Most of the top 500 companies in the world are now benchmarking themselves against their peers on climate change and carbon performance. Ernst & Young has examined how companies prepare for a transition to a low-carbon economy and the challenge of making sustainable growth compatible with business models?
Key findings of the Ernst & Young Report report include the following:
Energy costs are still the primary driver of abatement efforts.
The carbon policies that have been implemented by governments over the past decade have given carbon a value. At present, however, the price of carbon is in general still too low to encourage companies to embark on major abatement initiatives.
For now, companies are mostly pursuing inexpensive emission reduction measures with reasonable payback times. But as carbon becomes an increasingly limited and expensive resource, companies must rise up the cost curve and attempt more radical abatement efforts.
Regulation has encouraged many companies to put in place carbon management strategies.
Many companies have implemented, or further developed, their carbon management strategies and incorporated carbon into management reporting and investment decision-making processes.
Companies are also responding to pressure from investors and other stakeholders, who are starting to benchmark companies on their climate and carbon performance. This trend will continue to grow as new carbon regulations emerge around the world.
Improved carbon disclosure has helped to increase awareness and transparency of climate change issues.
The Carbon Disclosure Project is an important development that engages companies in the climate change debate, and stimulates them to develop carbon strategies and infrastructure. In addition, a growing number of multinationals are putting pressure on their suppliers to do the same.
Cap-and-trade schemes have had little positive financial impact on corporates, but this will change.
The effect of carbon markets on the bottom line of companies depends greatly on the maturity of the specific market and the allocation methodology. Schemes, such as the EU ETS, are usually divided into distinct phases, which allows for market improvements.
During the first two phases, there has been limited or positive impact on corporate financials. But as allocations become more stringent, the gap between high-performers and low-performers will widen.
Climate change represents an important opportunity for business, as well as a risk.
As consumer behavior changes and regulation becomes more stringent, many companies will have an opportunity to develop new services, products and investments that are appropriate for a carbon-constrained world. Companies that think early about longer-term opportunities will be the first to create value from them and achieve a long-term strategic advantage from climate change.
Companies must adapt to a carbon-constrained world.
Most companies are now pursuing inexpensive incremental measures to adapt to climate change. Over time, however, a much greater shift in mentality will be required to prepare for a carbon-constrained economy. Companies will need to consider how to make sustainable growth compatible with their business.
The impact of carbon on corporate decision-making
It is, however, important to note that cost is not the only carbon-related consideration:
- Regulatory clarity and uncertainty
- Costs and benefits
- Stakeholder pressure (shareholders, investors, consumers)
- Risks and opportunities
These drivers and their effects on business strategy are discussed in the full document from Ernst & Young here