Countries have joined thousands of scientists in reminding the world that climate change is a growing risk that is already affecting lives and livelihoods. They warn in the IPCC Fifth Assessment Synthesis Report that we need to reduce global greenhouse gas emissions quickly – by 40 to 70 percent by 2050 – to stabilize rising global temperatures and avoid the most serious economic damage.
Businesses and governments know this. They know how to cut emissions through energy efficiency, renewable energy, and sustainable land use, and they can leverage the money needed to finance a low-carbon transition.
The question is how to change economic incentives and disincentives so they can turn that knowledge into action that has a measurable impact on climate change.
It’s a challenge that forward-thinking investors, government officials, and business leaders are taking up. We spoke with business leaders during the World Bank Group/IMF Annual Meetings about solutions, particularly about carbon pricing policies that could incentivize low-carbon choices.
The executives – including from pension funds AP4 of Sweden and ERAFP of France, the international asset management firm Amundi, and the global technology company Alstom – talked about the need for consistent, meaningful carbon pricing; flexible policy frameworks that allow for innovation in how businesses lower their emissions; links between the diverse carbon pricing systems being developed around the world; and complementary policies, such as binding targets for energy efficiency and renewable energy.
They also discussed the importance of corporate disclosure of climate risks and greenhouse gas emissions to help investors and business leaders direct capital toward low-carbon choices, and the impact that requiring disclosure could have.
Capital is available to finance the low-carbon transition, they said, but it will not flow at the levels needed for the long-term until governments provide consistent and credible policy signals.
“We have to start reallocating money from the bad to the good,” said AP4 CEO Mats Andersson, whose pension fund asks the companies it invests in to report on their emissions and climate change risks. “We see many companies taking this very seriously and putting it into any investment case they have.”
Lowering emissions starts with risk assessment. It’s a concept basic to business practices and economics: calculate today what emissions will cost your business or community tomorrow and act accordingly.
For investors, however, that risk can be obscured when companies don’t report climate risks, such as the vulnerability of their supply chains and assets to natural disasters, resource limitations tied to climate change, and the impact of climate policies or mandates. A growing number of investors are encouraging companies they invest in to disclose their climate risks and carbon footprints to improve the companies’ and the investors’ decision-making.
Requiring climate risk disclosure, starting with public pension funds, would be in governments’ best interest, said Frédéric Samama, deputy global head of institutional and sovereign clients at Amundi. Governments should be asking themselves if public pensions funds are investing in polluting companies that will ultimately costs the country, its citizens, and its budget, and they ask why, he said.
Reporting is also connected with behavioral finance, noted ERAFP CEO Philippe Desfossés: If you have evaluations every six months or every year, and if reporting is present in daily corporate monitoring, it becomes an issue business leaders will act on.