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COP26 is creating an impetus for business to act — here’s why

COP26 marks a watershed moment for the race to save the world from the worst of global warming — and industry will be expected to step up. 

With devastating floods and record high temperatures across Europe and the United States over summer, wildfires from Australia to Siberia, and rain recorded for the first time on Greenland’s ice sheet, the world is getting an unwelcome look at the early impacts of global warming.  

The Intergovernmental Panel on Climate Change believes human-induced warming already reached about 1 degree Celsius above pre-industrial levels in 2017 and has continued to climb an average 0.2 degrees per decade.  

This presents an enormous risk to mankind, with estimates an average temperature rise of 1.5 degrees or more will be accompanied by more drought, an increased risk of natural disasters, sea level rises and shifts in the global biome.  

And it’s the reason the Paris Agreement, a legally binding international treaty on climate change signed by 196 parties in 2015, committed countries to start reducing net greenhouse gas emissions, with the goal of carbon neutrality by mid-century.  

That treaty was signed at COP21 — more properly known as the 21st UN Climate Change Conference. We are now poised for COP26, which will run from October 31 to November 12 in Glasgow. 

At this critical juncture for the world’s climate future, COP26 once again has the opportunity to review international progress against the Paris Agreement and the UN Framework Convention on Climate Change, both of which demanded concrete action. 

Against the backdrop of increasing fear that the world is running out of time to prevent permanent and catastrophic change in our climate, COP26 represents a chance for governments, major industries, significant stakeholders and others to demand and, importantly, demonstrate swifter, more significant action than aiming for net-zero by 2050.  

Already, a number of countries have set tougher targets and big business is increasingly taking up the baton. But will this latest wave of climate-saving activity be fast and broad enough? And what can we do to speed it up? 

Why is COP26 so important? 

The focus on COP26 not only reflects growing international alarm about the impacts of climate change but also the increasing importance of the environmental aspect of ESG in the business landscape. 

ESG describes the environmental (E), social (S) and governance (G) performance of a business and how that performance might be tracked, measured and reported. 

Pitcher Partners Melbourne Principal Consultant Chris Gibson argues that while each aspect of ESG is important, the environmental aspect will likely require the greatest effort from businesses to overcome and this challenge would shape boardroom conversations for years to come. 

“The term is broader than just talking about sustainable business practices or corporate social responsibility,” Mr Gibson says.  

“(It) builds on the convergence of a range of big and important societal issues that have led consumers and investors to focus more closely on the actions and practices of the businesses they interact with.” 

These included the impacts of climate change, as seen through events like bushfires across Australia and California, summer floods in Europe, as well as social issues such as sexual harassment and abuse, racial inequality, and modern slavery, and practices such as profit-shifting and the off-shoring of funds. 

For bigger businesses, the focus COP26 brings to climate change issues will be a chance to talk up the actions they are taking to reduce emissions in their practices and supply chains. 

“There’s been a growing movement of the world’s largest companies towards strong, earlier targets designed to avoid any punitive measures based on their emissions, as well as using these announcements to promote their public ESG stance,” Mr Gibson says. 

“The goal for multinationals is to counteract the combined risks of reputational damage, shareholder activism and even the withdrawal of investor or financier funds.” 

Big business taking the lead 

Increasingly, we are seeing big business lead the charge towards tougher targets and faster action on climate change. For most, it’s a pragmatic response to both immediate and longer-term risks. 

The Climate Council cites research estimating the global economic cost of climate-related disasters – through disrupted economic activity, lost productivity and health impacts – at A$272 billion in 2020.  

It warns this figure will rise exponentially to a potentially eye-watering A$24 trillion per year by 2100, if we fail to rapidly cut emissions over the next decade. 

More immediately, Baker Tilly, Netherlands Senior Consultant in Corporate Finance, Matthias Havenaar, says the prominence of climate change in the global public debate is already changing customer behaviour, regulatory requirements and shareholder demands. 

“These changes pose a risk to businesses if they are not addressed,” he says. “But changes also create opportunities. 

“Companies need a framework and a strategy to deal with changing global environmental and social circumstances. Where, previously, topics such as sustainability and corporate social responsibility were seen as important, many businesses lacked a clear framework, unclear KPIs and mechanisms for accountability and transparency. 

“What is exciting is that Baker Tilly is increasingly helping our clients to develop ESG frameworks with clear goals and the ability to measure their progress. 

“This clarity also helps to level the playing field between organisations because they all report in the same way and that consistency of approach helps to protect against ‘greenwashing’ by businesses that aren’t in fact making as much progress as they should.” 

It is not just an external-facing value proposition, however.  

Mr Havenaar says employees increasingly want to work for organisations they can be proud of, with high ethical and environmental standards. This gives businesses an opportunity to establish a competitive advantage in recruiting future workforce.  

Investors are also demanding the implementation of strong ESG standards. 

“People only want to invest in companies which have a positive impact, rather than organisations that have a negative impact and, as a result, might end up with stranded assets down the line,” he says. 

Investor concerns motivating change 

Investment in sustainable assets was estimated at around $US35 trillion globally in 2020, up 15% in the previous two years and representing more than a third of all professionally managed assets. 

While the definition of ‘sustainable’ is subject to debate, Corporate Finance Leader Julie Haeflinger from Baker Tilly Strego, in France, says the environmental performance of organisations will increasingly influence investor decisions and business valuations. 

Companies will be compelled to provide information that provides transparency beyond traditional financial performance. 

“For example, we’ll be able to see the difference between companies which have decided to engage by transforming their business model in order to face climate change, and that have not,” Ms Haeflinger says.  

“Investors will now have access to that information, like turnover CAPEX and OPEX, to help them choose between companies that are already engaged and those that are facing risks in terms of performance. 

“From now on, investors will be very interested in knowing a company’s ESG considerations and how they are taken into account in the company’s business plan. It definitely makes a difference when investors are looking at companies within the same sector. 

More regulation and pressure from investors are making it clear that businesses have to transform in response to climate change. Those that don’t will face the consequences in terms of risk and reduced value. 

A consistent but tailored response 

Baker Tilly is helping its clients respond to the climate change challenge, among others, by developing clear ESG frameworks that apply consistent standards and measurements while meeting their individual commercial objectives. 

Rather than a separate bolt-on, a good ESG framework is integrated with the financial considerations of a business and incorporated into its overall strategic approach. 

As COP26 refocuses the attention of governments and regulators on greenhouse gas emissions and the inevitable regulatory changes follow, we are also assisting our clients to identify and manage related risks and opportunities. 

For example, new regimes for reduction of greenhouse gas emissions, carbon taxes, emissions trading or the less obvious impacts of new regulations on supply chains that might be located in another country. 

Or advances in climate-friendly technology that may disrupt the market or present new investment opportunities. 

According to Alan Fustec, whose company Goodwill Management has recently joined forces with Baker Tilly Strego, in France, there is no bigger issue for mankind than sustainable development and how business responds in the next 10 years will be critical. 

“The company today that says, ‘Okay, I will think about these subjects in 10 years or in 20’, faces a very high risk,” he says.  

“Between 2020 and 2030, everything is going to change. We are going to be obliged to change the way we do business to meet the requirements of sustainable development. To me, it is absolutely obvious.” 

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