Companies and climate change

Companies & climate change

Adapt business models
and reduce emissions

Paris Agreement
COP21

The key elements of the international agreement from the COP21

RI & climate change

Financing the transition to a low-carbon economy

Carbon
risk

Financial consequences of fossil fuel asset devaluations

The basics

Les entreprises sont concernées par le changement climatique

Although certain business sectors like energy and transport are large emitters of greenhouse gases (GHG), all companies are affected to a greater or lesser degree by climate change. This phenomenon constitutes a cost for the entire economic value chain everywhere in the world. That is why many companies today are striving to reduce their GHG emissions.


QUESTIONS

1. What is the cost of climate change for the business sector?

When it comes to climate change, taking action will be much less costly than doing nothing, says Nicholas Stern, an economist whose studies on global warming's impact are considered definitive and incontestable today.

In 2006, Stern estimated that failing to act in the face of climate change would cost the world between 5% and 20% of global GDP, or between $3.5 trillion and €15 trillion! By comparison, the bill for the subprime loan crisis that originated in the United States and then spread across the world came to "only" $2.8 trillion. Even though this report was criticised, its findings remain key.

Since then, other studies conducted by the IPCC (Intergovernmental Panel on Climate Change) and large banks have drawn the same conclusions.

2. What role do businesses play in climate change?

According to the Intergovernmental Panel on Climate Change (IPCC), the increase in GHG emissions (particularly CO2 from fossil fuel combustion) and changing land use (deforestation) are the main causes of climate change. In other words, businesses are responsible for part of the problem.

A study published in 2013 by the magazine Climatic Change entitled "Tracing anthropogenic carbon dioxide and methane emissions to fossil fuel and cement producers, 1854–2010" claimed that ninety multinationals were responsible for two thirds of CO2 and methane emissions between 1854 and 2010 (914 billion tonnes of CO2 equivalent). Those businesses include many of the major oil and gas companies and cement manufacturers still in operation today such as BP, Exxon, Chevron, Saudi Aramco, Gazprom, ENI, Statoil and Total.

The agricultural sector is also a source of emissions, notably those of two very powerful greenhouse gases, methane and nitrous oxide.

3. How are companies affected by climate change?

The business sector is on the front line in the face of climate change. The growing scarcity of water and raw materials, rising sea levels, extreme climate events and rapidly shrinking biodiversity (plant and animal species) are all direct threats to companies' business models.

No sector will be spared. For a large number of them, these threats are already clearly visible. To cite just two examples, the droughts dreaded by farmers, and the typhoons, hurricanes and other storms feared by the tourism industry.

By choosing to ignore climate change, companies are taking a considerable financial risk. AXA, the world's largest insurance company, estimates that "major natural events" (in plain language, "natural disasters") have increased fivefold over the past 50 years and that their cost to civil society has gone up tenfold.

AXA also reports that for mainland France alone, indemnities for climate-related claims have totalled €30 billion over the past 20 years, and that for the next 20 years, it expects the annual figure to be €3.5 billion.

4. What is the cost of climate change for the business sector?

When it comes to climate change, taking action will be much less costly than doing nothing, says Nicholas Stern, an economist whose studies on global warming's impact are considered definitive and incontestable today.

In 2006, Stern estimated that failing to act in the face of climate change would cost the world between 5% and 20% of global GDP, or between $3.5 trillion and €15 trillion! By comparison, the bill for the subprime loan crisis that originated in the United States and then spread across the world came to "only" $2.8 trillion.

5. How can companies combat climate change?

Companies have numerous ways to adapt to climate change and reduce their impact.

  • Measure GHG emissions, i.e. measure the company's carbon footprint. This carbon footprint should also take into account the activities of suppliers.
  • Set an internal carbon price: set a sufficiently high per-tonne price for CO2 that it will actually influence the company's strategic decisions.
  • Integrate climate risk in strategic planning: key activities of the company may be affected by new climate regulations (e.g. clean-air laws in the United States) or larger green tax incentives. Questions need to be asked before any decision is made.
  • Use renewable energies: green energies cost roughly the same as fossil fuels. Even better, their cost has been steadily declining over the past ten years. Renewable energies are good for the climate and for the company's bottom line.

6. Can climate change represent an opportunity for some companies?

Yes. Those that begin taking climate risk into account in their strategies now will obviously gain an edge on their competitors because they will have factored in its cost (e.g. through internal carbon pricing). Some will also have anticipated new regulations affecting their activities (e.g. vehicle emissions standards) and have thought about alternatives for the production (e.g. reduction of energy consumption) and distribution (e.g. short circuits) of their products. Some companies can benefit more directly: for example, those providing energy efficiency solutions to other businesses or the public and those supplying renewable energies.

7. Why are some companies calling for carbon pricing?

Since 2014, many companies all over the world have been asking for a global carbon price to be set, though without necessarily specifying how this should be done (through regulation, exchange quotas or a tax) or how much it should be. They include renewable energy producers as well as large GHG emitters like cement, oil and gas companies. Some have already set a carbon price internally. Why? One reason is to avoid carbon leakage. At present, some countries have stricter regulations or a carbon market, causing companies to fear offshoring to countries with more relaxed policies. Another advantage: to redirect investment toward low-carbon technologies, which for some companies are still a little more costly than conventional ones. Gérard Mestrallet, chairman and CEO of Engie (formerly GDF Suez), compares the carbon price to a "compass" for companies.

The Paris Agreement does not mention carbon pricing. In the section reserved for non-State actors, however, the COP21 Decision – to which the Paris Agreement is appended - “also recognises the important role of providing incentives for emission reduction activities, including tools such as domestic policies and carbon pricing”.

8. Are there movements or coalitions of companies focusing on climate change?

Yes, there are many alliances that are being forged around the world with the aim of getting companies to think about joint actions or sharing their experiences on this subject.

Here are a few of them:

The Climate Group is an organisation that works with businesses as well as national and local governments to promote low-carbon policies and technologies.

We Mean Business is a coalition of organisations working actively to encourage companies to adopt more ambitious climate policies. It includes the Climate Group, BSR, The B Team, and the World Business Council for Sustainable Development (WBCSD) as well as engaged investors who take climate change into account in their investments.

Some organisations like the Carbon Disclosure Project (CDP) campaign to get companies to make climate engagements. That is also the aim of Road to Paris, which has persuaded over a hundred companies to become climate leaders by adopting at least one of six measures: ambitious GHG reduction targets, exclusive use of renewable energies, sustainable purchasing to prevent deforestation, GHG emissions reporting, public climate engagements, and internal carbon pricing.

9. What role do companies have in international climate negotiations?

Companies are not official participants in the negotiations, which are restricted to countries or parties (e.g. the European Union). However, they do have observer status, as do other NGOs under the designation BINGO (Business and Industry Non-Governmental Organisations.). This allows them to coordinate with one another, to put forward the private sector's views more effectively, and to hold informal discussions with representatives of the United Nations Framework Convention on Climate Change (UNFCCC) and representatives of other groups and countries as well as journalists.

Companies can also be sponsors of the Conferences of the Parties. By doing so, they relieve the host country of some of the financial burden or enable it to offer additional services (e.g. a fleet of electric cars for the negotiators). Environmental NGOs criticise this practice, contending that it gives the private sector greater influence over the negotiations.

10. Is there a place for companies in the Paris Agreement?

Whilst the Paris Agreement is well negotiated and intended mainly for governments, a small part of the COP21 Decision (to which the Paris Agreement is appended) is reserved for “non-State actors” or “non-Party stakeholders”. The text also welcomes the “efforts of all non-Party stakeholders to address and respond to climate change, including those of civil society, the private sector, financial institutions, cities and other subnational authorities”. It invites them to “scale up their efforts in support of actions to reduce emissions and/or to build resilience and decrease vulnerability to the adverse effects of climate change”, and “demonstrate these efforts via the Non-State Actor Zone for Climate Action platform” or LPAA.

Over and above the Agreement, the private sector was also active during the climate conference. A total of 450 companies gathered together as part of “Caring for Climate”, the largest initiative working to engage companies about the climate, and defined specific objectives for reducing their carbon footprint. Since 2013, this initiative has led to a 12% reduction in CO2 emissions.

Several initiatives were also launched or strengthened, in parallel to the negotiations, during the COP21 conference. This was the case for RE100, an initiative launched in 2014 which encourages companies to become 100% reliant on renewable energy. This initiative currently comprises 53 companies.