Friday, 28 January 2022

Business leaders must clean up quickly to cash in on COP26

5 min read

By Richard Hartung

While there was disappointment that delegates at the Conference of the Parties (COP26) in Glasgow did not do more to mitigate climate change, COP26 ended with a commitment to phase-down fossil fuels and a pledge to end deforestation. Although these are country level commitments, but business leaders and companies will be the ones that need to drive the change that stops global warming.

  • More than 100 countries have agreed to cut their methane emissions by 30% by 2030 under the Global Methane Pledge
  • According to International Energy Agency (IEA), global oil demands must drop by 75% to attain net-zero targets.
  • 40% of global energy-related carbon emissions result from the existing buildings according to the World Green Building Council.

Among the many pledges and commitments at COP26, four of the most significant announcements covered fossil fuels, finance, methane and deforestation. Overseas Development Institute (ODI) Director of Programme, Climate and Sustainability Sarah Colenbrander stated that the highlight of COP26 is the commitment to accelerate efforts to phase down coal power and inefficient fossil fuel subsidies. While the agreement does not eliminate coal, never before had world leaders addressed fossil fuels.

Additionally, more than 100 countries agreed to cut their methane emissions by 30% by 2030 under the Global Methane Pledge. Since methane is more than 80 times as powerful as carbon dioxide (CO2) in causing global warming, the pledge could have a huge impact. Also, more than 450 firms in 45 countries committed more than $130 trillion of private capital to transform the economy for net-zero under the Glasgow Financial Alliance for Net Zero (GFANZ). Firms that don’t demonstrate progress towards net zero may lose funding. Leaders of more than 100 countries agreed to end deforestation by 2030.

Companies must act on their country level promises

While the agreements are largely between governments, the actual action to mitigate climate change will have to come from the individuals and companies that are responsible for most of the emissions.

According to the consulting firm McKinsey, net-zero commitments are outpacing the formation of supply chains, market mechanisms, financing models and other solutions needed for decarbonisation. Companies that innovate quickly and lead coordinated action by industry peers, value-chain partners, capital providers and policymakers can gain a competitive advantage. A key change that companies need to make is in their supply chains since national commitments alone cannot keep us within a 1.5°C warming scenario. According to the consulting firm Gartner, this shifts the focus back to businesses to reduce emissions, with a spotlight on chief supply chain officers (CSCOs) because their operations account for the majority of emissions. CSCOs need to double down on their efforts to reduce emissions.  

Companies also need to develop standards and reporting frameworks, as their funding or loans and credibility with customers are at risk if they don’t track their climate impact effectively. A multitude of platforms already exists to assist with tracking and insights, including Novata, Impact Management Platform, and Google Carbon Footprint. While the International Sustainability Standards Board (ISSB) will eventually come up with a single, comprehensive and global baseline of sustainability standards, businesses should act faster. Banks, investors, customers and even employees will increasingly require credible and robust data about companies’ sustainability practices to make decisions about whether to loan, invest or buy a company’s products and services.  

Energy and agriculture sectors facing the biggest impact 

While companies in all sectors need to make changes, sectors such as energy, buildings and agriculture will likely feel the greatest impact. Even though the global oil and gas industry didn’t face specific requirements for reductions at COP26, according to S&P Global oil and gas producers were firmly in the sights of negotiators seeking a faster transition to clean energy. With the IEA stating that global oil demand needs to drop by 75% by 2050 to put the world on a pathway to net-zero emissions while renewable energy needs to surge more than five-fold, fossil fuel companies will be under increasing pressure to change their business models.  

Construction firms and building owners will also need to make changes to decarbonise. The US non-profit World Green Building Council found that existing buildings and new construction are the sources of nearly 40% of global energy-related carbon emissions, so a shift is essential. 

In the food and agriculture sector, forty-five governments pledged urgent action and investment at COP26 to shift to more sustainable farming. Brazil plans to scale up its ABC+ low carbon farming programme while the UK aims to engage 75% of the farmers in low carbon practices by 2030. While the number of countries may appear small, Food and Agriculture Organisation (FAO) data showing that agri-food systems generated 21% of CO2 emissions and 53% of methane emissions suggests that the pressure on farmers is bound to rise. 

Business leaders in these and other industries will need to build a company that serves the growing markets for zero-emissions goods and services. Companies that own carbon-intensive assets such as oil or coal will have to work with the financial institutions to secure funds to retrofit or retire these assets., According to the consulting firm Bain & Company, to succeed in moving rapidly towards net-zero companies must make the carbon transition integral to strategy, find new opportunities, monetise investments in carbon reduction and embed the transition into the business with actions such as tracking or pricing. 

A few trailblazers are showing the way

Several companies have already made significant progress and can be examples for business leaders or other firms that want to move quickly. The clothing giant Ralph Lauren CSO Halide Alagoz while speaking at the Reuters Responsible Business forum said that the company’s strategy is eliminating emissions in its value chain and that it is committed to 100% renewable energy. Ralph Lauren is moving to sustainable production practices for its materials, creating a circularity strategy, using recycled cotton, and investing in new dying technology that reduces water and energy consumption. It expects to eliminate 1 million metric tons of CO2 emissions by 2026.  

Unilever is partnering with suppliers to reduce the impact of its supply chain and distribution using new lower carbon raw materials and creating more sustainable product formulations. It achieved its 2020 target to improve the CO2 efficiency of its global logistics network by 40% and targets another 40–50% reduction by 2030.

Ben Meng, chairman Asia Pacific for Franklin Templeton said at his firm’s Asia Investor Forum, “we are at an inflexion point.” Extreme climate events, civil society activists, public policies from COP26, a younger generation that cares about externalities and investors who are demanding a solution are driving rapid change. While disruption is happening quickly and incumbents see it, Meng said they often still think it will happen gradually and only take incremental steps. Climate requires drastic measures, so companies that adapt fast will thrive and those that take small steps may go the way of the horseless carriage.  

Richard Hartung is the managing director at Transcarta with expertise in ESG and sustainable investing.  

Views and opinions expressed in this opinion editorial belong strictly to the authors/contributors and do not reflect that of Wealth and Society.

 

 



Keywords: COP26, Glasgow, Methane Pledge, Climate Change, Carbon Emissions, Deforestation, Sustainable, Fossil Fuel, Coal
Institution: International Energy Agency, World Green Building Council, Overseas Development Institute, Glasgow Financial Alliance For Net Zero, McKinsey, Gartner, Food And Agriculture Organisation, Ralph Lauren, Unilever, Franklin Templeton, Bain And Company, S&P Global
Region: Global
Guest: Ben Meng, Halide Alagoz, Sarah Colenbrander
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