Integrating environmental factors into strategy and finance
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Climate change-linked events are gaining increased attention, from tropical cyclones to forest fires. The recent Intergovernmental Panel on Climate Change (IPCC) SR15 report1 provided a sharp reminder of the consensus scientific view that climate change could have a hugely detrimental impact on both ecosystems and economies, and the clear benefits of limiting temperature increases to 1.5 degrees above pre industrialisation levels. But 1.5 degrees is notably lower than the Paris Agreement’s two degree target, and the IPCC SR15 research suggests we are very likely to move beyond the threshold that would enable us to limit temperature by that much in the near term.
This, alongside other recent events, has driven a shift in mind-set. All participants in the Global economy are starting to more strongly analyse their impact on the environment, what changes are needed, and the investment and financing needed to support that. The participants could be as wide ranging as consumers becoming increasingly conscious about the impact of their diets and the products they are buying, governments implementing policies to limit CO2 emissions, or corporations using more efficient machinery and reducing waste.
A result of the awareness and study of climate change is the huge opportunities that are emerging from the efforts to address the problem. In 2018, we saw various milestones achieved by both the private and public sectors, such as the use of ground-breaking technology and innovative business methods and the accelerating progress of the transition away from fossil fuel-based economies towards a greener economy.
In the energy sector corporations which have traditionally been associated with high volumes of CO2 emissions are taking steps to reduce their carbon impact, and are making senior management responsible for the implementation. In 2018 Royal Dutch Shell, a company whose business was built around the fossil fuel industry, implemented a new policy linking senior remuneration to the net carbon footprint of its energy products. The company has set the ambition to reduce its net carbon footprint by approximately 20 per cent by 2035, and 50 per cent by 2050.
There will need to be a much greener, sustainable financial system, and corporates in all sectors are working with banks to establish how they can transition their businesses to be more financially sustainable
In the autos space, hybrid and electric vehicles are starting to become more commonplace on roads around the world. They are a key feature in making urban development more sustainable. Shenzhen in China is a leading light in this regard. Having evolved from a fishing village of 30,000 residents in the 1970s to a city of over 12.5 million in 2018, Shenzhen has embraced technology and green transport as a means to develop the city, while maintaining a quality environment. During 2018 the Shenzhen government managed to complete the transition of all 16,000 of the city’s public buses to being electric-powered. The city now plans to convert all 17,000 of the cities taxis to electric power by 2020.
Underpinning this development, there will need to be a much greener, sustainable financial system, and corporates in all sectors are working with banks to establish how they can transition their businesses to be more financially sustainable. This stretches from the way companies raise finance, to the green credentials of their supply chains.
In the finance sector we have seen banks, encouraged by regulators, increasingly focussed on assessing the sustainability risks on their balance sheets, and investors looking at their exposure to high carbon in their portfolios. As a consequence, we have seen huge growth in the markets for financial products that connect capital to sustainable investment in the real economy.
With the UN suggesting that USD100 trillion dollars needs to be invested to transition the economy to limit temperature increases to two degrees, there is still a long way to go before we start celebrating any successes. However, with continued public and private sector cooperation and action, there will be progress and reason for hope. But if there is one message the research is telling us, it is that we need to move fast. The future is now.
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