Comment: As world leaders gather in Cornwall for the G7, Steve Varley of EY argues that with climate change both the biggest business risk and commercial opportunity of all time, there a strong commercial imperative to engage with this year’s summit in Glasgow
This year’s COP26 global climate change summit is shaping up to be a crucial event. It is the first since the 2020 deadline for numerous components of the landmark Paris Agreement, adopted by 196 countries and territories at COP21 in 2015. It is also a major focus for China and the US, which are jointly responsible for more than 40% of the world’s carbon emissions.
Evidence suggests growing political momentum behind the delivery of real and lasting change. This includes the recent joint statement on climate co-operation by the U.S. and China, the pledge by the U.S. to cut its carbon emissions by 50-52% below 2005 levels by 2030, and the UK’s target to slash emissions by 78% by 2035.
The Earth is currently on track to warm between three and four degrees Celsius by 2100, with potentially disastrous outcomes, like rising sea levels and large areas of the planet becoming uninhabitable. So, it’s clear that what happens at COP26 matters to the world. But does COP26 really matter to business – and, if so, why? I believe there are five major reasons why business should pay attention to COP26.
1 It will mean shifts in the expectations of voters and lead to new regulations
Climate change is the public’s second greatest concern (following job losses), according to the Edelman Trust Barometer 2021. Media coverage of COP26 is likely to influence voters’ expectations around what their countries can – and should – be doing to address the issue. National governments will want to respond to these expectations by committing to internationally agreed targets set at the summit and implementing new rules to achieve them – rules that will inevitably have implications for businesses.
COPs have undoubtedly played a major role in accelerating the pace of environmental regulation over the past 25 years. According to the Grantham Research Institute on Climate Change and the Environment there have been 2,110 environmental laws passed globally since 1947, with 2,037 of these laws passed since the inaugural COP took place in 1995.
COP26 allows businesses to get an early insight into where regulation might be heading so they can work collaboratively with governments. Business leaders are obliged to engage with policies that help countries to deliver on their emissions targets while protecting jobs, preventing energy poverty through high fuel costs, and further driving economic growth and prosperity.
2 It will turbocharge the green finance market
Investors are already flocking to invest in green assets, with the expectation that they will deliver superior returns in the long run. Nevertheless, COP26 is likely to turbocharge the green finance market, especially as one of the goals of the summit is to help private finance support a whole-economy transition to net zero.
Capital will increasingly flow toward greener companies and countries, putting extractive and polluting business models at heightened risk. At the same time, heightened focus on “greenwashing” will drive standardization, providing clarity around what constitutes a “green project” or “green finance”. Greater vigilance will reduce opportunities for regulatory arbitrage, preventing companies from shifting assets to countries that don’t prioritize the environment. The EU’s consideration of a carbon border tax to mitigate unintended consequences of its emissions trading system is one example of that vigilance in action.
The Bloomberg New Energy Foundation calculates that between $78tn and $130tn of new investment is needed by 2050, in areas such as power generation and hydrogen production, to enable the world to meet its environmental targets. Businesses should watch out for any green financing arrangements – both positive and negative – that are likely to come out of COP26, as well as anything specific to their areas of focus, such as clean air or habitat protection. There’s an opportunity to tap new sources of capital as existing capital pools dry up.
3 It will drive consumer behaviour and business revenues
Growing awareness of the climate crisis is influencing consumer expectations and behaviours. The EY Future Consumer Index found consumers willing to pay a premium for sustainable products and services will make up a third of the consumer base in 18 major markets as we move beyond COVID-19.
Businesses have an opportunity to create value and grow revenues by responding to the trend for sustainable consumption. Some companies are already differentiating themselves by using carbon footprint labels to communicate the environmental impact of their products to consumers. This trend is likely to be accelerated post COP26.
4 It will mean more innovation and new business models
The combination of advancing technology, rising regulatory risks for high-emission assets, the falling cost of capital for green investments, and the increasing price of carbon emissions will create new opportunities for businesses. These opportunities may involve the creation of new products and services, and even entirely new business models. For example, some companies are investigating alternatives to concrete, such as building material that uses waste glass, plastic and even paper.
In particular, the rising price of carbon creates significant opportunities for businesses that can develop products and solutions that generate carbon credits – for example, filters that directly remove carbon dioxide from the atmosphere, or seaweed farming that captures and sequesters carbon. Businesses can get valuable insights into these and other potential opportunities for innovation by engaging with COP26.
5 It will help attract and retain dynamic young talent
Research undertaken in 2019 found 73% of workers wanted their employer to improve its sustainability policy. 24% said they would refuse a job at an organisation with a poor sustainability record. Younger generations tend to be particularly concerned by the climate crisis. For example, Gallup research found that 70% of Americans aged 18 to 34 worry about global warming, compared with 56% aged 55 and older. It’s not enough for companies to claim to be green, however. Engaging around COP26, as a business, signals that your organisation recognises the impact of climate change and wishes to be part of the solution.
While COP26 matters to companies, the daily pressures of being in business, often compounded by the pandemic, means many won’t take much notice. That’s why companies that do follow this year’s COP, as well as future summits, will have a competitive advantage – because they will be better informed about emerging trends.
Climate change is arguably the biggest business risk and the biggest commercial opportunity of all time. Bill Gates has even said that the countries that “do the most to nurture innovation in this field will be home to the next generation of breakthrough companies.” Businesses seeking to manage this risk and seize this opportunity to protect and create value from sustainability, should pay close attention to COP26.
Steve Varley is EY Global Vice Chair – Sustainability. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.