Material Change? What Does the Paris Agreement Mean for Business?

black and white chessboard with globe on top

COP-21 is behind us and there is a new Paris Agreement in play when it comes to climate change. A huge amount of hype built up over the two weeks of the Paris negotiations, and we are already beginning to hear the rhetoric about how the Paris Agreement sets the world on a new green-growth course.

The Paris Agreement is full of ambition. It also contains ambiguities and hortatory calls for action, as opposed to a concrete, enforceable path forward for limiting climate change to 2oC, much less 1.5oC. The agreement hardly even mentions carbon pricing, which many observers have concluded is an indispensable tool if we want to achieve the agreed-upon targets. It’s easy to argue that the Paris Agreement may not end up meaning much for climate change policy.

From a business perspective, however, there is no question that the climate chessboard has shifted during 2015. The Paris Agreement is the culmination of the evolution we have seen take place this year. Two very important things have shifted when it comes to business risk (and opportunity):

  • The gap between “actual policy” and “policy ambition” has widened considerably. For years now international policymakers have characterized 2oC as the threshold for “dangerous anthropogenic interference” – the “legal” (but undefined) limit specified in the United Nations Framework Convention on Climate Change (UNFCCC). Post-Paris, that number is now 1.5oC. The difference in these two numbers goes far beyond a half degree of temperature; the required emissions reductions to achieve that extra half degree are hard to envision. If we think of the gap between current business-as-usual and the 1.5oC objective as the string of a crossbow, that string is now drawn about as tight as it ever could be.
  • After Paris, the business community “owns” the climate change issue much more than it has before. Business leaders maintained a high profile on climate issues leading up to COP21. Thousands of companies and business leaders signed letters or otherwise participated in calls for carbon pricing and climate action. The higher level of public involvement has raised public and government expectations regarding the responsibility of the private sector to help address climate change.

These two changes affect the strategic positioning of the business community on the climate chessboard. The Paris Agreement objective of limiting atmospheric temperature increases to 1.5oC has changed the risk and opportunity business scenarios associated with climate change. This change needs to be reflected in corporate scenario planning. Just imagine the business implications if governments actually try to implement the 1.5oC target! That scenario is by no means an assured — or even particularly likely — outcome of COP21. But there is also little question that the probability one might reasonably assign to the idea that countries will transition to a low-carbon path sooner rather than later is higher now than it was before COP21. That has potentially enormous business implications.

By “owning” the climate issue, businesses have taken on an implicit responsibility to act that they did not have before. That responsibility suggests we will see more risk assessment and risk disclosure in the near future, and that there will be more brand risk and CSR risk than we saw before 2015. It could translate into heightened litigation and other risks as well.

Many COP21 post-mortems will focus on the weaknesses of the Paris Agreement. But many businesses realize that the magnitude and nature of risks and opportunities associated with climate change (and potential climate policy) have shifted materially during 2015.

 

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