The Intersection: Dec 2015

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The Road from Paris: Implications for Business

While politicians may debate the enforceability of the Paris climate agreement or disagree with its premise, the fact is that the agreement is “a big deal.” Signed by 188 countries and creating a global media story, the agreement provides further evidence that businesses need to take into account how governments, partners and customers feel about the stewardship of the environment. There are several trends driving interest in corporate responsibility toward the environment. Chief among them is the emerging impact millennials are having in the marketplace and the workforce. This demographic, which will be the largest driver of spending in the US in two years and will make up three-fourths of the global workforce in less than a decade, places a greater value on social, environmental and ethical behaviors when forming their view of a company. Last January’s Deloitte survey, titled “Big demands and high expectations,” found that care for the environment is one of millennials’ top concerns and that more than 80 percent believe business can and should be doing more to address this issue.

The Paris agreement represents a move towards a global regulatory environment that aims to significantly reduce carbon emissions. Indeed, by establishing a clear, long-term goal to reduce greenhouse gas emissions, the governments that committed to the Paris climate agreement have set a goal that puts the global economy on a path that will decouple economic growth from fossil fuel use over the next several decades. This creates a driving force for businesses to transform.  Many believe that this trajectory is now irreversible—only the pace of this transition remains to be determined. The question now becomes: What does this mean for business?

Plan and Act

Paris produced a willingness by 188 countries to develop plans to steadily and verifiably reduce their carbon emissions. According to a PwC analysis of the agreement, on average, countries will need to more than double their economies’ carbon intensity reduction rates in order to achieve their targets, adding pressure on companies to reduce their carbon emissions. Up until now, a large majority of companies have adopted a “wait and see” approach toward assessing the impact of climate change and potential climate regulations on their operations and reputation. The Paris agreement and pressure by climate NGOs, coupled with the changing views of consumers, will likely shift this approach to one of “plan and act.” To date, 114 companies have aligned their carbon reduction efforts using the same scientific methodology set out in the country commitments that were codified in Paris.

Five Initiatives for Businesses

Below are five specific initiatives a company can undertake to determine the starting point for a business plan as it charts its course to successfully transition into an economy that is influenced by this agreement.

  • Know the values and attitudes of your core customers. If it’s a business customer, they likely are establishing environmental guidelines for doing business with them. If it’s a consumer, you are likely to find that an increasing number of them believe reducing your carbon footprint is good for the environment and an important factor in retaining their loyalty to your brand.
  • Translate the “post-Paris” landscape of national policy commitments into an assessment of risk and opportunity across your corporate operations, including your supply chain. Chances are, virtually every country where you operate will have a carbon reduction plan. Your assessment should include an internal audit of the impact a carbon tax would have on your operations. Knowing the types of policy risks and how they may affect your compliance with climate change regulations is an important first step.
  • Equally important is understanding and managing physical risks from extreme weather and any disruptions it may have on your operations or supply chain. From this risk analysis, develop adaptation strategies to mitigate those risks.
  • If your company has not made a commitment to reduce its carbon emissions, it should do so. It should also consider aligning its targets with the methodology used by countries to determine their emission reduction commitments. If your company has made a carbon reduction commitment, determine the degree to which further reductions might be needed and the timeframe necessary to keep pace with the continued efforts to reduce emissions by the countries where you operate.
  • Disclose, communicate and engage with your stakeholders around the progress you’re making in reducing your company’s impact on the environment. This not only protects your company’s reputation, but it enhances its ability to operate, particularly in developing countries.

Summary

The Paris agreement is now a “north star” for both governments and the private sector to chart a new course towards a global economy that is significantly less harmful to the environment. Business leaders need to recognize the regulatory, physical and reputational risks that climate change and this agreement will have on their company.

This agreement will help accelerate a transformation taking place with Fortune 500 companies that will require them and their suppliers to re-think the way they operate in order to remain profitable and competitive, protect reputation, sell products, and attract and retain the best talent. Business leaders will need to understand the complex nature of sustainability issues, integrate solutions for environmental challenges, and produce solid financial results. The question is not, will companies change the way they do business, but rather, how will they change?

 

COP21