Six signs that carbon could affect your business’s bottom line

We rarely meet a business that doesn’t believe protecting the environment should be part of its commercial strategy. But overall, private sector climate action continues to lag behind the level that is required to limit temperature change to 2 degrees – let alone the 1.5 degrees that is pledged under the Paris Agreement.

 

Investing to improve the environmental performance of products, reduce the environmental impacts of your supply chain, and make the necessary changes to comply with future environmental legislation, all make long-term business sense and for many companies help to alleviate future risk. But, these future risks are often unquantifiable and each activity requires short-term financial outlay, which can be harder to secure.

We’ve identified five key trends that demonstrate the importance of taking action now, which can help you make the business case in your organisation. The longer we delay climate action, the greater the risks and expense to be borne by your shareholders in the future.

 

1.Mandatory carbon prices are becoming widespread

The percentage of global emissions covered by a mandatory carbon price – that is a tax or cap and trade scheme – has increased from 13% in April 2016, to 20 – 25% in April 2018[1]. Insufficient action now to reduce emissions outside these mandatory programmes could result in liabilities under new carbon pricing mechanisms that may otherwise have been avoided.

 

2.Carbon prices are rising

The clearest example of this price movement is in the EU ETS. Since May 2017, prices have risen 200% to around €14 today[2] – a result of new rules on allowance reductions and increasing demand for allowances[3]. Research by Carbon Tracker suggests this price could reach €45-55 if Paris compliant limitations are proposed, a significant jump from today’s levels[4]. Whilst this trend is not apparent in all markets, we believe it is a likely indicator of future pricing in a Paris-compliant world.

 

3.Investors are looking at your climate risk

The Task Force on Climate Related Financial Disclosure, led by Michael Bloomberg and involving some of the world’s largest financial institutions, released its final report in June 2017. Investors are now assessing exposure to climate-related risk – whether physical or generated through new regulatory frameworks – alongside conventional financial metrics.[5] Climate-wise companies who take full responsibility for their climate impacts are attractive investment opportunities. Laggards are not.

 

4.Flying will no longer be climate-exempt

The aviation industry has to date been exempt from international climate agreements, notably Kyoto in 1997 and Paris in 2015. However, the International Civil and Aviation Authority, aviation’s international body, has committed to climate neutral growth from 2020[6]. A likely repercussion is that demand for voluntary and compliance carbon credits is going to rise substantially. The International Aviation and Transport Association suggests 2.6 billion tonnes of carbon will have to be offset between 2021 and 2035[7]. Such demand is likely to generate substantial upward pressure on credit prices for all purchasers of project based emission reductions. For airlines, securing a future supply of credits now could avoid significant payments in a few years’ time.

 

5. Nor are other sectors

There is a huge gap between where we are now and the level of global climate action required to bring us in line with the Paris Agreement. Under this Agreement, where every signee country has a target, more sectors are likely to be brought under the remit of compliance frameworks, changing the economics of operations in different industries.  Like aviation, the shipping industry is currently consulting on its own climate action programme which will have knock-on effects for the balance sheets of companies along the supply chain.

 

6. Reputational risk

Businesses that fail to address climate impacts are attracting international media attention. The Divestment movement has pressured many investors to move away from their association with conventional fossil-fuels. Consumers are telling companies they don’t want excessive packaging, they want to know where their products come from and how they were produced. Who are the brands being applauded in these climate-conscious times? Tesla. Ikea. Patagonia. Body Shop. Those who’ve worked out how to make money out of doing something good.

 

Climate action needs to be integrated in your decision making at board level now, in the interest of profit, as well as environmental and social integrity. International intention to take climate action is clear – but achieving that goal is only going to become more expensive.

 

By George Beechener, Sustainability Executive, ClimateCare

 

 

[1] Institute for Climate Economics, 2018. Global Carbon Account 2018. https://www.i4ce.org/wp-core/wp-content/uploads/2018/04/Global-Carbon-Account-2018_5p.pdf

[2] Carbon Tracker, 2018. Carbon Clampdown. https://www.carbontracker.org/reports/carbon-clampdown/

[3] Reuters, 2018. https://uk.reuters.com/article/us-eu-carbon-survey/analysts-raise-eu-carbon-price-forecasts-on-emissions-rise-uk-brevity-clarity-idUKKBN1HI1LR

[4] Carbon Tracker, 2018. Carbon Clampdown. https://www.carbontracker.org/reports/carbon-clampdown/

[5] Task Force on Climate Related Financial Disclosure, 2017. https://www.fsb-tcfd.org/publications/final-recommendations-report/

[6] International Civil Aviation Authority. https://www.icao.int/environmental-protection/Pages/market-based-measures.aspx

[7] IATA. http://www.iata.org/policy/environment/Pages/corsia.aspx