Corporations must (& will) more forcefully call for policies which actually achieve Net Zero
With just over 2 months to COP26, the clock is ticking for active support
If you are attuned to stories that underscore how the climate is warming, there have been plenty to choose from of late. Wildfires in California beyond any historical precedent, hurricane Ida flooding Louisiana and killing New Yorkers with its remnants, perturbations in the jet stream, not to mention floods in Germany, and a largely spoiled vintage of French wine due to fires.
Business leaders stereotypically are not among those who pay disproportionate attention to climate news. Weather, even outlier weather, is a market phenomenon that creates risk and opportunity. Disruptions in supply chains due to transient issues, whether human-made through war or naturally-induced through natural disasters are planned, insured, and navigated through commodity markets, operational flexibility, financial instruments and contracts. Concern over a changing climate is an attitude amongst a consumer segment that must be addressed through product development, responsible policies, and, at times, PR. Investor concerns due to multiplying risks is addressed through disclosures and investor relations, and regulatory bodies consider issuing new rulings on mandatory disclosures. Companies band together to lobby for policies that are favorable to them. Even as evidence piles up that climate change, beyond being a “mega-trend” of consumer attitudes, is actually going to affect operations in ways that are far beyond near-term forecasts, most companies operate within their framework of quarterly and three year plans. Operating budgets are formed, debated, and maintained. Hiring plans are thrown out of kilter through the impacts of a pandemic on consumer demand and labor markets. New product introductions continue quarter after quarter, and sales incentive plans are made or missed.
In other words, most businesses, are made up of functional practices: supply chain, sales & marketing, customer service, HR (also frequently christened “people team”), finance and so forth. Whether at large companies or startups1, these functions operate as they always have, their day-to-day filled with achieving goals set that cascade to an overall set of company goals. In most successful companies, a strategy team, board or forward-thinking CEO will look over the horizon and figure out where the company needs to march to over a longer time scale. Investors often catalyze these discussions and push for a crystallization of long term strategy.
And yet, even today, most long-term strategies are not centered around climate, nor do they acknowledge the centrality of climate and the related issues. The fundamental changes and the time frame involved are too different from the bedrock of how company planning is done. Faced with a discussion of whether the world will be 1.5 degrees or 2 degrees warmer in 2050 and how company plans should revolve around these scenarios is beyond the comprehension of nearly any company. Many companies (whether immense or startups) will no longer exist in 30 years, and certainly there are very few executives or leaders who can count on their own employment that far out. Most compensation, even if tied to so-called long-term-incentive plans, will not be tied to any single company’s performance in 30 years. So executives, focused on growth and profitability, understandably cannot link how today’s fires, floods, storms, and crop failures link to their own careers. They may feel deep concern personally, and may have children and grand-children about whose living conditions they are deeply worried - but the levers of control they have at their own company feel (and are) so unlinked from the outcomes of global warming that they cannot justify pulling hard on those levers today. And indeed, they are right that they cannot individually influence global markets. As several oil company CEOs have pointed out, if their individual companies stopped drilling tomorrow the world’s internal combustion cars would still demand oil, and someone else less principled would pump more. This is the definition of a commodity market.
So in this dire situation, where many company executives are sorely concerned as individuals but uncomfortable or unconfident that they can act on behalf of their companies (and in fact, they would likely be rapidly fired by angry shareholders if they started doing uncompetitive and unprofitable things like cutting emissions far faster than competitors in ways that were not economically optimal), what are we to do? What would we have these corporate leaders do? How do we escape from this equilibrium of inaction?
To me the answer is clear. Only policy can save the day, but they can influence policy. They should devote their companies’ lobbying efforts to explicitly support legislation and regulation which is designed to create a level playing field and which is guaranteed to get net emissions to zero by 2050. Instead of seeking advantage, they should spend the next two months before the COP26 meeting in Glasgow focused on demanding national governments support carbon scarcity. There are many mechanisms - standards (like the US CEPP to get dirty power out of our electricity markets and replace it with clean power), cap & trade policies (like the once-toothless but now very successful EU ETS or the nascent and as-yet toothless Chinese market), CBAMs designed to reduce emissions leakage from imports into less ambitious geographies, and on and on. But the details are far less important than the visible and loud support of corporate leaders for ambitious policy that is effective, efficient and equitable. There have been plenty of group meetings and letters from corporate leaders who support policy changes such as ambitious NDCs2. Suited corporate leaders are not known for their activism, least of all in asking for costly regulation. But they cannot begin to act until rules and markets support their actions - and so it is long past overdue for them to begin to engage in corporate activism. The best positioned for carbon advantage (those whose cost structures are likely best positioned to deal with the transition over the coming decades) will be in the vanguard, but they will not be alone. To date, there has been a significant mis-match between many companies stated ideals / Net Zero plans and their lobbying efforts, but this gap will close.
Politically, the climate is changing. Looking at the news (or the IPCC report), the climate is changing. In board rooms, the climate is just beginning to change. But it’s time for leaders to grasp the economic reality of climate. If equity markets and financial markets are in disarray in decades, it won’t matter which stocks you own - the whole world (including your kids) will be far poorer. It’s time for them to put effort behind the rules which will allow them and all their peers & competitors to do what’s needed to actually cut emissions.
Let this serve as my encouragement of corporate leaders and call to action that the time has come to take a far louder and more forceful voice calling for NDCs and the policies to give them teeth - to ensure that they succeed. Investors should take companies to task and audit what their lobbying efforts have been with regards to NDCs, carbon scarcity, and climate policy overall.
Policies work, and with the support of business leaders & investors, those policies can become a reality which address the root cause & change the trajectory of the climate.
Obviously the pace and ambiguity feel different at a startup vs. a Fortune 100 company, organizational bounds are less well-defined, and companies are redefined in the blink of an eye as they “pivot”. But the basic dynamic of commercial goals (even if couched in terms of “changing the world”) are still the order of the day - whether big or small, you focus on the success of the company.
The letter from more than 400 companies in April to President Biden is a clear example of support asking for NDCs (a commitment or goal) and policies which back it up. This letter from more than 450 investors representing more than $40T of assets calls on G7 nations to not only create NDCs which “get us to the goal line” but calls for specific policies including carbon pricing (which all economists know are the least costly way to get us to the goal line, but which have proven to be politically kryptonite).