2014 bsd-session 14

MGT 620: Business and Sustainable Development

Dr. Trupti Mishra

SJMSOM, IIT Bombay

Session 14: Climate Change and Private Sector

MGT 620, Spring 2014

Session Questions

• How will policy responses to climate change affect firms?• What are the new opportunities created by climate policy (CDM,

carbon finance)?


What’s the Policy on Climate Change?


• Earth Summit • Kyoto Protocol • World Summit on Sustainable Development


In Response

Some businesses have adopted carbon mitigation programs and actively engaged in climate change policy making, while other businesses are still in a preliminary phase to manage carbon and relatively apathetic to climate change policy making

Traditional dilemmas between environmental regulations and corporate responses to the regulations-

Opponents contested that imposing caps on GHG emissions will negatively impact organizations’ economic performance by incurring costs on the process of production and deliverance.


In Response

Energy intensive sectors showed strong opposition to the Kyoto Protocol individually or by joining the organizations such as Global Climate Coalition particularly after governments adopted the Kyoto Protocol in 1997

Companies such as BP, Shell, and Toyota changed their approach in favor of climate measures


Types of corporate responses to climate change regulations

Types Extent of influence in regulation Main Characteristics

supportive Active -Support of climate change measures to reduce emissions

-Pressuring international or national policy regime

- Request for a long-term, global climate change regime

defensive Active -Opposition of Kyoto’s global emission reduction approach

-Doubts on scientific evidence about climate change

-- Advocacy of voluntary approach to reduce emissions

neutral Inactive -Appreciation of climate change issue- In favor of voluntary initiatives and programs, but lack of active engagement in both carbon reduction programs and policy-making process

Climate Change as Economic Threat

- CO2 limits threaten oil, coal, auto industries, other energy intense sectors (aluminum, cement chemicals, malls)

- New technologies threaten corporate assets, capabilities

- Ideological challenge: “they think we are having too much fun, they want us all to live in beehives” (Auto industry exec.)

- political threat: rise of international environmental bureaucracy, NGO pressure

1. Direct cost impact: cost of fuels and power, allowances

2. Indirect Costs: product and process changes, IT systems and personnel.

3. Carbon mgt and cost control: fuel switching, efficiency, process improvements, logistics

4. Corporate Branding and Product Differentiation: at corporate, facility, product levels

5. Demand impacts: e.g. fuels, lighting; cleantech; software, services

6. Strategic impacts: competitive positioning, innovation, competences

7. Carbon trading

Climate Change: The Single Most Important Strategic Issue Facing Business in 21st Century


Potential Effects of Climate Change on Selected Sectors

Electric Utilities

Peak electricity demand due to warmer and more frequent hot days could in some regions exceed the maximum capacity of current transmission systems and will be combined with system stresses due to heat

Increased risk of damage to facilities and infrastructure from extreme and unpredictable weather conditions

Uncertainty over energy output from hydroelectric plants due to potential water shortages

Uncertainty over water supplies for cooling power plants



Mining

Extreme weather events increase physical risk to business operations, for example due to flooding

Integrated Oil &Gas

Negative business impacts due to weather changes and natural disasters

Food, Tobacco, &Beverages

Risk of food supply and operations interruptions due to extreme weather eventsLonger term weather trends may affect reliability (and quality) of supply of fresh producePhysical risk to water supply and raw materialsGreater risk of animal infections (e.g., avian flu), insect infestation, plant disease, wildlife damage, etc.



Building Design & Construction

Extreme weather events may disrupt transport for site deliveries and affect site work (e.g., muddy site conditions), restricting work-days

Infrastructure (e.g., drainage) affected by extreme weather events

Excessive heat in summer will affect some construction processes and onsite workforce

Design standards may need to be clarified or upgraded in response to changing climate

Insurance may be more expensive or difficult to obtain for existing buildings, new buildings, and during the construction process



Insurance

Increased need to develop catastrophe models to evaluate capital adequacy and overall natural catastrophe exposure

Disruptions to business operations become unpredictable and more financially relevant

Competition for water resources between agricultural and urban developments increases commercial risks with impacts on crop insurersIncreased risks to human health (thermal stress, vector-borne diseases, natural disasters)

Prolonged periods of poor weather or extreme events increase costs of claims and make it more difficult to deal with high volumes of claims



AgricultureMore refrigerated distribution and storage required and problems with livestock transportation in summer heat

Damage to transportation infrastructure or disruptions in services due to floods, etc. creating problems with transporting raw materials

Limited availability of water and potential interruption of supply to irrigation systemsEquipment and other investments, as well as expertise of farmers and workforce, are linked to specific crops, which may become unprofitable or may no longer be viable



Agriculture

Quality issues: overheating of grain, or availability of water for pre-washed productsAccess to land during flood or extreme rain conditions

Less frequent frosts will affect quality of certain crops and reduce kill-off of pests/disease

Exposure of workforce to increased heat

Farm buildings affected by extremes of wind, heat, rain (animal welfare issue)



Motor Manufacturing

Supply chain interruptions and vulnerable transport systems carrying high value products around the world (e.g., one ship carries over $60 million of product)

May need vehicles that tolerate new extremes of climate, including greater intensity of rainfall (affecting seals, wipers, tires) and increased need for cooling

Process environment will become hotter with increased need for cooling—particularly important for comfort/health of workforce and performance of production processes

Increased drying time for painted products as a result of increased humidity

Climate change and Business Risk

• Physical• Regulatory• Shareholder• Litigation • Reputational


Climate Change and Business Risk


• Extreme weather disrupt the supply of certain product and affect the revenue - negative impact on reputation – create a demand for local sourcing

•Adverse impact on data center due to climate flooding – Banking company

•Energy company- rising temperature would affect the operation of power plant

•Banking sector- more investment by companies for rising sea level

Boost to Business


More than 40% of companies look forward to a growing demand for their services as a result of climate change.

Construction companies in some regions of Europe might benefit from a warming climate. “Shorter and milder winters with less snow and cold can increase the productivity at some construction sites, as construction activity may experience less potential delays due to snowfall”,

Boost to Business


Adaptation is key to maintaining the health of corporate finances. “Through the development of financial instruments such as catastrophe bonds, especially for regions of Africa which are particularly impacted by climate change, the financial risks posed by natural disasters and droughts can be avoided”, says Barclays, the banking group.

“Industry environmental transparency and performance is today a prerequisite for attracting new investments and creating new jobs – there’s increasing evidence of the links between how well a company manages environmental and climate issues and its financial performance or access to capital.”

• Tackling climate change could create opportunities for a company to increase its value by up to 80%if it is well positioned and proactive. Conversely, it could threaten up to 65% of value if the company is poorly positioned or a laggard.


Risk leads to opportunity

• Perceived regulatory opportunities tend to involve providing new products and services to customers - Alstom today is uniquely positioned versus its competitors to provide clean power and transportation with a variety of solutions to help its customers meet new regulatory requirements related to climate change.

• Regulation provides particular business opportunities for the financial sector. This sector has low direct emissions but exerts a powerful influence both on future prospects for energy-intensive sectors and on the growth of new low-carbon business areas.



• Regulation leads to emergence of new business areas. Google reported: “Google sees an opportunity to help raise awareness about the physical changes to the Earth's climate through Google Earth and other products.


• Secondary impacts from climate change, such as biodiversity loss and changes to disease patterns are typically seen as a business risk. However for companies which specialise in these areas they can also be an opportunity.

• For example, GlaxoSmithKline reported: “GSK’s existing product portfolio of asthma and other respiratory disease products, antibacterial, anti-depressants, anti-malarials and vaccines, including one that targets rotavirus, (the leading cause of infectious diarrhoea in the world), will help governments to address some of the projected impact of climate change on disease burden. New medicines are needed for the treatment and, ultimately, prevention of diseases most susceptible to climate change.”



Opportunities

Market Opportunities• Demand for increased resilience – increase demand for product

and services suited to new climate – heat resistant ,water proof, not dependent on water, power

• Demand for climate risk solution – monitor, measure risk, provide expertise, drainage, greening project, insurance

• Changing taste, lifestyle and consumer behavior – food , drink, extended tourist season


Opportunities

Production opportunity• Existing process – may be more efficient (e.g, extended growing

seasons. Fewer construction stoppage)

• New process – use of cold/hot sensitive equipment, new crops, locally sourced exotic fruits, more timber production with rsing co2 level

• Adapting better to threat – feasibility and R& D for new product, technology, new marketing activities,


• The opportunities and risks are driven by shifts in consumer behaviour,

• technology innovation and regulation.

• Regulation is usually the key initiator of change although the cost of carbon is not the decisive factor in many sectors.


Drivers for Corporate Action on Climate Change

Regulation

NGO pressure: Carbon Disclosure Project

Market opportunities – clean tech, carbon trading

Corporate branding – GE’s Ecomagination, carbon labeling

Voluntary action – pre-empting regulation, baselines


• Transformation: both value-at-risk and opportunity are high. This will transform the nature of the business as players adapt to a new mode of competition. Auto and Aluminium are examples from the sectors studied.

• Downward demand shift: the value-at-risk is significant and reflects a downward shift in demand in the sector. Value creation opportunity is low in the core business area (but could be significant in adjacent business areas). Oil & Gas is an example.


• Upward demand shift: the value-at-risk is low, but there is considerable value creation opportunity in capturing an increase in volume for the sector as a whole. Buildings insulation and Consumer electronics are examples.

Volatility: the value-at-risk and the opportunity are relatively low, reflecting only a modest likelihood of significant long-term impact. However, short-term cost impacts or demand changes could cause volatility in earnings. Beer is an example.



There’s NO Business like CO2 Business

Investment to reach 450 ppm, 20 goal estimated at $500 billion/year worldwide, 80-90% from private sources

Global carbon market: $136 bn , 8.2 bn tonnes C02e

$80 bn of US stimulus package for clean tech

Clean tech 12.5% of US VC funding $8.2 bn.

Global investment in clean energy $145 bn

Green Jobs

14,400 Mass. Jobs14,400 Mass. Jobs43% Energy Efficiency43% Energy Efficiency28% Renewable 28% Renewable EnergyEnergy28% Consulting & 28% Consulting & SupportSupport1% University 1% University ResearchResearch

Funding for CleanTech

“smart grid”

subsidize loans for renewables, efficiency

state efficiency and clean-energy grants

weatherize modest-income homes

buildings energy efficiency for advanced batteries

for mass transit

for high-speed rail

in tax incentives and credits

Measuring and managing carbon is big business

- Enterprise Carbon Mgt software: Logica, EnerNOC, SAP etc.

- accounting, consulting, legal firms

- carbon trading

Energy Efficiency

Potential for $1.2 tn gross energy savings through 2020Upfront investment of $520 bn neededEnd-use demand reduced by 23% in 2020.Reduced GHG emissions of 1.1 GtC02e/year

By sector: end-use efficiency potentialResidential: 35%Industrial: 40%Commercial: 25%

Carbon Risk and Trading

Evaluating carbon risk in financial analysis

Carbon accounting/pricing for trading, derivatives, offsets

Loan portfolio risk for banks

Market for green mutual funds, ETFs

Venture capital risk/returns


Overview of Registered CDM Projects

• As of April 2011, more than 2100 projects are registered as CDM projects. China continues to dominate with a share of more than 36 percent, followed by India (23 percent), Brazil (8 percent), Mexico (5 percent), Malaysia, Indonesia and Philippines.

• In terms of the expected average annual CERs from the registered projects, China is likely to get almost 60 percent of the total CERs, followed by India (12 percent) and Brazil (6 percent).


Distribution of Registered CDM Projects across Host Parties


Overview of Registered CDM Projects

• In terms of the regions, Asia and Pacific countries dominate the CDM projects with a lions‘ share of more than 75 percent. Latin American countries come next with close of 22 percent of the registered CDM projects. African countries are still to make their presence felt through CDM projects.

• While the large projects continue to dominate (56 percent of the total CDM projects), the thrust given to the small-scale projects is showing results with a considerable improvement in the share of such projects over time.



Europe in general is investing largely in the CDM projects.

Close to 80 precent of investor parties of the registered projects are fromEurope. Japan, Canada and Australia are other major parties in terms of theCDM investments

Distribution of Registered CDM Projects across Investor

Parties

Distribution of Registered CDM Projects across Investor

Parties


Distribution of Registered CDM Projects According to Sectoral

Scope


• Some of the projects belong to more than one sectoral category.

• The highest number of projects (61percent) have been registered under ‗energy industries‘ (including renewable and non-renewable sources), followed by ‗waste handling and disposal‘ (18 percent).


Distribution of Registered CDM Projects According to

Sectoral Scope

Strategic Dilemmas for Business

- First mover advantages vs. risks of early investment - High uncertainty re science, policy, technologies, markets - Dangers of new products and markets - Reputational impact - Seat at policy table, political positioning - Hedging strategies - Risk of policy fragmentation - Risk of major climate crisis, war-time mobilization

The Grand Carbon Compromise?

- Carbon Coalition: business, gov’t, NGOs - reliance on “win-win”, low carbon prices - central role of carbon trading, flexible measures - protects core business interests - stabilize emissions in first 5 years - policymakers driven by ‘competitiveness’ - NGO reliance on carbon disclosure


Session References

Mckinsey &Co Report on “Climate change – a business revolution? How tackling climate change could create or destroy company value”.

Business Beyond Copenhagen: Low-Carbon Strategies in an Uncertain Era, David L. Levy , University of Massachusetts, Boston

Technology

2014 bsd-session 14