In the wake of President Trump's decision to pull out of the Paris climate agreement, many businesses and city and state governments have committed to plans to decrease their greenhouse gas emissions. Beyond saving the environment, these commitments could also help companies mitigate competitive and reputational risks.
Friday, July 7, 2017
By Edward Hancox
Last month, the Trump Administration roiled the global environmental movement with an announcement that the United States would be withdrawing from the 2015 Paris Climate Conference (COP21) agreement on limiting greenhouse gas (GHG) emissions. However, almost immediately after this decision, many major corporations doubled down on their commitments to reduce their GHG emissions. Moreover, numerous state and city governments also broke with the President.
Often citing it as a “job killer” for American businesses, President Trump made withdrawing from the Paris Agreement a key part of his campaign speeches, claiming that the emissions-reduction goals set by the agreement put the US at a competitive disadvantage on the global market.
The GHG reduction commitments of major corporations seem to be a refutation of the President's core argument that GHG targets set within the Paris Agreement are inherently bad for business. While the GHG strategies of major corporations may come as a surprise to some, there are several motivating factors behind the pro-Paris Agreement movement.
Reasons for the Commitment to GHG Reductions
Proponents of the Paris Agreement frame it as the last best chance to curb the growth of greenhouse gas emissions, which are widely regarded as a major driver of global climate change. The goal of the Paris Agreement is to limit the long-term increase in global temperatures caused by human activity to 1.5°C - a level scientists believe will mitigate the worst of the projected effects of climate change.
Many companies officially recognize global climate change as a legitimate factor that will impact both the future of the world and company operations within it. In fact, ahead of the Trump decision, 25 major corporations purchased a full-page ad in the New York Times, the Wall Street Journal and other major publications urging the President to reconsider his withdrawal. Furthermore, as reported in the Times, a pair of prominent CEOs - Tesla's Elon Musk and Disney's Robert Iger - both withdrew from the President's economic advisory council in protest.
Businesses that want to maintain a competitive advantage for themselves within the global marketplace are also unlikely to change their energy policies. While the US may have withdrawn from the Paris Agreement, 195 other countries are still committed to the agreement, meaning that companies doing business basically anywhere else in the world outside of America will still have to deal with some level of GHG reductions.
Since companies will have to engage in GHG reduction activities regardless of the role of the US in the Paris Agreement, some CEOs feel that their companies should strive to remain at the forefront of emission innovation. For instance, following President Trump's withdrawal, in an interview with CNBC, Hewlett Packard Enterprise CEO Meg Whitman said, “This is not in the best interest of Americans. We need to own the next generation of jobs, and whether that's clean energy, 3-D printing or immunotherapy, this is an arena that America should lead and must lead.”
In addition to competitive risk issues, there are also reputational risk considerations for companies that do not maintain their GHG reduction commitments. Investor activism is a growing trend, with investors increasingly holding companies to account for their environmental activities. This trend was examined in some depth in a recent GARP Risk Intelligence webcast on supply chain risk, which explored how investors, including sovereign wealth funds, were insisting that companies meet specific anti-deforestation efforts set by the investors.
The bottom line is that most of the world (including numerous localities within the US) remains committed to climate change reduction activities. Consequently, boards of directors of companies that move away from existing GHG reduction commitments are likely to find themselves under increasing pressure from a motivated, pro-environment investor base. Companies that do not respond to such investor pressure may quickly find themselves at a competitive disadvantage, with their financial valuations reflecting this reality.
Edward Hancox is a vice president of GARP's ERP program.