Climate Talks For Business

On 1st of October the ICAEW, Carbon Credentials and the Prince of Wales’ Corporate Leaders Group co-hosted an event looking at what a successful climate agreement in Paris (the United Nations Framework Convention on Climates Change’s 21st session of the Conference of the Parties, or COP21) this December would mean for businesses.

Over 100 delegates gathered at Chartered Accountants’ Hall to discuss the business risks and opportunities associated with climate change, and how COP21 in Paris in December this year would impact these risks and opportunities.

Move beyond the financial business case and focus on the moral case

Michael Izza, the CEO of the ICAEW, introduced the evening with an emotive speech that urged businesses to move beyond the financial business case for sustainability and to start thinking about the moral case for addressing climate change:

“I would argue that, yes, the business case is important - for some people that will be paramount - but for me it is secondary, because, most importantly, it is just the right thing to do.”

Indeed, this is supported by PwC’s research into what personally motivates CEOs to drive business action on climate change; a vast 81% of CEOs were motivated by future generations.

Scientists have agreed that in order to avoid dangerous climate change, we must limit our global temperature increase to just 2˚C above pre-industrial levels (we are currently at a 0.8°C temperature increase) – we therefore have a ‘carbon budget’ of approximately 1 trillion tonnes of greenhouse gas emissions which the world can ‘afford’ to release into the atmosphere. The World Bank has warned that

“As global warming approaches and exceeds 2°C, there is a risk of triggering non-linear tripping elements. Examples include the disintegration of the West Antarctic ice sheets leading to more rapid sea-level rise, or large scale Amazon dieback drastically affective ecosystems, rivers, agriculture, energy production and livelihoods. This would further add to 21st century global warming and impact entire continents.”

Izza highlighted that the current individual country emission reduction pledges that have been submitted ahead of the Paris negotiations are predicted to reduce projected warming to 2.7˚C above pre-industrial levels.

There is therefore a gap between countries’ committed emissions reductions and the 2˚C limited set by the scientific community. Izza, pointed to the Cambridge Institute for Sustainability Leadership’s important work on the role of business and corporate initiatives in ‘wedging the emissions gap’ left behind by policy to ensure that a 2˚C future remains viable.

Use data, technology and expertise to measure and manage climate change risksIn the same week as this event, Mark Carney, Governor of the Bank of England gave a renowned speech at Lloyd’s of London on climate change and financial stability. Carney emphasised the importance of transparency and disclosure;

“With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy.”

Cian Duggan, co-founder and CTO at Carbon Credentials (co-hosts of the event), referenced Carney’s speech and encouraged delegates to

“learn from Lloyd’s example in combining data, technology and expert judgment to measure and manage [climate change] risks”.

Carbon Credentials is a London based carbon compliance and energy performance consultancy that uses data analytics tools and expertise to help companies understand and manage carbon and energy risks.

Following Michael Izza and Cian Duggan’s introductions, 7 eminent speakers provided short provocation speeches to stimulate debate.

Source: PwC - http://download.pwc.com/gx/ceo-pulse/climatechange/index.htm

Climate change risk is systemic, non-linear and unquantifiable

The City of London as a Green Financial Centre

Simon Sharpe, Head of Climate Strategy and Communications at the Foreign and Commonwealth Office (FCO) kicked off the provocation speeches by examining climate change risk as systemic, non-linear and unquantifiable.

Drawing from a recent report titled ‘Climate Change: A Risk Assessment’ which was

sponsored by the FCO, Sharpe argued that the risks of climate change should be assessed in the same way as risks to national security, financial stability, or public health and as a consequence, we should concentrate on understanding the worst case scenario and then assessing the likelihood of that.

Sharpe highlighted the diminishing window of opportunity to avoid dangerous climate change in his presentation of the graph below which shows non-linear increase in energy-related emissions and the shrinking carbon budget.

But Sharpe ended on a more positive note, demonstrating an equally non-linear decrease in the cost of solar PV. Costs for large-scale solar photovoltaic installations in many countries are now below $2 per watt, encouraging many countries, such as India, to revisit their investment decisions around electricity generating capacity.

Dame Fiona Woolf, Former Lord Mayor of London, explored the ways in which London is leading the international finance community through the transition to a low carbon economy.

Woolf looked at how the UK demonstrates green leadership through policy, business and financial services institutions. She argued

that mandatory GHG emissions reporting for FTSE listed companies has generated growing awareness of climate change business risks and opportunities; importantly, 92% of UK business leaders now see green growth as an opportunity and the UK is now 6th largest exporter of green goods and services.

The City of London is increasingly viewed as a green financial centre; with innovation in financing low-carbon infrastructure increasing rapidly as a result of collaboration between all categories of market participants. Woolf argued that the market is particularly attractive to investors with a long term outlook (such as pension and sovereign wealth funds) and that commercial returns and interest rates are now the focus, rather than Government subsidies. Nonetheless, investors are looking for stable policies and a commitment to a low carbon transition, and as such, in Woolf’s opinion, a global treaty will provide the most significant key to unlocking the huge potential of the green financial market.

Guest Speakers

Investors must encourage companies to make long term decisions

The impact of climate change on global GDP

Stop talking about carbon and start talking about energy

Climate change presents business with a huge opportunity

Nick Silver, co-founder of The Climate Bonds Initiative, an international, investor-focused not-for-profit focused on mobilizing the $100 trillion bond market for climate change solutions, spoke about what investors are doing, what they could do, and what they are currently failing to do, to tackle climate change.

What are investors doing? Investors are encouraging companies to disclose their emissions and climate change risks through frameworks such as the CDP. They are lobbying Government to provide investment certainty through policy. And they are increasingly actively engaging with the companies which they own to ensure that they understand climate change risks and establish effective ESG practices. In some instances, investors are even divesting from fossil fuels.

What are investors not doing? Silver referred to the UK Government review of institutional investors in equity markets (the Kay review) which claimed that investors are “not doing their jobs properly”. Kay suggests that currently, in our economy, the capital allocation decision is not made my investors; it is made at company level. Therefore, the investors’ job is one of stewardship – to influence and incentivise companies they own to make long term decisions. The Kay review suggests that investors aren’t doing this, or at worst, they are encouraging short termism.

Silver outlined a number of policy mechanisms which could incentive investors:

• The Government could issue, underwrite or insure green bonds, shifting capital at scale into low carbon transformation.

• It could re-examine regulatory requirements, for example,

regulations for insurance companies, banks and pension funds encourage liquidity (having assets you can buy and sell easily) which encourage short termism.

• Set capital adequacy rules to encourage financial institutions

to invest in the long term.

David Gerrard, CFO of Veolia, gave a rather more positive presentation, focusing on the business opportunities associated with climate change. He clearly demonstrated that being environmentally focused and generating profit are not mutually exclusive; Veolia recognised that demand for infinite natural resource and uncertainty in terms of security of supply provided them with

a huge business opportunity around remanufacturing, reprocessing and recycling materials. This innovative company is now changing the landscape of resource management, helping to shape the circular economy and making profit - already 2.5 billion euros of Veolia’s worldwide turnover (20% of total revenue) is generated from the circular economy (with a goal to double this by 2020).

The World Economic Forum has forecast that the circular economy will contribute $1 trillion per annum globally by 2025. In the UK, using resources in a closed loop system has the potential to contribute £29 billion to UK GDP and provide 175,000 more jobs (an opportunity to decrease unemployment by 10%).

Simon Dietz, Co-Director of the Grantham Research Institute on Climate Change and the Environment and Principal at Vivid Economics discussed the financial value at risk from climate change. He pointed out that we have long known that the economic cost of climate change could be large (estimated by Stern at £3.6 trillion in 2006), but that only now is the connection with financial assets

being explicitly made.

Vivid Economics modelled the effect of climate change on global GDP and found that, when discounted back to their value in the present day, private investors can expect a mean loss of US$4.2 trillion and governments can expect a mean loss of US$13.9 trillion as a result of climate change. However, the tail risks are far more serious; warming of 5°C is consistent with US$7 trillion in losses for private investors—more than the total market capitalisation of the London Stock Exchange.

In agreement with Sharpe, Dietz stated that climate change impacts are likely to pose both systemic (non-diversifiable) and firm/sector specific (diversifiable) risks; Vivid Economics estimated the economic impact of mitigation for over 30 industries and found a 5% – 15% decrease in profit margin when carbon dioxide was priced at just £10 a tonne.

Lord Rupert Redesdale, Chief Executive of the Energy Managers Association, was the final speaker and perhaps the most provocative (which is indeed what we asked of them!): “The EU-ETS is a joke – it really doesn’t work. This idea that you can build a financial mechanism that suddenly trades carbon away is mad.”

Redesdale was a founding member of the All Party Parliamentary Climate Change Group (APPCCG) and wholly understands the threat of climate change, however, he suggests the rhetoric is wrong; “businesses don’t like the word carbon and they don’t understand it”. Indeed, it is quite difficult to comprehend what a tonne of carbon dioxide looks like or means. Redesdale suggests that we start talking about energy instead of carbon, since energy presents a more visible and tangible risk to business.

In the next 3 years the UK is decommissioning every coal power plant in the country which will be positive for decarbonising our economy, but will have a huge impact on energy supply. These 16 assets on the grid represent 32% of the UK’s power which will be gone by 2017. Redesdale suggested that we will experience power black outs or brown outs either this winter or next; last winter in London (one of the mildest winters on record) there was a 1% capacity gap.

National Grid uses the Triad (the three half-hour settlement periods with highest system demand between November and February, separated by at least ten clear days) to determine charges for demand customers with half-hour metering. The Government has just set the top price for 1 mWh at peak time at £3,000. Rising energy prices and insecurity of supply present a big risk to British business. Redesdale suggests that regardless of whether businesses want to act on climate change because it’s the right thing to do, as energy prices go up, financially, they will be forced to act.

In the 45 minute roundtable session, delegates debated topics including the role of disclosure, innovative financing models, carbon pricing and business model innovation, and prepared a number of questions for the panel of speakers.

What is the most effective policy response to climate change globally/ regionally/ nationally?

In the age of the Great British Bake-off, what are the 5 critical ingredients for a low-carbon future?

The speakers explored various policy tools for avoiding dangerous climate change.

Simon Sharpe explained that a cap and trade scheme results in both a cap but also a carbon floor; it creates a negative feedback loop which means that any actions by one company to reduce their emissions result in a surplus supply of tradeable emissions which drives down the price and reduces the incentive for others to reduce their emissions.

Conversely, a carbon tax and dividends system provides a positive feedback loop; if anyone does the right thing, the overall dividend reduces and therefore cost for everyone else is increased, and in turn the incentive is increased.

However, one disadvantage of implementing a carbon tax compared to a cap and trade scheme is that it fails to encourage the flow of funds from rich to poor countries.

While the speakers generally agreed that a carbon tax is the most effective policy tool in terms of achieving the vast emission reductions in the short time frame required, they recognised that it is politically difficult to implement. Ultimately, all speakers supported a blended policy approach.

1. EducationDavid Gerrard suggested that education and advocacy would be the first essential ingredient. We must demonstrate the necessity to shift towards a low carbon economy and shout about the opportunities.

2. FlexibilitySimon Dietz suggested that a vital ingredient was for businesses to be flexible and responsive in the face of changing regulatory landscapes. Dietz pointed to Drax as an example of a company that reacted to Government policy but failed to adapt to policy changes; Drax turned itself from a burner of fossil fuels to burner of biofuels, but when the Government rolled back green subsidies the share price plummeted.

3. Large-scale government investment along the lines of the US’s Apollo ProjectNick Silver explained that if we are to avoid catastrophic risk of climate change, we require a total transformation of our economy. One way to do this might be a large scale developmental plan by the state, much like the Apollo project in the US. He suggested that, in many ways, the West is stuck in an economic rut of low investment, with a high debt economy based on financial services and housing, and a project of this sort would stimulate the economy and accelerate the decarbonisation.

4. The ‘internet of everything’Lord Redesdale suggested that we should move towards a smart grid system with smart controls on buildings, pumps, water supply etc. This would allow us understand every aspect of energy consumption and how to drive it down.

5. Availability of affordable large-scale energy storageSimon Dietz explained that one of the biggest challenges we have is energy storage which is currently preventing renewables providing more than 30% of energy supply anywhere in the world.

Carbon Credentials would like to thank the ICAEW and the Prince of Wales’ Coporate Leaders Group for co-hosting the event, the roundtable hosts and the excellent speakers who stimulated lively discussion.

In the 45 minute roundtable session, delegates debated topics including the role of disclosure, innovative financing models, carbon pricing and business model innovation, and prepared a number of questions for the panel of speakers.

Roundtable 1: How will COP21 change climate change disclosure?Hosted by Jane Stevenson from the Climate Change Disclosure Standards Board

Roundtable 4: COP21 – is this the time for carbon pricing?Hosted by Jill Duggan from the Cambridge Institute for Sustainability Leadership

Roundtable 5: Will COP 21 drive innovation in financing models for energy efficiency?Hosted by Paul Lewis, COO at Carbon Credentials

Roundtable 2: Will COP21 make sustainability issues in capital investment appraisal mainstream?Hosted by Christine Brogan, Deputy Director of Accounting 4 Sustainability

Roundtable 3: How will COP21 change climate change regulation?Hosted by Nick Blythe, Policy and Practice lead at IEMA

• The Non-Financial Reporting Directive will be transposed into law in early 2016 and business should be getting ready now.

• Mandatory disclosure forces companies to measure the climate impact and measurement drives management.

• Climate change disclosure is driven by regulation and reputation.

• Disclosure allows investors to understand carbon liability.

• The complexity and different approaches to disclosure makes it a burden for business – the CDSB framework seeks to simplify this.

• How high does the carbon price need to be to drive actual change? Is there a political will to have a high price?

• The level of emissions reductions where there is a carbon price are better than in places where there is no carbon price.

• Tokyo has an effective emissions trading scheme that has seen 23 % reduction in carbon reductions.

• A % target reduction might be better than a carbon price for many companies.

• What type of carbon pricing would be best? The CRC was good at forcing companies to understand energy consumption and it got energy on the CFO’s radar.

• Should public projects be decided on carbon reduction rather than rate of return?

• What should be done with the receipts from carbon pricing?

• How can energy/ sustainability managers get past 3 year payback requirements?

• There is lots of finance out there but it is often difficult accessing it.

• Energy performance contracting with third parties can allow businesses to accelerate decarbonisation.

• Companies need a pipeline and plan of projects to be funded.

• The City needs to develop capital markets.

• There is too much short termism and not enough focus on long termism.

• Companies and investors need policy certainty.

• The price of carbon is uncertain (estimated at $37 per tonne but it could be as high as $1000).

• Returns and paybacks need to be clear in order to make a business case.

• The conversation needs to be different for different industries as they have different material impacts.

• Sustainability needs to be approached in the economic sense as well as moral and ethical.

• Sustainability should be integrated into all areas of the business.

• Action on sustainability has to be driven by the board.

• Accountants and CFOs need to be trained to understand energy.

• Will COP 21 help make sustainability issues become part of regular due diligence?

• There is a diverse policy landscape internationally and regionally.

• Can private sector achieve carbon reduction voluntarily?

• Is there a way of approaching climate change mitigation by smaller, clear achievable targets and policies?

• Should there be an overarching international trading scheme or a blend of an overarching scheme underpinned by a mix or blend of policies?

Roundtable Discussion

Roundtable 6: Climate change - how does my business start to address it?Hosted by Scarlett Benson, Sustainability Consultant Carbon Credentials

Roundtable 7: How will we seize the advantage of a low-carbon future?Hosted by David Gerrard, CFO at Veolia

Roundtable 8: What questions should non-executive directors be asking of their Boards?Hosted by Eliot Whittington, Director of the Prince of Wales’s UK Corporate Leaders Group on Climate Change (UK CLG)

Roundtable 9: How will business models have to change?Hosted by Stephen Ibbotson, Director of Business at ICAEW

• Organisations need to build tangible strategies that are not just ‘greenwash’ but practical and realistic.

• The board is most likely to support something that is related to compliance or has a financial/ reputational impact making it easy to engage stakeholders.

• Very diverse skillsets are required for the implementation of a sustainability strategy and so members from a larger cross section of business functions should be involved.

• All strategies must be aligned to the top vision within the company and be in line with commercial objectives – the senior leadership team must champion this and embody the values.

• There needs to be clarity around the vision at all levels within the organisation.

• A successful approach involves understanding what needs to be measured, making sure there is good data, creating and measuring against targets.

• Getting climate change on the risk register is a good way of raising it up the board agenda and gaining a mitigation budget.

• Education is important as it allows employees to put it into context and understand why it is so important.

• If an organisation is not flexible and does not adapt then it will be at risk within a changing marketplace.

• Reporting frameworks such as the CDP can provide organisations with an excellent structure to complete a sustainability strategy.

• To what extent is climate change discussed at board level?

• In what terms is climate change discussed at board level and by non-execs – in terms regulatory/physical risk, strategy and / or just being the right thing do to?

• Are non-executive directors sufficiently informed on sustainability / energy to ask the right questions?

• Do boards have a fiduciary duty?

• Should boards require that non-executive directors have an understanding of sustainability?

• Business will have to confront threats and opportunities of an increasingly turbulent business environment.

• What is material varies from one business to the next. We cannot make a financial argument for energy in all sectors – SMEs and small businesses will be hit first and hardest, and they don’t necessarily have the processes in place to monitor these aspects.

• Business models are continually changing and challenged, e.g. Apple who are soon to produce electric cars and do 3D printing.

• It is not necessarily the role of business to make a change – it is a cultural thing e.g. in Japan everyone carries their own hand towel to reduce paper towel waste.

• Why does business have to lead since business can only sell what people want to buy?

• Consumers are never prepared to pay the full costs. The cost of changing the business model poses a dilemma because the business also struggle to front these costs with a long-term payback.

• How do we get accountants to measure change?

• How do we get community to change their culture? And then how can this be communicated to business?

• What should leadership of the global accounting profession look like in a responsible world going forward?

• Incentives at senior level will drive the shift to low-carbon practices (e.g. bonuses being dependent on sustainability performance).

• Legislation is fundamental, for example, end of life recycling requirements in the car industry.

• Advocacy is important.

• Internal engagement within companies has an important role.

• Companies should test and prove the business case by doing pilot projects.

• There is a skills shortage and the cost of implementation will be high.

• The low carbon future presents businesses with a plethora of opportunities including improved brand reputation, reduced cost, new products and attracting talent.