There are many hopeful signs that the world is getting serious about climate change. The One Planet Summit in Paris in December confirmed unprecedented government and private sector support for climate action. Almost all countries in the world have agreed to take action.
Despite this momentum, in 2017 global CO2 emissions rose for the first time in four years and we must conclude that we are not on track to achieve the climate treaty agreed in 2015 in Paris.
We can and need to do better. Unfortunately despite all efforts, things could get worse. The capacity of the oceans to absorb CO2 is declining and research suggests that tropical forests are now releasing, rather than absorbing, carbon dioxide. The melting of the permafrost could trigger a “runaway reaction”.
Already, millions of people are confronted with the effects of climate change; think about the bleaching of the Great Barrier Reef and the impact on ocean life, the increased typhoon impact and the floods around the world.
For people in the south of Bangladesh it has become almost impossible to grow their crops due to the floods; it is the same in the Horn of Africa but due to droughts. This could lead to a large increase in climate refugees, which is causing concern at the NATO Parliamentary Assembly. The Bank of England has warned that climate change can lead to financial instability and risks. There are many reasons to take bold action now.
Many companies and countries are cutting their own emissions. This, of course, matters, but it is not enough. We need a fundamental change, not just at the level of individual businesses or countries, but across the economy and society. We need new ideas and new behaviours that will help create a low-carbon economy.
Putting a price on carbon would help enormously. By doing so, we anchor doing well for the climate into our own economic system and create a financial incentive to address climate change. It unlocks the potential for investors as well. It will help speed up the transition to a low-carbon economy and shift the social and economic costs of our carbon emissions from the public to the polluter.
During the World Economic Forum in Davos last year, CEOs agreed that a price of around $40 per tonne or more would be enough to facilitate this change. The good news is that this incentive will be introduced sooner rather than later.
Countries like China are introducing a carbon price and others, such as Chile, Peru, Colombia, Mexico, Canada, and the states of California and Washington, are working together by linking their carbon pricing systems. In addition, the European Union agreed to reduce access to allowances in the coming years, which will ramp up the prices of the EU Emissions Trading System to a more meaningful level.
We also need a shift in mindset and ambition. Companies are increasingly expected to care about things beyond the bottom-line. Society is asking ‘what are you doing for us?’ So are some investors.
Larry Fink, CEO and founder of world’s largest asset management company BlackRock, was clear in his letter earlier this month: companies need to contribute to society as well. Business leaders need to adapt and reinvent their companies. What is the company’s purpose? Can its current business model survive into the future? Is it set up to thrive in a low-carbon economy? Does the portfolio align well with the circular economy of the future or the current (but dated) linear model of make-use-dispose?
Having a clear purpose will help answer these questions. It will also help public companies pursue long-term strategies. The sole focus on the short term is counterproductive. Moreover, research shows that emphasis on short-term earnings leads to value-destroying behaviour.
As leaders, we must strike a better balance between short-term performance and long-term value creation. For example, we can design compelling long-term strategies with new performance metrics and engage investors in the process. There are lots of shareholders who should be – or even are – interested. Pension funds and insurance companies, which have a very long-term focus, represent about 70% of money invested in the stock market.
Leaders who focus on the long term can reinvent their companies with the future in mind. They have more latitude to depart from old models and accelerate the transition to a low-carbon, circular economy.
This is one of the things that executives will discuss this week when the Alliance of CEO Climate Leaders – who believe the private sector has a responsibility to cut greenhouse gas emissions – convenes at the World Economic Forum in Davos. I will co-chair this group who believe the private sector has a responsibility to cut greenhouse gas emissions
We have issued a report with examples of how companies are already leading the way. It is a valuable source of information for others who want to address climate change through their business. I am proud to see that a growing number of companies want to take bolder steps.
There isn’t much time. According to the Paris Agreement, global emissions must peak by 2020 then start declining if we want to keep average global temperature increase under 2° Celsius.
The new low carbon economy is an enormous business opportunity for those who embrace it. The glass is half full. We need to act now if we don’t want it to evaporate.