Posted by President Biden recently signed several executive orders that put the environment squarely at the heart of U.S. federal policy, and for good reasons. The future competitiveness of the U.S. economy is at stake, and climate action is an effective way to boost jobs, prevent future systemic shocks, and secure a prosperous future. Growing evidence shows that investment in “green” industries like electric vehicles and renewables will be a better way to boost GDP as we emerge from the COVID crisis.
With the U.S.’s renewed commitment to climate action, over 70% of the global economy has now set, or is intending to set, targets to reach net-zero emissions. For both U.S. business, and any business operating in the U.S., the message is very clear: To survive and thrive in the net-zero future, now is the time to scale up climate action.
But what does this mean for businesses and their leaders? Here is my interpretations:
1. Climate regulation is on the way. The global trend toward net-zero is inevitable. The effects of climate change are already being experienced in many parts of the world, and climate-related regulations are already being implemented. The EU is committed to more than halving emissions by 2030, for example, and the UK has set 2030 as an end date for sales of new petrol and diesel cars.
In the U.S., the Biden-Harris administration is expected to set targets to reach net-zero emissions by 2050, in addition to interim milestones to meet by 2030, as part of the country’s contribution to the Paris Agreement. With a Democrat-led congress in place, national goals will be more seamlessly translated into concrete regulations and incentives, and companies will be required to align their strategies accordingly.
How can companies get ahead of this regulation? U.S. firms will be best positioned to thrive if they integrate science-based emission reduction targets aligned with limiting global warming to 1.5°C into their strategies now. This gives businesses clarity on where and how to implement net-zero solutions across entire value chains. From an investor’s point of view, any company without “climate concerns” in the strategy would appear less attractive.
Many major U.S. companies are already aligning their business strategies with net-zero emissions by 2050 or sooner, including Amazon, Apple, Ford, Microsoft, Walmart, Uber, and Verizon. These companies and others have committed to achieve their targets through corporate initiatives like the Business Ambition for 1.5°C campaign, the Climate Pledge, and the CME Climate Hub for small- and medium-sized enterprises.
2. Delayed action is a business risk. Companies that fail to take climate action soon are risking that their products and services will become unviable. As climate regulation is implemented, any business that is not already decarbonizing will begin to lose market share and miss out on the time and opportunity to grow and innovate. It will be far more costly for companies that have to make this transition abruptly rather than taking time now to strategize and prepare. Companies that wait will end up going the way of Blockbuster or Kodak – both of which did not adapt to digitalization and got left behind. When it comes to climate, companies like Orsted are a great example of the benefits of taking decisive action. It has already made the full transition from a black to green energy company and is thriving.
3. Investors will increasingly favor businesses taking climate action. Investors are already moving their portfolios away from high-polluting companies, which are expected to be heavily impacted by the growing wave of climate regulation. BlackRock, the world’s largest asset manager, is now pushing its companies to have net-zero by 2050 targets, and has indicated it will divest from those that don’t. Further, companies with higher ESG ratings tend to consistently outperform their peers. Consequently, there is currently an influx of capital looking for green business to invest in.
4. Corporate disclosure on climate risk and GHG emissions will become mandatory. It is a well known concept in business in business that you can’t manage what you don’t measure – and this is no different for a company’s GHG emissions. The Biden-Harris administration has promised executive action requiring public companies to measure and disclose climate risk and GHG emissions. This recognizes a 2020 warning from the Commodity Futures Trading Commission, a U.S. federal agency, that financial regulators “must recognize that climate change poses emerging risks to the U.S. financial system.” it called on them to “move urgently and decisively to measure, understand, and address these risks.”
To start assessing, managing, and reducing climate-related risk and keep ahead of increased climate regulation, companies can disclose their environmental impacts through CDP (Carbon Disclosure Project) and set science-based targets to address their climate-related risks. They can also follow the recommendations of the Taskforce on Climate Related Financial Disclosure.
5. Public investment in the clean energy economy will rise. The Biden-Harris administration has already pledged to invest $2 trillion in infrastructure and clean energy. It aims to achieve 100% clean electricity nationwide by 2035, with 40% of clean energy funding directed to disadvantaged communities. The administration has also agreed to grant California a waiver to set the nation’s strongest clean car standards, and President Biden signed executive orders in support of environmental justice and suspending new fossil fuel licenses on federal lands. Finally, the administration is also poised to reinstate the environmental regulations the Trump administration rolled back.
By backing clean energy, Biden recognizes that it is competitive and will only become more so. Onshore wind and solar PV energy generation have now fallen below five US cents per kilowatt hour – compared to fossil fuel power generation costing between 5 to 18 US cent per kilowatt hour. As innovation continues, renewables are set to become even more cost competitive. Many major U.S. companies are on the same page. Through commitments to 100% renewable power (RE100) and electric car fleets (EV100), 79 U.S. corporations and counting have already helped steer the market away from polluting fossil fuels.
With this level of commitment to clean energy, the U.S. can help accelerate global s-curve of growth in renewables – which indicates the tide has already turned. Companies and industries that rely on fossil fuels should transition on renewable energy sources and infrastructure as quickly as possible, or else they risk being left with stranded energy assets – which pose a major risk to global capital markets.
As a summary, climate will become a keyword for U.S. businesses under the Biden-Harris administration. And whether embedding “climate” in business strategies will become a major distinguisher for companies. For investors like myself, I’ll keep an eye on companies’ annual reports and strategy statements.
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