International Business Review


The Business of Climate Change
The COP21 climate deal sends a clear message

by IBR Malaysia
28 January 2016

The Paris climate deal, signed by 195 countries plus the EU, was hard won. The final document contained almost a thousand square brackets to clarify areas of disagreement. But it is the first sign of concrete political will in twenty years of climate talks, and it sends Malaysian business a clear message.

Following months of negotiations, the 21st Conference of the Parties (COP21) wrapped up with exhausted applause and a unanimous pledge to keep the global mean surface temperature below two degrees. The deal sets a goal of net-zero emissions by second half of this century, a boost for renewable, green energy technologies, and the end of the fossil fuel era. After decades of demands from developing nations for financial support in addressing climate change, developed nations promised to provide US$100b (RM439b) a year for a climate fund.

Unilateral pledges

As with previous climate talks politicians led the way, and most participating nations had submitted their climate action plans. Prior to the summit, Malaysia committed to a 45% reduction in greenhouse gas emissions by 2030. It also reiterated its Rio commitment to retaining 50% forest cover across the nation.

While the press focussed on presidential proclamations however, business played a major role in the negotiations for the first time. The private sector ranks second only to cities in carbon emissions, and a number of agreements were signed by multinational corporations on the periphery of the main negotiations. Marks and Spencer, IKEA and Walmart, among many others in the retail sector, pledged to source only 100% renewable energy for their businesses. A group of manufacturers including China Steel, Renault and Sony committed to ‘science-based emissions reduction targets’.

Private finance is going to play a key role in decarbonisation. The Portfolio Decarbonisation Coalition now has members with assets of US$600b (RM2.63tr) removing carbon from their portfolios. 140 companies, with a combined market capitalisation of $2tr (RM8.8tr), signed the Statement on Fiduciary Duty and Climate Change Disclosure. The Montreal Carbon Pledge, a commitment to annual, public disclosure of a business’s carbon footprint, has now been signed by 120 investors representing over US$10tr (RM88tr) in assets. Charities and universities continue to push for divestment from fossil fuel companies.

This rush to sign up demonstrates that climate change has economic – and therefore corporate – implications.

Immediately following the announcement, companies heavily invested in fossil fuels saw their share prices drop slightly; renewable energy businesses received a boost. Within hours the status quo had reasserted itself, but once the various pillars of the deal begin to come into effect, the long-term impact of the agreement will have a profound impact on businesses globally. Companies need to put plans in place now. Many companies already have. In the run-up to the climate meeting, several organisations announced unilateral commitments.

Green-washing or good sense?

In recent years, public awareness of corporate polluters has grown, particularly through online campaigns, and consumers are much more savvy to marketing speak. Companies which propose vaguely-worded pledges in the future tense will find themselves the target of social media ire. But while many companies have been accused of greenwashing when announcing climate-based initiatives, any resulting boycotts have usually had a minimal impact on that business’s balance sheet.

Post-Paris however, companies whose activity has an identifiably detrimental effect will find themselves under more official scrutiny. Germany’s Volkswagen provided companies with a useful example last year. The legal cost of their emissions-cheating software will run into the hundreds of millions. The damage to the brand has yet to be assessed, but in the months after the scandal broke, VW sales had fallen by 25% in both the US and Europe. With governments keen to back up their Paris commitments with action, the question of whether corporate declarations on climate change are merely publicity stunts is largely moot.

The change that the Paris agreement will bring about is one where companies will have to put green strategies in place to avoid falling foul of their own governments. In order to live up to their Paris promises, national governments – particularly in the developed world – will have to introduce regulation ensuring that companies reduce emissions. In turn, companies not wishing to fall foul of the law will have to anticipate green restrictions on how they do business.

On the plus side, this also means that in order to meet their goals under the agreement, governments around the world will also have to balance the threat of sanctions against companies who continue to pollute, with support for those businesses who do not. 

Government funding will be made available to companies who want to switch to renewable energy. This will also stimulate innovation. Technology companies supplying cost-effective renewables can expect a subsidised windfall. Public sector support for these technologies will result in new jobs. The EU has already announced a doubling of funding to US$2b (RM9.6b). The US$100b carbon fund announced in Paris will be increased prior to 2025.

Change leadership?

Over the years a great many CEOs have declared a personal desire to address their organisations’ environmental impact, but cite their fiduciary responsibilities as preventing them acting on these concerns. But as stronger laws for transparent reporting of emissions are implemented in many countries, shareholder scrutiny will increase to ensure the business is in line with government regulations. If non-compliance threatens day-to-day operations, shareholders may actually demand greater environmental action by board members.

A great many businesses are joining private sector initiatives. Over a thousand have signed the Business for Innovative Climate and Energy Policy (BICEP), a private sector coalition which lobbies Washington on climate change. Declarations like these not only change how signatories do business, but in most cases, they will demand that their partners and suppliers follow the same guidelines. With ebay, Unilever, Nike, Ikea, Nestle and Apple all BICEP members, any company wanting to partner with these global giants will have to have its sustainable processes well mapped out beforehand.

Malaysia in the spotlight

Southeast Asia does not have the vocal climate deniers US politics does, but neither does it have the widespread green movement found in Europe or Australasia. This puts business firmly in the driving seat when it comes to solving the region’s carbon problems.

The Malaysian government has been taking positive steps, but it is going to have to tread carefully. It is not a big polluter like China, the US or India, but national revenues do rely on industries which pollute.

Western opinion on Malaysia's oil palm industry may be largely inaccurate, but it is still frequently the target of negative press. Increased focus, combined with the UN’s recent commitment to ending deforestation by 2030, will mean Malaysia’s commodities sector will come under very close scrutiny. The electronics manufacturing sector will also draw attention, with the world keeping a close eye on the release of greenhouse gases from the many refrigerators and air-conditioning units the country produces.

Many of the sticking points of the Paris deal are aimed at whether and how the developed world was going to provide financial report for the decarbonisation of the developing world. While a fund was agreed upon, Malaysia is in an unfortunate position. As one of the more developed of developing nations, it may have access to less of the carbon fund than poorer countries.

Malaysia could raise its own fund though. It is recognised by most governments that the issuing of permits to pollute which can then be traded resulted in nothing more than a windfall for powerful companies which then continued to pollute. A carbon tax which charges by the tonne has long been demanded by green groups, and governments are gradually responding. The state of Alberta in Canada has announced a tax of C$20/tonne (RM62) will be introduced in 2017, rising to C$30 (RM93) in 2030. on how they do business.

On the plus side, this also means that in order to meet their goals under the agreement, governments around the world will also have to balance the threat of sanctions against companies who continue to pollute, with support for those businesses who don’t.

The possibility of a similar tax in Malaysia may even be out of the Malaysian government’s hands. Taxing carbon is a more effective way of dissuading polluters, far more than subsidies for renewable energy. If it becomes the favoured way for governments to suppress fossil fuel use, developing nations receiving support from the carbon fund may well find the cash comes with conditions.

Government Support

Over the next 15 years, around US$90 trillion will be spent globally on increased urbanisation. Governments will be pouring money into green building materials (rather than concrete, which is one of the worst GHG emitters), and low-emission transport systems in order to meet their own climate commitments. This need to match words with action has the potential to incentivise Malaysian companies. Four of the 12 pillars of Putrajaya’s National Economic Transformation Programme contain environmental initiatives totalling RM232b. Private sector companies with aligned climate goals can expect a significant degree of support.

For smaller businesses, recent announcements of a Feed-in-Tariff means those who create their own energy via renewables can sell the excess to the national grid. Further subsidies of renewables would not only increase energy security but would also protect against the nation’s declining oil reserves. Secondly, given the money which can be saved once renewables come on stream, it is more than simply a case of managing a very serious risk.

Selling the long-term goal

As with any business decision, initial outlay will (hopefully) be rewarded with a healthy return on investment. Even without further innovation, the International Energy Agency estimates that investing in energy efficiency measures that are already available today would boost cumulative economic output by US$18 trillion by 2035. Some studies estimate that the world has already spent US$2.7 trillion more on natural disasters than usual in the last decade.

It will certainly be worth supporting those companies planning the technology we will need to deal with a warmer world. The company or country which hits upon a new technology to help mitigate our climate woes will find itself sitting on a gold mine.

The agreement reached in Paris is by no means perfect, and some have suggested the two degrees limit will be breached by mid-century. But as more enlightened green campaigners have been pointing out, no company wants to do away with its customers, which is our worst case scenario.

Despite the obvious opportunities climate change offers to businesses, there is a curious disconnect at play in many boardrooms. The first question bosses still ask when looking into renewable energies is: ‘How much will it cost?’ The answer is simple, ‘How long do you plan to be in business?’  

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