Companies need to understand the speed at which change will come, the cost of extreme weather, the impact on supply chains, the increase in regulation and the increasing concern about liabilities.
- Rapid action on climate change will lead to equally rapid shifts in the regulatory and operational environment.
- Significant changes are already taking place in investment and policy frameworks and they are likely to accelerate, opening new avenues of risk across all industries.
- Companies not prepared to face the coming changes risk being left behind.
The technologies exist to solve the challenges we face, what needs to change is the regulatory and investment environment – and that is already happening.
Research has shown emissions could be cut drastically by using policy levers to reach so-called ‘decarbonisation tipping points’. This is where a small intervention can cause a large effect, where ‘super-leverage points’ not only cut emissions in one key sector, but also support faster changes in other parts of the economy. They are what can push a market to a tipping point.
A report released at Davos in 2023, The Breakthrough Effect: How to trigger a cascade of tipping points to accelerate the net zero transition, demonstrated how three “super-leverage points” could trigger a cascade of decarbonisation in sectors representing 70% of the world’s greenhouse gas (GHG) emissions. They are green mobility, ammonia and plant-based proteins.
In this context, a tipping point happens when a zero-carbon solution advances to a point where it outcompetes the existing high-carbon solution. Once reached, self-reinforcing ‘feedback loops’ drive exponential growth in the adoption of the new solution and a rapid decline of the old. Reaching an agreement on how to achieve these, however, looks to be an increasingly challenging process.
Political battles continue over taking action
Climate change is not the purview of scientists alone. Many of those protecting the status quo argue that markets should operate freely, without state intervention. Yet those are never the people discussing externalities – or how companies can operate in markets without considering the impact of their pollution, exploitation of resources and people, as well as damage to the air and to biodiversity.
Today, the political battle in the US over investor and asset manager use of an ESG investment lens seems to be focused on this. It is even accelerating despite the fact that it is market thinkers who are expressing concern – there is little question that the risks are real and must be considered. Even though BlackRock’s (NYSE:BLK) Larry Fink’s annual letter to shareholders in 2023 did not mention ESG, it reiterated concerns about supply chain risk and took as fact the changes being driven by the energy transition.
The energy transition is already a reality for both climate and economic reasons, and what happens in the energy market is going to be replicated elsewhere. Most importantly, Fink talked about the reality of concern about climate risk, tracking the transition to a low carbon future “just as they track any other driver of investment risk”.
Central banks and security make climate a national concern
Central banks are concerned about the overall impact on financial stability. When US Treasury Secretary Janet Yellen spoke to the First Meeting of the FSOC Climate-related Financial Risk Advisory Committee in March 2023, she warned that “as climate change intensifies, natural disasters and warming temperatures can lead to declines in asset values that could cascade through the financial system. And a delayed and disorderly transition to a net-zero economy can lead to shocks to the financial system as well”.
This is a concern of those who are not looking at climate change as a distant problem that affects others, but at the cost and implications of climate change at home today. In the US, for example, Yellen said that there has been at least a five-fold increase in the annual number of billion-dollar disasters over the past five years compared to the 1980s, even after adjusting for inflation.
Julia King, chair of the UK Climate Change Committee adaptation sub-committee and of the Carbon Trust, said that the UK needs to adapt at home to protect the coastline, transport, homes and agriculture, but also needs to help poorer nations to adapt. She added: “With a fifth of the economic value of this country’s critical supply chains in areas at medium to very high increased risk from climate hazards, it’s increasingly in our national interest to be providing that support.”
To clarify the connection between climate impacts abroad and impacts at home, Professor Emily Shuckburgh, director of Cambridge Zero at the University of Cambridge, warned about the interconnections between global systems.
She said: “Last year’s floods in Pakistan engulfed a third of the country, killing 1,500 people, devastating crops and livestock, and cost $30 billion. Pakistan is the second biggest supplier of the UK’s rice; impacts of devastation … threaten food supplies, force people from their homes, fuel conflict, and destabilise governments. In short, the climate crisis threatens our national security. As the economic benefits from tackling it far outweigh the falling costs of climate solutions, the key to protecting our national security is firmly in our grasp.”
National policies are accelerating transition
Countries around the world are recognising this and changing the shape of markets. In the US, the $369 billion in investments outlined in the Inflation Reduction Act are driving a race to the top, spurring greater innovation, as well as spending on clean energy and resilience from other global economic powers. The EU has proposed its own response with the Net Zero Industry Act, intended to support green manufacturing and the scale-up of clean technologies.
As Anne Christianson, director of international climate policy at the Center for American Progress, said: “As we see the EU proposing new measures to rival the scale of US investments and fuel the clean tech boom at the pace we need this decade, we also must demand the political change that makes these investments durable and catalyses a permanent clean energy transition.”
The underlying operational framework of our economies is beginning to change. That means it is becoming imperative to manage the accelerating impact of climate change. Companies and industries that fail to adapt to coming changes, operational, legal, reputational and otherwise, run the risk of being overtaken by realities for which they are unprepared.
Achieving transformational change on emissions will transform industry
As the IPCC pointed out, it is crucial that investors, banks and governments get behind an agreement on action, immediately and at scale. Given that most scientists believe that dramatic action will need to take place in the next two to three years to have a chance of achieving the goal, then businesses must prepare for the physical and operational consequences that a hotter climate will entail, the regulatory squeeze from addressing the issue, and the potential reputational damage arising from not doing their part.
Whichever way you look at it, businesses today must prepare for transformational change. And that does not mean making plans for tomorrow, it means taking action today.
Part 1 of this series on the 2023 IPCC Synthesis Report, Where we are on climate change, can be read here.
Part 2 of this series on the 2023 IPCC Synthesis Report, What the report tells us to do, can be read here.
