Carbon Emission Reduction in the Absence of Leadership

The G8’s pledge on Tuesday 8 July 2008 to halve greenhouse gas emissions by 2050 is being seen by many as, at best, a travesty (President Bush’s commitment to anything containing the words ‘climate change’ is generally considered amusing) or, at worst, a tragedy. In 42 years’ time, with a world population roughly double that of today, it is widely considered unthinkable that emissions will have been lowered without stringent short-term targets having been put in place. Booz Allen & Hamilton has stated that if emissions are not reduced by 80% over the next 20 years, the consequences of global warming to the world economy as a result of crop damage, food shortages, and disease, will be a catastrophic.

But perhaps a more immediate ramification of the global leaders’ (non-) commitment is that many firms, interpreting governments’ delay as confirmation that climate change is a non-issue, might indefinitely put off incorporating energy alternatives into future business plans. They might argue that integrating expensive processes that lower emissions (if they don’t have to) will make their firms uncompetitive. This thinking could be fatally flawed. Certain more pressing forces exist that should drive short-sighted firms to reconsider procrastinating.

First of all, the market is changing. That is an exceptionally broad statement, but intended to allude to widespread switching by individuals and corporations to more environmentally responsible alternatives. Many major corporations have begun to rethink their supply chains, choosing lower carbon options over cheaper inputs in many instances. Many have begun to rethink their entire strategies. Look at Deloitte. Even their offices are designed around reducing the firm’s carbon footprint. Much of this is driven by an acknowledgement that the firm’s employees and customers are increasingly wanting to engage with a firm that is environmentally responsible. And Deloitte is not alone in their move to green. Essentially, there is an overall lowered demand for products, services, and relationships that do not minimize carbon emissions.

Many firms’ moves towards alternative energy options are driven by regulation or incentives. Despite their G8 meeting communiqué, many countries – even the US – have put in place national or regional programs that subsidize or encourage innovative approaches to reducing oil-based energy dependencies. Germany provides strong financial support for renewable energy programs. The US gives tax credits to the producers of renewable energy. In Canada, the BC government recently imposed a carbon tax to prompt individuals and firms to explore alternative energy sources. The BC transit authority has subsidized the development of new technology clean fuel transit vehicles for the 2010 Winter Olympics. This is a small sample of the many progressive initiatives making efficient practices not only financially advisable for firms transacting in and with these regions, but largely inevitable.

As a result of the incentives, regulation, and changing demand, the financial justification for reducing carbon emissions is clear. Doing nothing while the new technologies and standards that will bring about emission reduction are being developed, tested, and adopted, is clearly not an option. Those going about business-as-usual in the hopes that they can simply acquire a clean energy producer or clean technology solutions further down the line, put off making comparatively small investments now in favour of massive investments later. Granted, investing in new ideas in the short-term carries high risk because of the emergent and rapidly changing nature of the technologies in question. But firms waiting to incorporate ‘low-risk’ solutions may not survive long enough to acquire and implement the winning technologies that finally become accepted as the standard; potentially decades down the line, after most customers have deserted in favour of products and services that are better for the environment. GM is a case in point. Putting in place environmentally conscious processes will soon cease to be a strategic differentiator, and simply become a requirement to participate in the market. Those without low-carbon emission plans will soon find themselves outside the game entirely.

Finally, firms that are not explicitly cutting emissions, or alternatively are engaging in environmentally damaging practices, are becoming less attractive as investment targets. Indices developed by investment advisors to guide large institutional investors are increasingly taking firms’ environmental impact into account in their analyses. Penalties for high-emissions, reduced revenue prospects, high taxation, and potentially large capital expenditures when firms finally play catch-up to their more environmentally-conscious competitors, are only a few reasons that shareholders looking to invest for the medium or long-term might steer away less progressive companies. Investors are beginning to see environmentally-unfriendly practices as unsustainable; and we can expect to see more shareholder activism against firms who ignore their obligations to protect owners’ interests by failing to put in place measures to reduce energy costs or to seek alternatives to carbon-based inputs.

Therefore, the failure of the world’s leaders to set appropriate targets to ensure that our environment can sustain economic and industrial development over the next few decades does not mean that, until further notice, firms do not have to focus on cutting carbon emissions. Government targets and regulation are not alone in driving the imperative for businesses to address their contribution to global warming. Those refusing to wake up and smell the CO2 are unlikely to be around long enough to realize that the G8’s targets play a small and supporting role in deciding if and how firms should respond to climate change.

July 10, 2008
By Lisa Papania, Research Director, CIBC Centre for Corporate Governance and Risk Management