Climate scientists overwhelmingly agree that the global economy must reach net-zero greenhouse gas (GHG) emissions by 2050 to ward off the catastrophic effects of climate change. Despite this scientific consensus, and despite broad agreement that climate change will disrupt every sector of the global economy, governmental action has not been sufficient to establish a path to net zero.
A market-based mechanism for climate action emerges
Instead, non-governmental organisations and the private sector are stepping in, launching decarbonisation initiatives that are driving down GHG emissions in virtually every industry and region of the globe. The financial sector is adding more pressure for net zero, warning that climate risk is financial risk. Large asset managers are beginning to vote against the management of companies they believe are not adequately addressing climate risk in their business strategies.
Together, these forces are creating a market-based mechanism in which climate action is becoming a competitive differentiator. Companies taking climate action can expect to attract more – and more loyal – customers, partners and employees. Other things being equal, this will drive profits and win favour with investors. These interlocking forces create a climate action feedback loop that rewards and reinforces corporate climate action, prompting more of it. The feedback loop is helping to accomplish what governments have not yet achieved.
The climate action feedback loop is not yet mature
There is not yet enough transparency or accountability for the feedback loop to be fully effective. It requires more transparency so that all key stakeholders – consumers, partners, employees and investors – can make informed decisions about which companies to support. It requires more accountability so that companies are held to their climate promises, and false claims – greenwashing – are exposed. If these are in place, it will be easier for all stakeholders to participate.
Every company can become a climate leader
Still, hundreds of companies have already made commitments to reach net zero by 2050, with more than 100 committing to a 2040 target. We expect that the pace of commitments will increase as early movers demonstrate that decarbonisation is possible and that it brings market rewards sufficient to draw more participation and accelerate the climate action feedback loop. In years, not decades, stakeholders will be able to choose net-zero providers for a wide range of products and services.
Likely winners in the energy transition include consumer-facing industries and those with the flexibility to shift business models away from climate disruption. They include automotive, retail, media, banking, insurance and technology.
Facing greater, even existential, challenges will be industries that are far behind in the transition away from carbon or that cannot escape climate disruption. They include oil and gas, coal, chemicals, real estate, pharmaceuticals, construction and agriculture.
Every company must recognise that the science is clear, and the need for climate action will only increase. It is an ‘all hands on deck’ moment that calls for an ‘all of the above’ approach – regulation, voluntary action, technology innovation and self-interested action by companies seeking competitive advantage as they balance near-term and long-term business strategies. Inaction is not an option.
This commentary is an extract from ‘Climate Change’, the latest in a series of ESG thematic reports from GlobalData.