In the 100 days since the historic Paris Agreement on climate change, businesses have begun to shift their approach from mere talk to taking substantial actions. While reactions to the agreement have varied from hyperbole to cynicism, companies are increasingly realizing the importance of addressing climate change and are taking the issue more seriously. The focus has shifted from questioning why a company should act on climate change to why it shouldn't.
A clear signal from the Paris Agreement is that all countries are planning to be more ambitious in their efforts to tackle climate change. However, the national pledges made by countries still fall short of the ambitious goal of limiting global warming to 1.5°C, aligning more closely with a 3°C increase. This contradiction highlights the need for companies to demonstrate their ability to thrive under different climate scenarios, regardless of the level of policy action. Companies must show that they can adapt to both current operational challenges and make investment decisions that consider long-term climate risks.
Here are five ways in which businesses are changing their approach:
Risk analysis and reporting: Companies are being urged to provide better information on climate risks, addressing concerns about stranded assets. Investors, regulators, local communities, and NGOs are demanding increased transparency in assessing the impact of climate risks. The G20 Financial Stability Board is developing guidelines for climate-related financial disclosures, aiming to help financial institutions make informed investment decisions considering climate risks.
Preparing for carbon pricing: Many companies are advocating for the implementation of market-based policies and internationally linked systems to address carbon pricing. Some companies have started implementing shadow carbon prices and incentives to incorporate climate risk into their investment and operational decisions. Understanding the appropriate carbon price and integrating it into decision-making processes poses a challenge for companies.
Board engagement: There has been a surge in board engagement on climate change issues. Boards are increasingly recognizing the implications of the Paris Agreement and climate risks for their companies, prompting a focus on addressing these concerns.
Action over words: Companies are shifting their focus from making pledges to delivering on the commitments they made in the lead up to the Paris Agreement. They are striving to make their commitments specific, measurable, achievable, relevant, and time-bound (SMART). Collaboration within industry-wide groups and sector-focused initiatives is becoming more practical and governance-oriented.
Clean finance: Financial institutions are considering new investment opportunities in low-carbon infrastructure, driven by the commitments made in 2015. Energy portfolios are being revised, particularly with regard to coal mining and power generation. The green bond market is also expected to grow, reaching approximately $50 billion in issuance, with increasing interest in China and India.
While low fossil fuel prices have hampered clean investment in the past, clean investment is projected to grow in 2016, with a focus on renewable energy. Moody's predicts a significant increase in the green bond market, driven by China and India's growing interest.
The Paris Agreement has sparked a shift in business mindset and actions, with companies recognizing the need to address climate change. By taking proactive steps, businesses are aligning themselves with the goals of the agreement and contributing to the global efforts to combat climate change.
