In 2015, 196 countries adopted the Paris Agreement: the world’s first legally binding climate change treaty, the goal of which was to limit global warming this century to 1.5-2 degrees Celsius above pre-industrial levels.
Since then, much progress has been made – but as Simon Stiell, Executive Secretary of UN Climate Change, put it late last year, “We are still nowhere near the scale and pace of emission reductions required to put us on track toward a 1.5 degrees Celsius world. To keep this goal alive, national governments need to strengthen their climate action plans now and implement them in the next eight years.”
These plans have included, and will continue to include, a mix of regulations and incentives. Businesses around the world should take note.
The European Union (EU) and United Kingdom (UK), for instance, jumped out ahead, laying out a variety of “sticks” to drive new corporate behaviors. These include heightened disclosure and reporting requirements, including the Corporate Sustainability Reporting Directive and Sustainable Financial Disclosure Regulation; stricter rules, like those for companies whose products rely on deforestation; and supply chain directives, like the German Supply Chain Due Diligence Law.
By contrast, the United States (U.S.) followed with a more “carrot-heavy” approach, offering hundreds of billions of dollars in tax and investment incentives through the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act. A new report concluded that these initiatives put the U.S. in a significantly stronger position to realize its climate ambitions, yet also highlights substantial barriers, including the need for new pollution standards, potential transmission bottlenecks, and supply chain constraints.
The current landscape presents significant opportunities for organizations which can take advantage of new subsidies to transform their businesses while complying with new regulations. Nevertheless, stakeholders should remain alert to political developments that may shift their calculus – be it European responses to U.S. subsidies, the role of China amid mounting geopolitical tensions, or efforts to support the Global South so that we can achieve the Paris goals in an equitable way (to name just a few).
As business leaders evaluate their approach to addressing climate change whilst also managing their bottom line, they should consider the following:
- Be cognizant of potential opportunities to leverage protectionist trade policies: For example, a European company could leverage incentives received to develop a green project in the U.S to get better terms domestically.
- Evaluate political risk. For instance, in the U.S., most IRA tax credits are relatively simple: they’re authorized and can be earned without competition on a clear timeline. Renewable tax credits run up to 10 years or more. While some believe these won’t go away even if we see a Republican in the White House (because most of those dollars are going toward projects in red states), organizations should be sure to assess political risk before accepting these credits.
- Beware of “Crowd Reg”: In addition to soft non-binding provisions, such as the United Nation’s Sustainable Development Goals or the Principles for Responsible Investment, businesses that do not “walk the walk” could fall behind their competitors as a result of public backlash via social media and consumer choice. Increasingly, this pressure may translate into ESG-related class action litigation, largely associated with assertions of greenwashing against those who may be doing or achieving less than they claim.
Whether or not the Paris Agreement goals are met, related regulation and subsidies are not going anywhere. Multinationals across the globe will be taking action regardless of shifting policies or geopolitical trends. Those who haven’t already should start evaluating their options and follow suit.