Private sector key in fight against climate change

Private sector key in fight against climate change

It has been two months since the world celebrated the signing of the Paris Agreement, a landmark accord designed to prevent the catastrophic warming of our planet. 

Since then, one thing has become clear: Realizing the ambitious targets set out in the accord - which include deep cuts to greenhouse gas emissions - is going to be expensive. Developing countries alone will need $100 billion in investments annually to cope with climate change. 

That is hefty bill for national governments to foot on their own. That’s why the private sector must play a crucial role in the fight against climate change.

But why should businesses, whose main responsibility is to their shareholders, care about climate change? The answer is simple: A growing number of studies show that it would be disastrous to their bottom line. If global temperatures jump four degrees by 2100, droughts, flooding and ferocious storms would wreak financial havoc on businesses large and small.

A study by CitiGroup found that excessive warming could shave up to $72 trillion off the world’s gross domestic product. A four-degree Celsius jump would batter sectors like agriculture, real estate and logging. Shareholders, especially those with emerging market equities, would suffer as well. The environment for businesses would be toxic.

In fact, some companies are already starting to feel the pinch. Earlier this year, the CEO of Unilever - which had $52 billion in sales in 2014 - turned heads when he said natural disasters linked to climate change cost his company about $330 million a year.

For years, companies around the world bristled at the idea of going green. Their argument: We just can’t afford it. However, a dramatic plunge in the price of eco-friendly technologies - especially renewable energy - and the rise of carbon pricing - which charges firms for releasing greenhouse gases - has changed that calculus. Companies are now flocking to climate-smart investments, not only because it’s morally the right thing to do, but because it adds to the bottom line.

A recent study of 1,700 leading international firms found the money they put into reducing greenhouse gas emissions saw an internal rate of return of 27 percent - a clear indication that those investments are paying off. 

Results like that have caused many firms to embrace the prospect of a greener future. In Paris, thousands of companies threw their support behind carbon pricing as a way to create jobs, encourage innovation and deliver a meaningful reduction in emissions. 

Like any disruptive force, climate change is creating opportunities for companies willing to innovate. A report by the International Finance Corporation (IFC), for example, found that Eastern Europe, Central Asia, the Middle East and North Africa could support up to $1 trillion in climate-related investments by 2020.

Globally, one area especially primed for growth is renewable energy. Many countries have set ambitious targets for wind, solar and hydro-wind generation and they’ll need private sector investment to get there. 

Renewable energy isn’t the only climate-related sector primed for growth. Companies can find opportunities in eco-friendly construction and in climate-smart financial solutions. Unfortunately, in many parts of the developing world, corruption and excessive red tape stifle investments in renewable energy and other climate-friendly projects. At the same time, state subsidies for fossil fuels keep prices artificially low, making it hard for renewables to compete.

Governments must remove these barriers and create an environment in which the private sector can thrive and in which investments in renewable energy make financial sense. The private sector should play a role in pushing for these reforms, which have the potential to unlock billions of dollars’ worth of investment opportunities. 

The Paris climate conference brought into sharp focus the hazards of runaway climate change. It constitutes a fundamental threat to economic development in our lifetime and, left unchecked, could push 100 million people into poverty by 2030. But with the proper support, private companies can help the world to avoid that future.

*Dimitris Tsitsiragos is the vice-president of Global Client Services at the IFC, a member of the World Bank Group. Mr. Tsitsiragos leads the investment operations and advisory services for the IFC, overseeing new business developments, portfolios and client relationships with key private sector partners worldwide.