Businesses and investors are increasingly recognizing climate change as one of the top global risks. And so it is not surprising there were a record number of events during the World Economic Forum’s annual meeting in Davos to discuss the challenges and help advance the solutions. Here, we summarize the key conclusions.
The business community now falls into two main camps. The first group have already started mobilizing to drive the shift to a low-carbon and climate-resilient economy, looking to take advantage of the economic opportunities it presents. The second group – reading the signals from policy-makers and markets – is beginning to realize that the world’s shift to a low-carbon future is now inevitable and is grappling to understand the disruptions it will bring and the speed at which they will come.
Both groups recognise that while tackling climate change is a collective challenge for governments, civil society, and businesses at all levels, it will also involve new technologies, operating models, and investment landscapes that present particular challenges and opportunities for companies.
Conversations in Davos covered a range of issues and 5 key areas emerged as priorities for climate action in 2017. These are the trends to watch.
There are multitudes of great projects tackling climate change scattered across the globe – but it is not enough. There will need to be a step change in the level of investment going into sustainable business models and infrastructure development to tackle the scale of the challenge and meet the commitments governments made in the Paris Agreement.
The good news is that it presents a huge economic opportunity. The International Finance Corporation has identified almost $23 trillion of climate investment opportunities in emerging economies as a result of the Paris Agreement and the most recent report from the Business and Sustainable Development Commission indicates that developing sustainable business models could unlock $12 trillion of economic opportunities and create almost 400 million jobs by 2030.
To realize these opportunities there will need to be a significant ramping up of sustainable finance with increased collaboration between public and private financial institutions to take advantage of blended finance options. We may be seeing early signs of this ramp-up in investment with $81 billion in green bonds issued in 2016 – almost double the amount issued in 2015. There also needs to be a collective effort to break down barriers to investment in emerging economies – in particular, finding solutions to issues such as currency risk.
Phasing out fossil fuel subsidies
Fossil fuel subsidies – totalling $493 billion in 2014 – prevent a competitive landscape for a clean energy transition in many countries. This level of support distorts markets and makes unabated coal, gas and oil appear favourable – crowding out low-carbon alternatives that are critical to avoid dangerous climate change. This also has implications for employment – renewable energy generates more jobs than fossil fuel regardless of whether you measure it by dollars invested or by electricity generated.
In 2009, the G20 agreed to phase out fossil fuel subsidies, the focus now needs to be on agreeing deadlines for those subsidies to stop – preventing taxpayers’ money flowing into a twilight industry rather than supporting more promising future technologies. Corporate support for phasing out fossil fuel subsidies will be particularly important in regions where phasing out fossil fuels is politically challenging, either due to the stronghold of the fossil fuel sector or the perceived conflicts around development.
Fortunately, the economics of clean energy technology is now unstoppable. It is estimated that by 2020 solar photovoltaic will have a lower cost than coal or gas across the globe and has become a compelling investment opportunity (for example, the NYSE Bloomberg Global Solar and Wind Indices have produced double-digit returns since 2013). This economic argument makes it tough to justify anything other than a shift to clean energy.
Standardizing corporate reporting on emissions and climate risk
There were several lively conversations around the draft recommendations on climate-related financial disclosure released by the industry-led Task Force in December 2016. The intent of the recommendations is to encourage better and more consistent information on climate-related risks facing a business – and how businesses are managing those – so that shareholders can make more informed decisions about their investments. The consultation phase is ongoing with final recommendations to be presented at the G20 meeting in July 2017.
Corporate support for increased transparency and consistency on reporting greenhouse gas emissions and climate-related risks will increase understanding of the economic advantages of switching to sustainable business models. Support for the recommendations came from carbon intensive sectors as well as the financial community – with some suggesting that consistent reporting on greenhouse gas emissions and climate-related business risks should be mandatory. In 2016 several ratings agencies also announced plans to start factoring climate risks into their ratings – suggesting that the era of greater reporting and disclosure of climate risks is upon us.
Putting an effective price on carbon
The conversation around carbon pricing has matured significantly over the last few years and the emergence of the Carbon Pricing Leadership Coalition, which is convened by the World Bank, provides a strong platform for carrying this conversation forward. This year in Davos the discussion revolved around what an effective price would be to enable investments to shift rather than a debate on whether a carbon price is a good idea or not. Ninety-six percent of CEOs taking part in an informal survey indicated that by 2020 a price on carbon above $20 a tonne would be needed to effectively shift investment. And most think the price should rise over time with more than 63% saying it should be above $40 by 2025.
Many of the businesses providing a view have already set an internal price on carbon – and therefore are not just providing a best guess but are speaking from their own experience. A recent report from CDP indicated that more than 1,200 companies disclosed their plans or current practice of placing a price on their carbon emissions as an approach to managing carbon risk. A clear sentiment from CEO discussions was that setting an internal price on carbon was a smart way to stress-test medium and long-term business strategies and investments.
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The landmark Paris Agreement on climate change formally recognizes the role that ‘non-state actors’ – such as businesses – will need to play in driving climate action. Global organizations working with thousands of companies have come together to form the We Mean Business Coalition and are driving the trend for setting science-based targets and making a commitment to 100% renewable energy. Collectively, the companies in these coalitions have immense resources and diverse expertise. For example, the 79 CEO Climate Leaders that signed an open letter to government leaders in support of a global deal on climate change have combined revenues of more than $2.1 trillion and combined greenhouse gas emissions of more than 820 million tonnes. To put this in perspective, if they were a country they would be the sixth largest emitter globally. And this doesn’t include the emissions generated by the suppliers who provide materials for their products or the customers who use those products. In other words, what these coalitions do, matters.
The World Economic Forum’s Climate Initiative is a platform to help accelerate climate action in support of the Paris Agreement, with a particular focus on market-led, low-carbon and climate-resilient growth.