Why Take Action? The Impact on Businesses

It is generally accepted that the earth's climate is changing due to emissions of green house gasses into the atmosphere, caused by human activity. If the resulting temperature increase is more than 2°C, any damage will be irreversible, scientists believe. To combat climate change, governments all over the world have committed themselves to emission targets and enacted policies accordingly. Although the main policy instrument has been the introduction of carbon emission markets, many other policies are in place, including eco-taxes, building regulation, tax credits, technology-specific incentives (for instance, technology-dependant feed-in tariffs), or laws on recycling.

In practice, business decisions are driven by government policy, changes in consumer demand and the technology innovation that enables businesses to comply with regulation and seek new opportunities. Climate-smart companies adapt quickly to gain a competitive advantage.

Risks for Businesses

Climate Change Policy Risk

With climage change mitigation driven by lawmakers, the risk of politically motivated changes to public policy towards climate change is high. Businesses that are in a carbon-intensive industry or reliant on climate change-motivated subsidies or other favourable regulation are particularly vulnerable. Conversely, most investors avoid projects with high policy risk due to its unpredictability.

Market Risk

Naturally, businesses face the risk of changes in the prices of oil, gas, electricity and, where required, carbon. To mitigate these risks, companies can either reduce their exposure or hedge the risk. At 2009 levels of carbon price, the cost of carbon is almost negligible. However:

At $60 per ton carbon price, 10% of total cash flow of listed companies will be transferred from companies with below average carbon efficiency to those with above average efficiency.

Climate Change Impact

With adverse weather conditions, changes in climate may cause damages to buildings, interruptions to infrastructure and supply chains (for instance food). It may also change travel and migration patterns.

Reputational Risk

Since climate change issues are high in the public mind, not to engage in the debate could cause a public backlash.

Credit Risk

Due to increased business risk exposure to carbon price, credit rating of such entities may be at risk. For instance, Drax Power, which operates a coal fired power plant in the UK, has been downgraded in 2009 to below investment grade, thus increasing the cost of borrrowing and making it unsuitable for institutional funds to invest.

Financial Risk

Induced by regulation on carbon emission targets, the cost of capital for projects that are not carbon-reducing may increase in line with expectation of a carbon price.

Actions

Adaptation

As climate change policy has many facets, so has its impact on businesses. Mandatory activities range from completing surveys, paying taxes, implementing health & safety regulations to participating in the carbon market.

The real challenge is in keeping up-to-date with often fast-moving legislation. Where businesses operate in multiple locations, they will also face the daunting task of learning about the differences between countries, states and even councils.

Over and above the minimum compliance activities, all companies can modify internal processes, supply contracts, products and services to drive down costs while going "green" at the same time.

Corporations can take a much more pro-active approach by creating and publishing a sustainability report alongside their annual report to explain how the business' objectives are consistent with sustainability principles. As part of the sustainability strategy the business may implement

Carbon strategy: to measure, monitor and reduce the footprint
Eco-efficiency: to become more resource-efficient.
Full cost accounting - encapsulate environmental effects within the financial measures used to make decisions.

New Investment Opportunities

Companies seek specific market opportunities, often backed by venture capital, in developing new technologies. Some of those companies have grown into publicly traded, large organisations such as , SolarWorld, First Solar, or Q-Cells. Other investors seek specific opportunities in renewable energy assets - solar and wind farms, promising more stable cash flow.

New Revenue Streams

Climate change leaders develop new offerings based on their core capabilities and infrastructure to pursue new revenue streams:

HSBC created a number of climate change indices (e.g. Low Carbon Energy Production Index, Energy Efficiency Index) that can be invested in through the bank.
IBM has launched the IBM Big Green project to reduce data centre energy consumption with the help of IBM products and services.