By BNP Paribas
The 21st Conference of Parties to the United Nations Framework, more commonly known as COP21, will take place in Paris in early December, with the aim of achieving a universal and legally binding agreement to address climate change. This will include a common legal framework applicable to all countries, together with targets that will be regularly reviewed in light of the goal of limiting global warming to 2°C. It will also hold all countries accountable for meeting their targets.
Now more than ever this is of vital importance, as there is consensus among scientists that time is running out to take action to limit global warming, and that COP21 represents the ‘last best’ opportunity to reach a universal climate agreement. With politicians increasingly taking account of the views of investors and the wider public, we’ve never been so well placed to reach an agreement. Historically the stance taken by the US and China has meant that it has been difficult to do so, although they have now moved forward a long way and expressed their willingness to commit. Furthermore, so have the other members of the G7, and collectively these nations account for approximately half of all global emissions. So there seems to be the political will, although if under these circumstances negotiations fail, it will be extremely difficult to build any confidence in any sort of summit in the future. In other words, it will be up to each country to fight its own battle against climate change, or to hitch a free ride on everyone else’s efforts.
But even if a political agreement is reached, companies will still need to take notice and those within sectors at the top of the emissions list such as utilities, transport or industrials are likely to experience the greatest impact from stricter regulation to limit emissions. From a business perspective, it is important to understand that for most companies to seriously reduce their carbon footprint (for example a 40% reduction by 2030) this will mean making considerable investment. And for some it will require some significant long-term changes to business strategy. For example, an energy company might have to progressively move away from coal or oil and concentrate on natural gas and renewables. While for a real estate company it might mean renovating buildings so that they are more energy efficient. Such actions can be very costly indeed.
But if companies fail to take notice there will be a price to be paid. Whether through carbon markets, taxes or other regulatory mechanisms, the cost of pollution will be increasingly higher for companies that don’t adapt. Higher costs will have to be factored in companies’ balance sheets, resulting in higher operating costs and lower margins. At best, such companies will become less attractive investments, while at worst they might lose their license to operate.
Meanwhile the failure to reach an agreement may lead to an increase to beyond 2°C above pre-industrial level, resulting in significant risks to companies. Of course, the impact will vary tremendously depending on which sector they are in and where they operate, but generally speaking, they could face operational disruption, falling production, higher raw materials costs and declining demand. Some impacts are already being felt, in the form of disruption to production resulting from natural disasters.
Understandably most companies are not willing to commit to such investments or changes without long term certainty. In Europe we have already seen how the financial crisis and changes in government have affected energy policy. This has impacted on many companies who had adapted in order to accommodate policies that have now been revised again. A universal agreement should form the basis of a clear, stable, long-term climate policy framework globally, and this long-term certainty would not only benefit companies but also the investors in them. This is precisely what COP21 can deliver.
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