By Stephen DeAngelis
As last year came to a close, the world held its 28th annual Conference of the Parties (COP) to the United Nations Climate Change Conferences (UNCCC). COP participants meet annually to discuss progress being made towards mitigating the worst effects of climate change and to commit to new actions. Concerning COP28, environmentalist and journalist David Wallace-Wells reported, “It only took 28 years. When Sultan Ahmed Al Jaber banged his gavel on the resolution text of COP28 in Dubai, it marked what has been widely called a historic achievement: the first time nearly every country on Earth agreed that oil and gas play a role in driving global warming, and the first time they nodded toward the need for a fossil fuel drawdown.”[1] However, agreement and action are two different things. Wallace-Wells observed, “For a historic text, the language was quite mealy-mouthed, since the resolution only ‘calls on’ nations to ‘contribute’ to ‘transitioning away’ from fossil fuels — and only in the energy sector.” So, what does this mean? Simply put, the world is going to continue to heat up and climate disasters will continue to wreak havoc.
The Costs of Fighting Climate Change
The editorial board of the Wall Street Journal (WSJ), which is not known for supporting green energy initiatives or encouraging the reduction of greenhouse gas emissions, wrote this about COP28: “The event has done the one thing such confabs are supposed never to do, which is expose the truth about climate change and the race to net-zero carbon emissions.”[2] And, according to them, what is that truth? The board writes, “[Countries] are discovering that no matter how hard they push on the net-zero string, costs never come down, green jobs never materialize to replace industrial employment, and the subsidy bill never declines. Meanwhile, Europe’s economies already are highly efficient in carbon emitted per euro of gross domestic product — and China and India keep building coal-fired power plants anyway. Developing economies don’t have the luxury of net-zero fantasies and understand they need fossil fuels for their people to enjoy rising prosperity.” The board is right about one thing, the cost of fighting climate change is high. Boston Consulting Group (BCG) analysts assert, “An $18 trillion capital gap exists between current commitments and the investments needed for alignment with net zero goals in 2030. Electricity and end-use sectors account for 90% of that shortfall.”[3] Of note, the 2030 goal has all but been abandoned. Most government and corporate Net Zero commitment goals have been pushed to 2050.
The WSJ editorial board insists, “No number of elaborate climate summits will persuade ordinary people to return to the darkness.” What they really mean is that people aren’t willing to pay the price for tackling climate change. So, where does that leave us? Doing nothing is also going to cost ordinary people in the long run. Rebecca Newman, a Senior Climate Risk Analyst with the Australian Prudential Regulation Authority, and Ilan Noy, a professor with at Victoria University of Wellington, insist, “Extreme weather events lead to significant adverse societal costs. … We find that US $143 billion per year of the costs of extreme events is attributable to climatic change. The majority (63%), of this is due to human loss of life. Our results suggest that the frequently cited estimates of the economic costs of climate change arrived at by using Integrated Assessment Models may be substantially underestimated.”[4] Unfortunately, based on historical norms, the WSJ editorial board is correct: People are much more likely to talk about fighting climate change than being willing to pay for the fight.
The incontrovertible conclusion is that the world must prepare to adopt to climate change. Governments, corporations, and individuals should seriously begin thinking about how to adapt to the effects of climate change. Gim Huay Neo, Managing Director of the Center for Nature and Climate at the World Economic Forum, writes, “For years climate change warnings have followed a similar pattern: act now to prevent catastrophic consequences in the future. … That message alone is not enough — we must also focus on the need to protect ourselves and our planet today.”[5] She adds, “Climate adaptation is key to our survival. … The longer we wait to focus on climate adaptation, the more lives will be affected and the more difficult and expensive it will be. The UN estimates that the current cost of meeting adaptation needs is $70 billion. By 2050, it could reach $500 billion.” In other words, pay now or pay later. And, who is going to pay, Neo writes, “Until now, climate adaptation has largely been considered the responsibility of governments, multilateral institutions and donor agencies. … But governments cannot do it alone. … The private sector must also step up — and there is a clear business case for doing so.”
The Business Case for Net Zero
Like Neo, BCG analysts conclude, “Financing climate adaptation and resilience (A&R) is an opportunity for businesses and private investors — not a burden.”[6] In a report entitled “From Risk to Reward: The Business Imperative to Finance Climate Adaptation and Resilience,” they make the business case for adaptation and resilience business case by laying out three key opportunities for the private sector to secure value. Those three opportunities are:
• The “Protect” Opportunity. “Companies can safeguard value at risk and protect assets, supply chains, and operations by implementing and financing adaptation and resilience measures. Lenders and investors can safeguard their portfolios by deploying capital toward resilient assets and companies.”
• The “Grow” Opportunity. “Investors can finance companies that develop adaptation and resilience solutions, and companies can invest in new adaptation and resilience product lines, creating climate-resilient revenue streams and thereby expanding the overall market of adaptation and resilience solutions.”
• The “Participate” Opportunity. “The private sector can collaborate with the public sector to finance and implement capital projects and deploy finance toward vehicles that support a portfolio of projects.”
McKinsey & Company analysts also believe a business case can be made for a Net Zero strategy. They explain, “A successful net-zero transition will require achieving not one objective but four interdependent ones: emissions reduction, affordability, reliability, and industrial competitiveness. A poorly executed transition could make energy, materials, and other products less affordable, compromising economic empowerment. It could also make the supply of energy and materials less secure and resilient, and it could render some countries and companies less competitive. If that happened, progress toward net zero itself could stall.”[7] To execute a successful Net Zero strategy, McKinsey analysts suggest organizations follow seven principles which, they believe, “could help the world reduce emissions while protecting affordability, reliability, and industrial competitiveness.” The seven principles are:
• Allocating spending efficiently.
Principle 1. Create incentives to deploy lower-cost solutions.
Principle 2. Drive down costs of expensive solutions.
Principle 3. Build effective financial mechanisms to drive capital where it is needed.
• Redesigning physical and energy systems.
Principle 4. Anticipate and remove bottlenecks for materials, land, infrastructure, and labor.
Principle 5. Revamp energy markets and planning approaches for an electrified world.
• Navigating risks and opportunities.
Principle 6. Manage existing and emerging energy systems in parallel.
Principle 7. Compete for opportunities created by the transition, using comparative advantage as a guide.
Concluding Thoughts
The last of the seven principles presented by McKinsey analysts is probably the most important one on which to build a business case. When Enterra Solutions® created our Enterprise Growth WarRoom™ offering, we understood that current and future trends would emerge faster than the ability of most organizations to adapt using existing tools and processes. However, as the McKinsey analysts point out, understanding how to compete for emerging opportunities in a changing world is critical for future success. The WarRoom capability addresses the need for increased corporate agility by analyzing the external factors impacting companies’ operations and developing system-generated recommendations for strategy development and execution. The doom-and-gloom attitude expressed by some will address neither the challenges created by climate change nor the need to adapt to climate change. Most companies now realize their future depends on their ability to help and to adapt.
Footnotes
[1] David Wallace-Wells, “What No One at COP28 Wanted to Say Out Loud: Prepare for 1.5 Degrees,” The New York Times, 16 December 2023.
[2] Editorial board, “The Truth About Net Zero, at Last,” The Wall Street Journal, 8 December 2023.
[3] Rebecca Fitz, Maurice Berns, Pattabi Seshadri, Asheesh Sastry, Jesper Nielsen, Ben Gottesdiener, and Betsy Winnike, “Bridging the $18 Trillion Gap in Net Zero Capital,” Boston Consulting Group, 20 November 2023.
[4] Rebecca Newman and Ilan Noy, “The global costs of extreme weather that are attributable to climate change,” Nature Communications, 29 September 2023.
[5] Gim Huay Neo, “It’s time to get serious about climate adaptation. Here’s how,” World Economic Forum, 15 November 2022.
[6] Veronica Chau, Qahir Dhanani, Nathanial Matthews, Charmian Caines, Trish Stroman, Rebecca Gibbs, Maxine Yee, and Pippa Fielding, “Why Financing Climate Adaptation and Resilience Is Good for Business and the World,” Boston Consulting Group, 6 December 2023.
[7] Mekala Krishnan, Humayun Tai, Daniel Pacthod, Sven Smit, Tomas Nauclér, Blake Houghton, Jesse Noffsinger, and Dirk Simon, “An affordable, reliable, competitive path to net zero,” McKinsey Sustainability, 30 November 2023.
