Much Risk and Opportunity In the Gathering Climate Change Storm

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Much Risk and Opportunity In the Gathering Climate Change Storm

23/02/2007
Rapidly converging forces are raising the profile of climate change and the need for carbon emissions reduction. Business must prepare to minimize risk and realize the opportunities that are rapidly emerging, concludes an Executive Action report from The Conference Board.

Hurricanes in the U.S. raised the public profile of climate concerns. Rapid increases in energy costs highlighted the need for alternative and renewable energy sources for both economic and security reasons. Accelerating economic growth in China, India and other emerging regions underscored the magnitude of the future challenges of satisfying energy demand while preventing harm to the environment. "The stage was set for the massive change that is now underway," the report concludes.

How Forces are Converging to Align Climate Change with
Business Strategy

In 2006 and early 2007, major trends and events dramatically increased the profile of climate change and carbon emissions and related concerns about energy supply and security. From a business perspective, these fall into several key categories:

Science and policy perspectives are converging toward an even greater consensus both on the role of humans in climate change and the need for aggressive action to stabilize emissions in the future.

In the U.S., changes in the national political landscape and the intensity of state and local commitment to GHG (greenhouse gas) controls increase concerns about a fragmented regulatory regime. Numerous Congressional hearings are planned and varied Federal legislation is contemplated, while California, among other states, has gone forward with aggressive GHG policy implementation of its own.

Public and media interest continue to address with growing frequency both climate change and the need for alternative and renewable energy for security and environmental reasons.

Financial institutions increasingly address the potential risks and opportunities that companies may face in a "carbon-constrained" future. Recent UBS and Lehman Brothers cautionary warnings are the latest in a growing succession of reports focused on the potential impact of climate change on investment values. For example, Lehman Brothers suggest this issue "…is likely to prove to be another of the forces that will influence whether, over the next several years, any given firm survives and prospers; or withers and, quite possibly, dies."

High-profile companies continue to speak out on the issue and advocate the need for more level playing fields, whether nationally or globally. Some that were previously skeptical are becoming increasingly engaged in the discussion of how best to address the issue to assure fairness and ongoing economic prosperity. At the World Economic Forum in Davos, Switzerland, several companies from various countries announced a coalition to advance carbon trading.

"Many of these trends have been in play for some time," says Charles Bennett, Senior Research Associate at The Conference Board and author of the report. "But their frequency, pace and profile today are creating an unprecedented convergence and this is transforming the landscape for the issue in the United States."

Risk and Opportunity
"In the past, discussion often focused on the downside of carbon emissions controls, labeling them as constraints on business opportunities and economic expansion," says Bennett. "Today that perspective is beginning to change. Business is increasingly approaching the strengthening prospect of a carbon-concerned or carbon-constrained future as a source of both risk and opportunity."

Large emitters of GHGs see risk on the horizon, especially on an uneven "playing field." Regulation of GHG emissions could significantly increase their costs and reduce competitiveness, especially if not applied evenly equitably around the world. The long-term sustainability of some businesses could be at significant risk.

Political pressure for curbing carbon emissions may evolve rapidly and result in a dramatic and disruptive change. Says Bennett: "Companies must objectively assess their exposure to these risks and realistically consider alternative fuels, materials, technologies, and business processes that will enable them to adapt to changes. Companies need also to seriously consider participating in public policy discussions to be part of whatever 'solutions' or 'rules of the road' are being designed now."

While high GHG-emitting companies are at greatest risk of constraints on their future sustainability, they and many others are beginning to see potential business growth opportunities in the concern about carbon emissions and climate change.

Energy companies and agricultural interests are pursuing a variety of alternative fuel possibilities. Vehicle manufacturers are embracing lower carbon-emissions technologies and the need for increased fuel efficiency, although at differing rates and with U.S. manufacturers preferring voluntary and not regulatory approaches to hastening this transformation. Construction companies, REITs and building users are expanding demand for "green" buildings, and materials suppliers and construction companies are responding to this demand. Software companies are seeing increasing opportunities in energy management, traffic flow planning and other areas of potential efficiency improvements.

Says Bennett: "Energy efficiency approaches of all types – many well proven but often allowed to languish during low-energy-cost times – are being embraced across the economy and around the world. Many companies are already embarking into the world of carbon trading despite the absence of a mandate to do so or an organized global market which many would consider ideal."