Climate is front and center to our global ‘green’ economic recovery
KPMG IMPACT, with Eversheds Sutherland, last year released their Climate Change and Corporate Value report. The report explores the global corporate response to climate change through conversations with directors and C-suite executives from more than 500 of the world’s leading companies. CEOs and CFOs alike reported that climate change is being driven across their whole value chains: from their employees’ need for purposeful profit, to the way they operate their business, decarbonize their supply chains, report to shareholders and demonstrate value to customers.
KPMG and Eversheds argue in their report that there are still large knowledge gaps in how corporates can effectively operationalize their current or to-be-set net-zero or low-carbon business strategies. Yet, transitioning to net zero requires a range of measures, including: supportive policy, regulatory clarity, extensive capital commitments and the development of credible, measurable and transparent climate metrics and benchmarks. The ability for corporates, no matter where they’re located, to absorb the cost of transformation, undertake and adopt new science, innovation or technology solutions to facilitate decarbonization or employ the right talent and expertise are all well-defined barriers and hurdles.
While climate change is on the agenda of corporates, government is playing catch-up
While the report addresses the rapidly escalating rise of climate change on the corporate agenda, in the six months since its publication, the arguably more important need for governments to support and enable a transition to net-zero to drive global economic recovery has accelerated.
Governments have a catalytic role to play in facilitating and, likely, regulating the transition of their countries to a low-carbon global economy. Without playing a role, they risk creating market failure whereby environmental degradation, social deterioration and economic decline are ‘permitted’. In actioning climate challenges, governments could learn from the corporate, nascent response to the climate agenda.
So far, various governments have made pledges to 2030 or 2050 targets that align them to net-zero emissions pathways in parallel to their Paris Agreement commitments1. A string of recent events has created a series of government pledges and commitments that have been announced. The most recent of which, a virtual climate summit called by US President Joe Biden in line with Earth Day last month, saw the US raise their emissions reductions targets to 50-52%2. Prior to the summit, UK Prime Minister Boris Johnson reset the UK’s emissions reduction target by 2035 to a huge 78%3, Canadian Prime Minister Justin Trudeau increased Canada’s emissions reduction target to 40-45%4 and Japanese Prime Minister Yoshihide Suga increased Japan’s target to 46%5. Notably, despite the virtual climate summit, Australia did not update its emissions reduction target.
Government is at a unique juncture, though. While we’re seeing the clear setting and use of targets, there is a greater need to rapidly operationalize action and solutions that will get us to these goals. Where are we seeing some leadership so far?
- New Zealand this month, mandated the reporting of climate-related financial disclosures for publicly listed organizations from reporting year FY22 onwards6.
- The United Kingdom in February published its Independent Review on the Economics of Biodiversity (the Dasgupta review), to which Prime Minister Johnson has acknowledged the need to ‘build back greener’ following the pandemic7.
- The United States – in January, the Biden-Harris administration took Executive Actions to address climate change, globally, centering the need to address issues as a matter of foreign policy, national security and environmental stewardship and creating a “whole-of-government federated approach to tackling the crisis”8.
- The European Union (EU) has, in March, agreed to put a carbon price on goods imported from outside the EU in its Carbon Border Adjustment Mechanism9 creating a World Trade Organisation-compliant levy on non-EU goods in support of the EU’s Green Deal10 (its emissions reduction approach and target).
What more can be done, within the cost-constrained economy
Corporates will likely look to government to tackle the challenges and barriers that exist in transitioning to a low carbon economy. Governments need to continue to build out an arsenal of tools that enable and deliver low-carbon solutions to deliver upon sovereign emissions reduction.
What might this include?
- Innovative finance and environmental market-making mechanisms to accelerate the delivery of outcomes such as carbon abatement, sequestration and renewable energy creation which may include underwriting or intermediating, providing concessionality and direct grant-making (to pay for environmental activities and outcomes on behalf of the public). In doing so government needs to crowd in, not out, the growing pool of ESG-linked corporate, social and institutional capital and ensure that available finance is affordable to anyone who’d like to access it.
- Designing tax policy to help achieve global climate ambitions – Tax policy has a key role to play in helping to change carbon behavior at both an individual and at a corporate level through the use of tax incentivization and punitive tax measures where appropriate. This will be particularly important in helping to encourage greater climate innovation and also to drive the mobilization of capital into green projects.
- Embedding and funding the delivery of programs and policies that deliver the scientific, technical and technological capabilities to identify, create and implement low-carbon solutions and standardise their measurement, monitoring and evaluation within an agreed upon international standard11. This needs to include appropriate capacity building tools to support their adoption and reduce implementation risks.
- Regulation, then deregulation – Used as a tool to drive action but acknowledge that the best outcomes will likely need to be a combination of reward and reprimand. Complex, overregulation or additive red-tape will create more barriers.
- Advocate for the incremental progress that’s been made to date but take big-bets in the future – Encourage co-benefits activities that deliver new employment opportunities, transform business models and strengthen the social fabric of countries.
It is important to note that these solutions cannot be to the detriment of recovering economies, nor overlook the people or businesses within developing countries.
Now more than ever, climate change is a priority for both corporate industries and government alike. Since the publication of KPMG and Eversheds report, this has accelerated the need for government to play a unique role in creating the right environment for industry to realize its ambitions and transform towards them. Clear, tangible action is required beyond targets and ambition.
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