IFC: Climate Change – Threat and Opportunity for Private Sector
As world leaders met at the 21st Session of the Conference of the Parties to United Nations Framework Convention on Climate Change (COP21) in Paris last month to hammer out a deal to prevent global warming, one thing became clear: the private sector, with its financial clout and penchant for innovation, must play a leading role in the struggle for a greener future.
The private sector was more visible and active at COP21 than in any of the previous COPs. CEOs from industries as diverse as manufacturing, mining, technology, and renewables stepped up their collective efforts to address climate change, readily pledging to decrease their carbon footprint, use more renewable energy, and adhere to sustainable resource management. Meanwhile, global financial institutions pledged to release hundreds of billions of dollars in new investment over the next fifteen years in clean energy and energy efficiency. Most prominently of all, the private sector called on governments to put in place stable long-term regulatory regimes, including a price on carbon, that they can use to guide their companies through the transition to a low-carbon economy.
“Developing countries will need about $100 billion of new investments each year over the next four decades to bolster economic resilience to the effects of climate change.”
No matter what kind of agreement follows Paris, arresting climate change will not come cheap. Developing countries will need about $100 billion of new investments each year over the next four decades to bolster economic resilience to the effects of climate change. Mitigation costs are expected to balloon to anywhere between $140 and $175 billion annually by 2030. This enormous burden cannot be carried by national governments alone. Many are already struggling to make ends meet and will need the buy-in and participation of the private sector in order to comply with the agreement reached in Paris.
But why should businesses, whose main fiduciary responsibility is to their shareholders, care about climate change? The answer is simple: a growing number of studies show that climate change is disastrous to their bottom line. If global temperatures jump four degrees by 2100 – the direction we’re heading in now – droughts, flooding, and ferocious storms will wreak financial havoc, upending small shops and large conglomerates alike.
A study by CitiGroup found that excessive warming could shave up to $72 trillion off the world’s gross domestic product. Another report, this one published in the journal Nature, concluded that global warming may reduce average global incomes by nearly a quarter. A four-degree (C) jump would also batter sectors such as agriculture, real estate, timber, amongst a host of others. Emerging market equities would suffer as well. All told, that would produce a toxic environment for businesses of all sizes.
Investors wouldn’t remain immune either. A report by Cambridge University suggests equity portfolios could tumble by up to 45% as climate-related fears ripple across global markets. Some companies are already starting to feel the pinch. Earlier this year, the CEO of Unilever – which had $52 billion in 2014 sales – turned heads when he said natural disasters linked to climate change cost his company about $330 million a year.
Perhaps Dean Scarborough, the CEO of manufacturing firm Avery Dennison, put it best in a recent interview with the Harvard Business Review: “Climate change threatens (our) supply chain, our customers’ businesses, and the communities we’re part of. If we want to stay in business for the long term, contributing to the fight against climate change is just smart strategy.”
For years, companies around the world bristled at the idea of going green. Their argument: we just can’t afford it. However, a dramatic plunge in the price of eco-friendly technologies – especially renewable energy – and the rise of carbon pricing – which charges firms for releasing greenhouse gases – has changed that calculus. Companies are now flocking to climate-smart investments, not only because it’s morally the right thing to do, but because it adds to the bottom line.
A recent study that looked at a sample of 1,700 leading international firms found that the money they put into reducing greenhouse gas emissions saw an internal rate of return of 27% – a clear indication that those investments are paying off. Other studies, like one from Harvard, have shown that companies with a reverence for environmental and social sustainability outperform firms that treat those issues with disdain.
Companies also realise the concerns over regulatory risk and governments proactively managing the transition to a low-carbon economy need to be taken into account while planning business strategies. That is why the private sector has become increasingly more open to a pricing carbon emissions and is calling for more stable regulatory regimes and long term price signals.
In September 2014, more than a thousand companies joined forces to speak out in support of carbon pricing. They have now signed up for the Carbon Pricing Leadership Coalition, which was formed during COP21 in Paris with the goal of expanding the use of effective carbon pricing policies in order to maintain competitiveness, create jobs, encourage innovation, and deliver a meaningful reduction in emissions. This adds to the growing corporate support for progressive climate action. Six major oil companies petitioned governments, and the United Nations, to take stronger action on carbon pricing in an open letter published in June 2015.
Where Are the Opportunities?
You don’t have to be a tech giant to embrace eco-friendly technology. Just ask Lebanon’s Arab Printing Press (APP). The company, which has 130 employees, is a prime example of the growing number of small businesses that are going green. The Beirut-based firm installed solar panels at its headquarters a couple of years ago, cutting its reliance on expensive fuel oil.
Like any disruptive force, climate change is creating opportunities for companies willing to innovate. A report by the International Finance Corporation (IFC), for example, found that Eastern Europe, Central Asia, the Middle East, and North Africa could support up to $1 trillion in climate-related investments by 2020.
Globally, one area especially primed for growth is renewable energy. Countries from Honduras to India have set ambitious targets for wind, solar, and hydro-power generation and they’ll need private sector investment to get there. Just how widespread is the desire for clean energy? Even Saudi Arabia, home to one of the world’s biggest oil reserves, is looking to generate the bulk of its electricity from renewables and nuclear power by 2040.
We’ve already seen companies take up the mantle in Panama where a consortium is building what will become Central America’s largest wind farm. The 215-megawatt Penonome plant will prevent the release of 400,000 tonnes of carbon dioxide emissions each year – equivalent to taking some 84,000 cars off the road. Meanwhile, the private sector is playing a key role in the construction of a massive 510-megawatt solar plant in the Moroccan desert that will provide power to 1.1 million people. The project, worth $2.6 billion, could help turn the North African kingdom into a renewable energy powerhouse and serve as a model for future public-private partnerships. In Nepal, the first project-financed hydropower plant in the country is expected to generate about 200 GWh of electricity, helping address debilitating power shortages which underlie the country’s lack of industrial progress.
Renewable energy isn’t the only climate-related sector primed for growth. Companies can find opportunities in eco-friendly construction and in helping cities prepare for changes in climate. By 2050, more than six billion people will live in urban areas, creating a pressing need for a host of infrastructure services such as water and sanitation. As well, 400 million homes are expected to be built by 2020, a potential boon for construction companies that can incorporate green technology into their designs.
Finally, there are great opportunities in climate-smart financial solutions. These run the gamut from green bonds issued by governments and international institutions to micro-loans for entrepreneurs. Just how much potential does the industry have? According to conservative estimates, borrowers need to invest at least $700 billion annually in infrastructure, clean energy, resource efficiency, and green construction between now and 2030.
One lender that has gravitated towards that market is found in South Africa. Sasfin Bank has created a credit line to expand lending to projects that will help small businesses in South Africa become more energy efficient and sustainable.
The Paris climate conference brought into sharp focus the hazards of runaway climate change. It constitutes a fundamental threat to economic development in our lifetime and, left unchecked, could push 100 million people into poverty by 2030. That would undo the stunning progress the world has made in fighting poverty over the past fifteen years.
Supportive Policies Required
The private sector can help the planet avoid its fate. However, in many parts of the developing world, corruption and excessive red tape stifle investments in renewable energy and other climate-friendly projects. At the same time, state subsidies for fossil fuels keep prices artificially low, making it hard for renewables to compete.
Governments must remove these barriers and create an environment in which the private sector can thrive and in which investments in renewable energy make financial sense. The private sector should play a role in pushing for these reforms, which have the potential to unlock billions of dollars’ worth of investment opportunities. It is time for the private sector to seize this opportunity by developing business strategies fit for a future without carbon.
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About the Author
Dimitris Tsitsiragos is vice-president of Global Client Services at the International Finance Corporation, a member of the World Bank Group. Mr Tsitsiragos leads the investment operations and advisory services for IFC, overseeing new business development, portfolio, and client relationships with key private sector partners worldwide.