THE BLOG

The Business Sector Is The Deer Caught In The Paris Agreement Headlights

26/09/2016 10:32

2016-09-23-1474622753-5442245-IMG_4935b.jpg

Paris climate agreement ratification exposes how the private sector is lagging in fight against climate change.

The Paris climate agreement is certain to come into force this year after 31 countries formally joined it last Wednesday, bringing the number of countries legally-bound to implement it to 60. These account for 47.7 per cent of global emissions. Together with ratifications from the UK, Germany, France and others promised before the end of this year, the required 55 countries, representing at least 55% of global emissions, will be there for the deal to be binding by the end of 2016. Theresa May even made the Paris agreement a focus in her first ever speech to the UN.

We have waited for governments to act on runaway climate change since 1992 and at last they have delivered something. Unsatisfactory as that might seem, the truth is it's vastly superior to the contribution of businesses and investors who should be called out on their splendid climate inaction.

Last week, the London-based non-profit CDP, an organisation that collects environmental data, released a report showing that 1,249 companies price carbon internally or plan "to soon do so" (whatever this means), of which some 140 are "embedding a carbon price deeper within business strategies and operations to help take tangible action on climate change". This was generally presented as evidence that investors are demanding comprehensive climate disclosure.

Nothing, however, could be further from the truth.

The private sector is 50,000 companies listed on stock exchanges, plus tens of millions of private businesses. In the United States, for example, there were 27.9 million small businesses in 2010, and 18,500 firms with 500 employees or more. Extrapolating based on the fact that the US is some 15 per cent of global GDP, there might be 125,000 companies worldwide with 500 employees or more.

In other words, the 1,249 companies that currently price carbon or plan "to soon do so" represent 2.4 per cent of listed companies and a very negligible percentage of companies with over 500 employees. Let's not even compute how representative 140 companies are.

Furthermore, pricing carbon isn't the same thing as accounting for climate risks and having the latter incorporated in investment decisions. A case in point: industry and banks continue to invest in oil, gas and coal when we know, as demonstrated most recently by a report last Thursday by the NGO Oil Change International, that "no new fossil fuel extraction or transportation infrastructure should be built, and governments should grant no new permits for them". How does the private sector perform the miracle of continuing to invest in dirty fossil fuels (and their related infrastructure) while claiming to price carbon? Simple: They ignore climate risks, in this case the clear and present danger to our existence caused by every new coal plant, oil tanker and gas power plant.

It's the same story among institutional investors, Wall Street, and the global banking sector. This wall of money, some 250 trillion US dollars strong, also broadly ignores climate risks and fails to take these into account in its investment decisions. Investors thereby keep the cost of capital of polluters low, allowing them to do more polluting.

The figures speak for themselves: Eighty-eight per cent of the world's top investors are doing absolutely nothing about excruciatingly obvious climate risks, according to the Asset Owners Disclosure Project, a London-based NGO. Most of the other 12 per cent are doing very little.

Yet the world is burning. 2014 set the record for hottest year ever recorded, then 2015 crushed it. Now NASA says there is a greater than 99 per cent chance 2016 will top 2015. "Effects that scientists had predicted in the past would result from global climate change are now occurring: loss of sea ice, accelerated sea level rise and longer, more intense heat waves," says NASA. The hard evidence of climate change's violent impacts is everywhere.

The private sector is hiding behind governments, pretending it needs a carbon price to act. Yet companies are perfectly capable of pricing all kinds of other risks on their own, from country risks, to sector risks, to management risks, to currency risks, interest rate risks and so on.

The private sector contribution to the fight against global warming should therefore be increasingly questioned and scrutinised, while pressure is applied by citizens and governments.

What's needed now is either for governments to actually introduce credible carbon prices everywhere; or for regulators such as the US SEC and others to force businesses to ensure they calculate the impact to their operations from climate risks; or for the insurance sector and the law to hold company directors and pension fund trustees liable for breaching their fiduciary duty to invest prudently.

Indeed the private sector - businesses, investors and markets - have just forfeited their option not to be regulated into incorporating climate risks everywhere in their investment decisions, supply chains, location assessments, product offerings and stakeholder relationships.

Comments

CONVERSATIONS