Storm clouds looming for business & climate change?
By Jonathan Grant and Malcolm Preston, PwC Sustainability & Climate Change.
The current economic conditions have been described by PwC’s UK economic analysts as the ‘new normal’. Put climate change in the mix, and we’d better get used to 'business as unusual.'
The current economic conditions have been described by PwC’s UK economic analysts as the ‘new normal’. It’s a period of high uncertainty, subdued growth and volatile commodity prices. Put climate change in the mix, and it’s business as unusual.
If the findings of this year’s Carbon Disclosure Project’s Global 500 report are anything to go by, we’d better get used to it.
Every year, our PwC team are responsible for gathering, analysing, and reflecting on the climate change strategies, targets, performance and reporting standards of the world’s largest 500 companies. Together with the Carbon Disclosure Project, we write and publish the annual review.
Even if we took a positive outlook on economic growth, the implications of this year’s report are that while growth might be good news for the economic environment, it’s less encouraging for the physical one.
Fewer than half of responding companies in the report this year report a decline in their emissions solely attributable to emission reductions activities. The economic slowdown led to staff reductions, closure of plants, offices and shops, reductions in output, manufacturing, and business travel, not to mention corporate and consumer spending. So while the recession has been good for carbon emissions, it’s the right result for the wrong reasons.
Companies are making short term operational or efficiency investments to reduce emissions but are holding back on longer term capital investments. Underlying technology, investment or strategy issues have yet to be addressed wholesale. Any economic recovery will be matched by a bounce back in emissions as well, and with it we’re seeing the goal of limiting climate change to 2°C slipping further out of reach. In fact, we are on track for 6°C of warming according to Fatih Birol, Chief Economist at the International Energy Agency.
In fairness to business, companies are responding as best they can in the current legislative and regulatory environment. In their responses to CDP, 49% of companies state that regulation is an important driver of corporate action. And regulatory uncertainty is a barrier to action. CEOs are rational people. They need investment-grade policies, at a national level, to get backing for the kind of game changing – low carbon investments needed.
And the issue of energy consumption and emissions is registering in the long term strategy of firms. The average longer-term target for companies’ emissions reductions is only 1% per year, well below the 4% required by countries to limit global warming to 2°C. Even with progress year on year, the reality is the level of corporate and national ambition on emissions reduction is nowhere near what is required.
If regulatory certainty doesn’t come soon, businesses’ ability to plan and act, particularly around energy, supply chain and risk, could be anything but ‘normal’. Perhaps best demonstrated in this year’s CDP report by the issue of business and extreme weather.
Increasing incidents of extreme weather events have disrupted business operations and supply chains around the world, pushing climate change onto the boardroom agenda, for CDP respondents, in a very real and present way.
With the hottest US summer on record, the wettest in the UK, fires in Russia and flooding in Japan and Thailand, among other events, 81% of reporting companies now identify physical risk from climate change, with 37% perceiving these risks as a real and present danger, up from 10% in 2010.
And that danger is on the boardroom agenda. 96% percent of CDP global respondents report that they have board or senior executive oversight of climate change and 78% have integrated climate change into their wider business strategy, so the attention is there.
So too should be the interest from investors. An investment in a basket of stocks of CDP Leadership Index companies following the publication of CDP's global report each year since 2006 and rebalanced on an annual basis to reflect that year’s CDLI would have generated total returns of 67.4%, more than double the 31.1% return of the Global 500. Moreover, past CPLI companies generated average total returns of 15.9% since 2010, more than double the 6.4% return of the Global 500.
The question increasingly for investors – the drivers behind the CDP report – shareholders and consumers, is how resilient is a business as unusual and all that entails – higher energy prices, the potential for regulatory change, volatile commodity pricing, extreme weather events. Are they managing that risk effectively in the long term, and creating the business models that grasp the opportunity of sustainable low carbon growth?
In short, are we ready for the ‘new normal’?