December 6, 2015

What Business Leaders Need to Know About the Paris Climate Conference

[I'm in Paris now for business conferences around the COP21 climate negotiations. More on that later -- see Twitter stream for in-the-moment thoughts/quotes/stats, at @AndrewWinston. But I wanted to re-post this piece from HBR last week on how business should think about Paris.]

World leaders and policymakers are meeting (defiantly) in Paris now to take on climate change. After 20 years of global negotiations that got us approximately nowhere near where the science tells us we need to be, this time looks different. The likelihood is high that over a hundred countries will accomplish something very important: coming to an agreement to cut carbon emissions dramatically.

These negotiations (known as COP21) are the latest in a series of meetings that began after the UN Framework on Climate Change (UNFCCC) was agreed to at the Rio Earth Summit in 1992, and went into force in 1994. The 195 member countries, or “parties,” hold a Conference of Parties (COP) annually, and this year is the 21st meeting.

These talks will reshape the global energy sector and every other industry that relies on energy — in other words, all of them. The impact on business will be profound, so it’s worth a quick overview of what the meeting is about and what business leaders can expect in its wake.

What will be the likely outcome out of the talks?

This time, nearly every country is entering the discussions with a legitimate commitment to cut carbon. And while the live negotiations are important, the key discussions, those within each country to decide what it could commit to, happened months ago.

In the past, negotiations have bogged down over a vicious cycle of two key related issues: 1) A strong belief in many developing countries that no deal should hamper their economic growth and that the developed nations created this mess and should take the lead in resolving it (a fair point); and 2) The richer countries, in return, balking at going first with no direct promise of reductions from the two largest countries (by population) in the world.

Things are very different today. The myth that creating a clean economy will damage the economy is crumbling, and all countries — but especially China and India – are coming in with serious offerings. So barring some unforeseen problem, an agreement to reduce carbon emissions between now and 2030 will come to fruition.

But it’s important to know three key things about these agreements, generally speaking:

  1. The commitments will vary greatly by country. The principle of differentiated responsibility based on historical contribution, and the need for economic growth to bring people out of poverty, has won over the world. For example, the U.S. has committed to reducing its greenhouse gas emissions by 26% (to 28% below its 2005 level) by 2025, the EU will cut emissions 40% by 2030 compared to 1990, and China will hit peak emissions by 2030 (or earlier), lower its emissions per unit of GDP by 65%, and increase use of renewables to 20% of energy consumption. The goals vary, but this is the first time in history that every country will agree to manage its emissions.
  2. They’re not exactly legally binding. There is virtually no chance that we’ll see a treaty with legal consequences if nations don’t live up to their commitments. There will likely be requirements on reporting – in his opening speech in Paris, President Obama specifically talked about tracking and transparency – but the mechanisms for checking progress, and the openness that requires, will likely be a sticking point for years. But, as climate policy expert Aimee Christensen pointed out to me, “the recent momentum going into Paris is primarily driven by the improving economics of action (e.g., renewables are getting cheaper than fossil fuels) and global peer pressure.” The biggest countries are now applying that peer pressure; in Chinese President Xi Jinping’s Paris speech, he said we need an “ambitious and binding agreement.”
  3. Even these significant achievements are insufficient. Two concrete agreements have come out of the previous 20 years of discussion: (a) the Kyoto Protocol, a general agreement to reduce greenhouse gases which the U.S. never ratified but the rest of world committed to; and (b) the much more specific 2009 Copenhagen consensus, where (nearly) everyone agreed that it would be wise to stop the warming at 2 degrees Celsius (3.6F). The Paris commitments are much more aggressive, but even if countries meet their new goals, the world will likely warm 3 or 4 degrees anyway. This is not a minor problem; 4 degrees could be catastrophic, the World Bank says, with significant risk of great suffering, extreme heat waves, declining food stocks, and severe economic costs.

All that said, these COP21 commitments, if met, will truly bend the curve of rising emissions for the first time. Paris is an important start, but everyone involved knows it’s just that — a start.

How is climate change already affecting businesses and the economy?

There’s real money at risk if we don’t address climate change. The direct economic impactsare already here and rising. As a Citi report estimated recently, the cost to the global economy of doing nothing could hit $72 trillion between now and mid-century.

Numbers like that are so large they can feel theoretical, but the impacts are also very real at the level of individual enterprises. Unilever’s CEO Paul Polman has said his company loses roughly €400 million annually from climate change and extreme weather.

Leading CEOs are seeing the work to manage climate change as a strategic and human imperative. Ken Powell, the CEO of General Mills says “human-caused greenhouse gas causes climate change and climate volatility and that’s going to stress the agricultural supply chain” — as in, the system that feeds us.

Many CEOs are going to Paris to speak at business-focused conferences running in parallel to the negotiations to show their support. When I asked Avery Dennison CEO Dean Scarborough about his keynote at the Sustainable Innovation Forum, he made it clear why he cares: “Climate change threatens Avery Dennison’s 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.”

Polman and Scarborough are joined in their concern by dozens of the world’s largest company CEOs. In just the last few months, oil giants issued a statement in support of a price on carbon, six of the world’s largest banks called for a strong climate deal, 81 American companies stood with President Obama, making more than 300 commitments to cut carbon or buy a lot more renewable energy, and the World Economic Forum gathered 78 large company CEOs to demand “bold action at COP21.”

And today, 100 big brands including Coca-Cola, Dupont, HP, Microsoft, Nike, and P&G are jointly running a full-page ad in the Wall Street Journal supporting a strong deal in Paris and investment to build a low-carbon economy in the U.S.

In short, It’s a myth that business opposes action on climate change.

What shifts should companies expect, post-COP21?

Regulations will be shifting. The world’s governments will be setting new policies over the coming years to cut carbon emissions, which will dramatically change how we produce and use energy — in the course of just one generation. We’re going to have to break a few eggs in the largest industry in the world, the one that keeps all other sectors — and our society — running.

The U.S., for example, has already seen executive action to double car and truck fuel efficiency and reduce emissions from our utility sector through the Clean Power Plan, which forces every state to develop a strategy to bring emissions down at roughly the same pace the U.S. as a whole has committed to. Energy is already a large source of risk for most companies — with enormous volatility in the price of traditional sources — and any new policies will undoubtedly impact prices.

But there’s also a big upside here, as both public and private spheres must invest trillions to bring about a fundamental change in how business works. Clean economy investments, already clocking in at $300 billion per year, will be rising. Companies that can align themselves with this shift — with new technologies and services in energy, efficiency, material science, logistics, building controls, transportation, big data, and much, much more – will find rapidly growing, multi-trillion-dollar markets and funding.

In the end, the meeting in Paris, and all the public and private sector commitments stemming from it, will greatly accelerate the shift that’s begun. We’ll get moving on the world’s most pressing challenge (and opportunity).

As Scarborough says, “Reducing emissions while still growing as a company is the defining business challenge of the 21st century…I’m representing Avery Dennison in Paris because we want to be as visible as possible in support of a climate agreement that finally gets the job done. There’s a sense that COP21 will be – must be — the transformative moment the world needs.”

The world’s leaders have assembled to move the needle for real. President Obama called for “a world marked not by conflict but by cooperation.” He summed up simply, “Let’s get to work.”

(This post first appeared at Harvard Business Review online.)

(Andrew's new book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot. Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

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