How Corporate America Can Support the Paris Climate Deal
Today not only marks Earth Day, but also an environmental milestone in the movement to tackle the increasing threat of climate change. The signing of the landmark Paris Climate Accord, reached by 195 countries, is worthy of recognition, but there is a complex two-degree question that still remains: how do we reach our reduction goals, given our voracious appetite for energy, our emission-creating destruction of forests, and our enormous methane emissions?
As a first step, governments must put frameworks in place to level the playing field, provide incentives, improve regulatory guidance, set targets and track progress. Then, the business sector can, and should, lead the way. Here’s why.
According to leading economist Michael Porter, in the U.S. business controls $20 trillion of revenues, followed by governments at $3 trillion and then civil society at $1 trillion. Business produces the majority of products and services that cause emissions through their production, transport, use and disposal. In fact, everything produced today has a carbon footprint. Take the example of deforestation (often for commodities such as lumber, soy, ranching and palm oil), which causes up to 17% of global emissions. However, much of our emissions are high because we have never had to design for or manage them.
Change starts with companies undertaking a lifecycle analysis of their products and services, and identifying material contributions to emissions. Let’s take the lowly cup of tea as a positive case in point. Sustainable tea farming that manages for reduced emissions ensures: the protection and regeneration of natural forests (which also preserves the rainfall the tea needs); plants in eucalyptus plantations to dry the tea (which reduce the use of nitrogen fertilizers); the use of FSC-certified paper for packaging and cellophane (versus plastic); the practice of low carbon transport; and finally, the education of consumers to boil only as much water as they need. The good news is that most of the world’s big tea companies, Lipton and Tetley among them, are working to make their supply chains more sustainable.
Industry, as well as investors, must move beyond a shareholder model focused on managing for a short-term share price to a stakeholder model with sustainability embedded in corporate strategy. Only then will we adequately manage risk and create value for the company and for society—and tackle challenges like climate change. Firms that place sustainability at the core of their business strategy will drive positive climate performance, create wealth while creating competitive advantage, reduce risk and create stable ecosystems that drive both ecological and corporate value.
For example, in the first 10 years of Dow Chemical’s campaign to reduce injuries and harm to the environment, Dow reduced solid waste by 1.6 billion pounds and water use by 183 billion pounds, and saved 900 trillion Btu (equivalent to energy usage of 8 million US homes in one year). Since 1994, Dow has invested less than $2 billion to improve resource efficiency, and has saved $9.8 billion from reduced energy and wastewater consumption in manufacturing.
GE’s commitment to investing in technologies that save money and reduce environmental impact through its Ecomagination program has resulted in similar financial benefits. At the end of 2013, GE (GE) had reduced greenhouse gas emissions by 32% and water use by 45% compared to 2004 and 2006 baselines, respectively, resulting in $300 million in savings.
A 2014 report by We Mean Business, The Climate Has Changed, shows that nearly 1,500 companies reported carbon savings of 420 million metric tons over two years through investment of over US$170 billion in low carbon projects. In the US, process energy efficiency measures get a high internal rate of return of 81%.
Environment, social and governance (ESG) metrics need to matter as much as financial reporting when measuring corporate performance. Mounting evidence shows that sustainable companies deliver significant positive financial performance, and investors are beginning to value them more highly. An extensive study by Deutsche Asset & Wealth Management and the University of Hamburg reviewed the findings of more than 2,000 academic studies assessing ESG and corporate financial performance since 1970 and found that only 10 percent revealed a negative correlation, while 62.6% showed a positive correlation. Additional research by colleagues at Harvard University found that firms with good performance on material sustainability issues significantly outperform firms with poor performance on those issues. These firms also experience more positive profitability margins.
With growing momentum among big banks, such as Citi (C) and JPMorgan Chase (JPM), which are substantially reducing their investments in coal, and institutions such as Yale University, which is applying carbon audit tools to make investment decisions, we are moving toward a new paradigm of profit, combined with principle and societal problem-solving, one degree at a time.
This Earth Day is indeed cause for celebration, but also a reminder that the work has just begun. Now, more than ever, marks a pivotal time for countries and companies to work together to reduce risk and increase the value to business and society at large.
Tensie Whelan is Clinical Professor of Business and Society and Director of the Center for Sustainable Business at NYU Stern School of Business. She is not an investor of the companies referenced in this article.