What’s changed since the Paris climate summit?

March 18, 2016

100 days on from COP21 Jonathan Grant looks at what’s changed for business.

Like a Rorschach test*, or ink blot test, asking someone about the Paris Agreement often tells you more about the person than the climate deal. The reaction to the Agreement has ranged from over the top hyperbole to deep cynicism. But I feel that companies are genuinely taking the issue more seriously now and have shifted from talking about it, to taking more substantial actions. Those who made pledges in the lead up to the summit don’t want to be accused of faking it on climate change, as one CEO suggested they might be. COP21 has also shifted attitudes from why is a company acting on climate, to why isn’t it.

Signals & noise

If there is a clear signal from Paris, it is that all countries plan to be much more ambitious in their efforts to tackle the issue. Most in business recognise that the Paris Agreement is essentially a big political statement by all countries which converged on the need for urgent action.  That signal is hard to ignore, and this year some countries have amplified that signal – for example, China’s 13th 5-year plan enhances its emissions targets.  But after that, there’s a lot of noise.  And even steps backwards too, such as the US Supreme Court decision to put the Clean Power Plan on hold.

At the heart of the deal is the fundamental contradiction between the hugely ambitious global goal to aim for 1.5°C and the rather more feeble national pledges (as illustrated in our well-worn Low Carbon Economy Index chart below).  If achieved, the national contributions are more in line with 3°C of warming.  So companies need to show to investors and others that they can thrive regardless of whether there is 1.5-2°C of climate policy or 3-4°C of climate impacts.  This applies to both their operations today and the longer term investment decisions they are making today.  In this way, Paris has turned a long term issue into an immediate one.

100 days on, here are five things business is doing differently:

1. Risk analysis & reporting – The challenge to demonstrate that their business is resilient regardless of the emissions or policy scenario possibly presents the most immediate challenge to companies. Many investors, regulators, local communities and NGOs are calling for better information from companies on the impact of climate risks. Some companies are already addressing this, often in response to concern about stranded assets.

This is being reinforced by the G20 Financial Stability Board (FSB) Taskforce on Climate-related Financial Disclosures which is developing reporting guidelines over the course of this year. The taskforce, chaired by Michael Bloomberg, will recommend principles for more comparable disclosures by companies on the physical and transition risks of climate change.   Its ultimate objective is that financial institutions will make more informed investment decisions which account for these risks.  Some stock exchanges may make these disclosure standards compulsory for their listed companies.  The taskforce will also consider how to increase the transparency of the investors’ exposure to climate risks.

2. Preparing for carbon pricing – companies seemed pretty unified around this policy approach in 2015. This year, some are stepping up their advocacy for the roll out of market-based policies and internationally linked systems (and ensuring that all the government affairs folks are saying the same thing as the CEO).

Other companies are now putting shadow carbon prices and incentives in place so that investment and operational decisions address climate risk. This year, we’ve been approached by companies interested in exploring this issue, and, broadly, they are keen to know  what other companies have learned when doing this, what the ‘right’ price is, and what organisational or process changes are needed.  While many focus on analysing different prices to use in sensitivity analysis, the bigger challenge is likely to be shifting the mindset in the project teams and senior executives to incorporate the cost of carbon into their decisions.

3. Getting the Board on board – we’ve claimed in the past that climate change is a board level issue. In our CEO pulse survey last year half of CEOs said that climate change is on the board’s agenda at least once a year. But recent indications appear to show a surge in the level of board engagement on the topic. Often our work is prompted by a board member’s concern about the implications Paris and climate risk for their companies.

4. Action not words – there is little enthusiasm for more pledges, communiques or joint letters from the business community. In 2016, companies are more focused on acting on, and delivering, the commitments they made in the lead up to Paris. To start with they are making their commitments SMARTer (specific, measurable, achievable, relevant & time-bound), which isn’t easy if the goals are rather lofty.  Companies are also working through practical and governance issues when collaborating either in industry-wide groups or sector-focused initiatives. 

5. Clean finance – building on actions and pledges made in 2015, some financial institutions are now considering whether the Paris Agreement presents new investment opportunities in low carbon infrastructure. Others are looking at their energy portfolios and revising their investment policies –particularly with respect to coal mining and power generation.

We suggested in a blog earlier this year that clean investment may be hampered by low fossil fuel prices.  While high prices force companies and consumers to consider alternatives, low prices take the pressure off, they reduce investment in the energy sector broadly and are expected to dampen investment in renewables.  But clean investment is set to grow in 2016.  According to Moody’s, the rating agency, the green bond market will reach around $50bn of issuance with growing interest in China and India. 

PwC’s Low Carbon Economy Index 2015: Business As Usual vs Paris targets vs 2° decarbonisation rates

LCEI main chart

 

 

 

*Freudian psychoanalyst, Hermann Rorschach, developed the inkblot test in the 1920’s which is used by some psychologists to assess an individual’s personality or emotional state. Interpretations of symmetrical inkblots on cards (like the example below) are recorded and analysed to give insight into an individual’s mental state.

Inkblot