. Success will
depend on cleaning up energy sources, reducing emissions from appliances and
retrofitting buildings, as well as making gains in efficiency to enable energy
demand to fall by nearly a fifth, back to the level of 2006, despite the
larger global economy.
All this will cost. A rule of thumb is that
one to two per cent of global GDP will need to be spent to achieve climate
goals. The OECD estimates that the necessary infrastructure will cost $7tn a
year up to 2030.
Other data present an optimistic picture. In the
UK, the opposition Labour party
identified
net benefits to the economy of £800bn if the energy sector’s net-zero target
is brought forward and reached by 2030. A 2018 Stanford University study
predicted a 60 per cent chance that keeping global warming within 1.5C instead
of 2C by 2050 would result in accumulated
global benefits of $20tn, although it does make caveats.
Progress to date A first step towards lower emissions has been to clean up the
power sector, notably coal-fired electricity generation. This seems to be
working. In August, Global Energy Monitor reported in
Carbon Brief
that global coal-fired power capacity shrank for the first time in the first
half of 2020, although countries such as China continue to expand.
In the UK, the effect of policies for greener economic growth and
cleaner air has been marked. Emissions related to energy supply have declined.
Provisional figures for 2019
published
in March show that the sector’s CO2 emissions are down by nearly two-thirds
since 1990, against an aggregate fall of 41 per cent. The transport sector is
next. Having barely reduced its emissions since 1990, it ranks as Britain’s
worst emissions offender.
Worldwide, policies are being put in
place to deal with vehicle emissions. In 2019, France became the first country
to legislate to phase out combustion engines, with a target year of 2040. By
June, according to the
IEA, 17 countries had announced 100 per cent zero-emission targets or the
phasing-out of vehicles powered by internal combustion by 2050. In November,
as part of the UK plan to tackle emissions, the government said it would ban
sales of petrol and diesel cars and vans by 2030, bringing that target forward
by 10 years.
So far, in the UK at least, a reduction in emissions
has had no effect on economic growth. The
Clean Growth Strategy
of 2017 said Britain’s economy had expanded by two-thirds since 1990: it
outpaced other G7 nations and it also did better at cutting emissions.
The outlook for businessBritish business will not be let off the hook. In 2018 the
commercial sector was responsible for 18 per cent of CO2 emissions, just
behind homes. In the same year, US industry accounted for more than a fifth of
greenhouse-gas emissions, according to a Senate Democrats’
report. In its 2019
progress report, the UK committee on climate change said: “It will be businesses that
primarily deliver the net-zero target and provide the vast majority of the
required investment”, adding that policy needed to give a “clear and stable
direction”.
The UK, which is due to host the COP26 summit in
Glasgow in November 2021, is priming companies for action with policies
directed at specific sectors.
At the opening of the COP26 private
finance agenda in February, before Covid struck in the west, Alok Sharma, the
COP26 president and UK business secretary,
highlighted the need for a shift in funding. “Only decarbonised economies”, he
said, “will be able to grow through the worst impacts of climate change.”
Speaking later to business leaders, Mr Sharma noted that the fight against
climate change “has to be a joint endeavour between nations, civil society and
business”. He called on businesses to commit to targets such as sourcing 100
per cent renewable energy by 2050 and switching all vehicles to zero emissions
by 2030.
The climate-related shift could be as transformational as
the advent of the internet. Businesses that do not adapt will be at risk,
while those that embrace change will see greater opportunities. Dr Bell
describes climate change as “the greatest economic transformation in our
lifetime, because it impacts on every single industry sector. Nobody’s
immune”. Andy Howard, head of sustainable investment at Schroders, the
investment manager, agrees. “[Given] the scale of disruption we are talking
about, there won’t be any easy wins,” he says.
The
Race to Zero Coalition, a global initiative under the UN Framework Convention on Climate Change,
counts among its supporters more than 1,000 companies, 450 cities, 549
universities and 45 investors.
Climate Action 100+, an investor initiative that started in 2017, includes more than 500
investors that urge companies into action on climate issues.
CDP, which runs a disclosure system for environmental effects, publishes an
annual climate action ranking of groups, based on a
questionnaire; in 2020, 9,600 companies took part.
Risks
■ PhysicalThe most tangible risk to assets lies in
areas that climate change will directly affect. This includes those that may
be submerged as the seas rise, as well as assets affected by the result of
extreme weather, including more frequent severe storms, droughts and
wildfires.
For existing assets, there are few solutions other than insurance. For new
projects the risk must be assessed at conception.
■ ExistentialAs the shift to a low-carbon world gathers pace, assets in
several sectors face obsolescence: they risk becoming stranded assets.
Extractors of fossil fuels and the producers of energy sourced from coal, oil
and dirty gas are obvious examples.
Carbon offsets are no longer considered a good way to counter
emissions
The risk also applies to areas including the auto industry and aviation.
Construction is also affected because of the carbon footprint of concrete and
steel. Innovation may create green alternatives but in the meantime producers
will have to reduce emissions in existing processes.
Shipping,
which accounts for nine-tenths of global freight by volume, is responsible for
three per cent of greenhouse-gas emissions, according to
Climate Action Tracker. While the International Maritime Organisation has adopted targets, the
analysis suggests that action so far is inadequate, with emissions likely to
grow.
Carbon offsets are no longer considered a good way to
counter emissions.
The Science Based Target initiative, which champions defined
paths to net-zero emissions, says offsets should not count towards targets as
they do not reduce emissions. The consensus is that abatement not offsetting
will power the shift to net zero.
■ Transitional Business models will have to change. Transport, for instance,
must shift to zero-emission vehicles. In June, British Gas made the largest UK
order of electric vehicles.
Volvo has said it will soon have fully-electric lorries on sale.
Emissions from offices also need to be cut. A fifth of UK
emissions are from commercial property, so the designers of new projects will
have to consider the climate, and old stock will have to be adapted. Schroders
highlights innovations in its London premises such as recycling heat from
refrigeration to the hot water system, while Freshfields, the law firm, says
its move to new premises was made with sustainability in mind.
The Urban Land Institute, a think-tank, says landlords that
invested in climate-resilient commercial real estate have reaped dividends. As
a result they can charge
higher rents to companies that value continuity.
The effect of
transition will be felt all the way from company to consumer. Huawei, the
Chinese technology group, says its approach is twofold: moving to renewable
energy at all of its premises and working to improve energy efficiency and the
recycling rates of its products. It says: “These measures often help customers
reduce total cost of ownership, creating a strong economic incentive for
climate action.”
During the FT Future Forum panel event, UBS said
that as well as reducing its own effect on the climate it was making use of
capital allocation to bring clients into a low-carbon world. This is
significant. Even companies that avoid setting a target will be affected by
decisions taken elsewhere. Tesco, among others, has made commitments to reduce
emissions in its supply chain, forcing its suppliers into action too.
■ Regulatory If companies and consumers do not
voluntarily work towards low-carbon targets, regulation will force the issue.
This could be costly for those late to make the change.
The
UN-backed Principles for Responsible Investment forecasts that “abrupt,
forceful and disorderly “policy change will come by 2025 and could wipe up to
$2.3tn in value from the world’s largest companies. Much of that will be the
result of carbon pricing, which Dr Bell describes as “an effective and fair
mechanism to rapidly reduce emissions”. Such a system would penalise any
company that has failed to reduce emissions to national limits.
“First, companies’ costs will go up because they are now paying
for something that they weren’t paying for before”, says Mr Howard. “Second,
all of their suppliers’ costs will go up . . . then the price of products will
also increase, because ultimately that will be passed on.”
Factoring in a corresponding fall in demand, Schroders concludes
that this could eliminate an average 15 per cent of cash flows across
companies in the MSCI All Countries World Index.
■ ReputationalDespite these pressures, for many businesses transition may still
seem a distant problem. If customers do not appear to care, acting on
emissions can look like an unnecessary expense. This is dangerous — and not
only because of the high likelihood of carbon taxes. Young people, the
consumers of the future, are particularly engaged in the issue and some have
run a “
Mock COP” in place of the postponed official COP26.
As visible climate
offenders such as oil and gas are sidelined, consumers will shift scrutiny to
companies in sectors that are thought to be avoiding action. Increased
transparency makes it easier to identify lower-carbon alternatives and so
empowers consumers in making choices. In September, Amazon
introduced a “
climate pledge friendly” initiative to flag up sustainable products.
More such data
could lead to stranded assets or unviable products in sectors that thought
they were safe.
James Hilburn, director of financial services at Carbon
Intelligence, believes that the demand for beef and cheese, and out-of-season
vegetables, could shrink. “As the carbon emission of these items becomes more
transparent and is eventually priced into the product, it may accelerate a
market shift away from them.”
In better news for old-world wine
drinkers, Mr Hilburn says that “a bottle of wine has an average CO2 footprint
of 1.2kg per bottle, but using a natural cork rather than a screw-top can
reduce the emissions by a quarter because of the carbon sequestration of the
cork tree”.
Financing
The role of capital allocators in the climate transition is
increasingly important. Mr Hilburn says 60 financial institutions have committed to science-based
targets. He says: “The financial sector is seen as the conduit into the
market. If you can measure the ESG [environmental, social and governance]
implications of capital you can actually flow down to all sectors, and you can
achieve change across all sectors. That is really powerful.”
Pension
funds, for instance, now invest with climate mitigation and sustainable
business in mind. Banks, too, consider climate in their lending practices and
direct their equity investments accordingly.
In July the UK’s largest pension fund, the government-backed
National Employment Savings Trust, announced that it would divest from fossil
fuel exposure. It will not be the last, as climate disclosure under TCFD
becomes more common.
Several large banks in the UK and US
have
signed up to the
Partnership for Carbon Accounting Financials, an initiative backed by Mark Carney, the former Bank of England
governor.
Next June the
BoE will put financial institutions through a climate stress test, which
will make more people and businesses acutely aware of the risks of climate
exposure.
The shift of capital is not only driven by ethics. “A
growing body of evidence links good ESG performance with superior market
returns”, Mr Hilburn points out, “and it comes through a number of factors.
You have better cost controls, you have revenue growth opportunities, you have
a more engaged, productive workforce.”
In debt funding, the move
from projects with a limited shelf-life in a net zero world is feeding into
costs. In
October Goldman Sachs reckoned that renewables projects could secure funding at
5 per cent or less, versus 20 per cent for long-term oil projects.
OpportunitiesAvoiding the downside of delayed action is likely to bring
substantial benefits for businesses that move quickly to deploy strategies
based on climate mitigation. There are also tangible gains. Mr Carney, who is
the UN special envoy for climate action and finance, calls the
transition to net zero the “greatest commercial opportunity of our age”.
Technology,
for instance, brings opportunities for developers and users. Energy group
Iberdrola and technology companies Lenovo and Google have deployed artificial
intelligence to enhance efficiencies. The machine-learning solutions that
Google created to cool its data centres are being applied to buildings
worldwide. Carrefour, the French retailer, used Google AI to analyse large
data sets and reduce food waste.
The services sector, including
consultancies and legal firms, stands to gain business in advising clients on
the best way to achieve net-zero emissions or, in the worst case, how to avoid
litigation.
Meanwhile, US juveniles backed by the Children’s Trust
were told they had
no legal standing to sue their government for jeopardising their futures by ignoring the
risks of climate change, although campaign groups such as the
Centre for Climate Integrity have highlighted how climate-related costs are borne by communities but
polluters are not held to account.
In its 2017
Clean Growth Strategy, the UK identified the low-carbon economy as an area of opportunity. In 2017
it forecast that the sector would expand at 11 per cent a year up to 2030,
nearly four times the rate of the broader economy. In the US, the Biden Plan
anticipates that millions of jobs will be created in sectors from renewable
energy to innovation to low carbon-related construction. Google says its own
sustainability investment should generate more than 20,000 jobs in clean
energy and associated industries in the next five years.
Meanwhile,
UNPRI has a positive outlook for negative emission technologies, or NETs.
Just one subset, nature-based technologies, could grow to encompass assets
worth $1.2tn, generating annual revenues of $800bn by 2050, larger than the
current market capitalisation of the oil and gas sector.
Building Back GreenerArguably, the coronavirus pandemic has delayed some of the more
ambitious plans to invest in green targets. During the panel discussion,
Danone acknowledged that its investment in climate change initiatives,
announced just before the pandemic, would have to be reviewed since tackling
climate change and Covid-19 together was hard.
Dr Bell, however,
notes that, against expectation, EY’s survey of investors conducted during the
pandemic did not indicate a return to purely alpha generation. “The opposite
was true. They said, ‘Nope. It’s far more important for us to focus on ESG now
than it has been ever’.”
Nations also look to the low-carbon
economy to help beat the economic effect of the pandemic. In June, Germany
allocated €40bn of its €130bn stimulus plan to green spending. The
Just Transition Fund was introduced a year ago to aid EU economies in the move to low
carbon. Its funds
will assist the recovery based on low-carbon principles.
Next StepsThe imperative for business to act now should be evident. While
setting targets is critical, giving the problem appropriate significance and
creating structures to ensure execution are also key to success.
Danone exemplifies what consultants such as EY and PwC advocate in
terms of placing climate and sustainability at the heart of strategy. In 2008
the company shut its corporate social responsibility department — an
acknowledgment that such issues belong in a broader agenda — and pegged the
bonuses of 15,000 managers to CO2 targets.
The FT Future Forum
event distilled a three-point action plan for companies to deliver
transformation: listen to your customer or clients, engage the full executive
team and consult employees, especially the next generation of leaders who are
impatient for reform and will leave if they do not see change.
Placing
ownership of climate strategy at the right level is critical.
PwC is not alone in recommending that this should rest with the board and
then be communicated to the organisation using clear targets.
ConclusionA huge amount of work lies ahead. A recent analysis of 6,000
groups by J Safra Sarasin, the Swiss bank, showed that their emissions were on
track for 3.5C to 4C warming, double the level set in Paris.
Dr Bell believes 2030 will be the critical moment, because that is
the date that most countries’
nationally determined contributions should be met.
“We see a crunch coming, partly from
the investor community — inadvertently. We know a number of leading investors
seek to align their investment portfolios to a 1.5C outcome, or to net zero,
by 2050.
“Given that we haven’t seen mass divestments yet, you could predict that if
companies don’t pivot their business models and start to decarbonise in line
with that 1.5C or 2C, there’s going to be this crunch point when investors
say, ‘We need to move our funds’.”
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