What the business community thinks of Paris (as of December 16, 2015)

It has been four days, and those who are interested have had time to comb through the text of the Paris Agreement.

As my last post indicated, this has been a fascinating semester, and I look forward to following these issues for many years to come! What follows is an (early and brief) evaluation of the ‘forecasts’ I made about the business sector’s position during COP 21 (see http://sites.duke.edu/duketoparis/2015/11/30/expected-business-community-positions-at-cop-21/).

The three major themes I predicted for the private sector (represented at COP 21 by the BINGO group (Business and Industry NGOs) with the International Chamber of Commerce as the business and industry focal point) were:

  1. A call for clear signals to the private sector on the future of climate policy.
  2. Promotion of party consultation with the private sector on INDCs.
  3. Strong advocacy around enabling environments for private investment.

My main takeaways from four days of news are:

  • Post-Paris, the business community is even more focused on national-level regulation and implications for competitiveness, cost, and policy stability.
  • The private sector did ‘win’ by securing a mention in Article 6 regarding the implementation of INDCs.
  • The private sector response to the Paris Agreement appears split along predictable lines according to industry (tech: positive and approving, oil and gas: skeptical to say the least) and whether or not companies had already taken a progressive stance on climate issues and a proactive policy towards transition to a low carbon economy.

It’s almost amazing how quickly the reporting on Paris shifted from ‘Can you believe it! We have an agreement!’ to ‘So now what?’ The business community may be split on whether or not the Paris Agreement is a welcome development, but companies seem universally concerned with questions of implementation. As noted by both Secretary of State John Kerry and President Obama on December 12th (and oft remarked by business leaders), it’s the private sector that will actually have to do the work of transitioning to a low carbon (or even emission free?) economy.

So what can we expect from the private sector and climate policy in upcoming years? I predict that we’ll see more companies accepting that it’s both a requirement and a potential business opportunity to transition to lower carbon practices and to invest in that transition. But I also think we’ll see continued pressure on national governments to ease in any climate regulation slowly and in a ‘business friendly’ manner. A relatively positive and pragmatic view comes from ‘We Mean Business’ – a coalition of companies working to “to amplify the business voice, catalyze bold climate action by all, and promote smart policy frameworks,” and their position is summarized in the video below.

Addressing the Business Sector on December 12th, 2016

Thank you to Thomas Caggiano (congratulations on graduation!) for his latest post – “The Ever-Fluctuating Thoughts of a UNFCCC Observer.” Like Tommy, I’ve been considering where my own path might take me post-graduation. Stating the (dull &) obvious – it will be somewhere in an economy that will need to adapt to changes in regulation and shifts in consumer demand for lower-carbon products and processes.

As a current MBA-Masters of Public Policy candidate, I’ve been fascinated to watch the evolving dialogue between policy makers and the private sector over the course of the semester. It remains unclear what the specific implications of the Paris agreement will be for business. Will there be further shifts in the ways global corporations structure strategic decision-making? Will global climate policy trickle down to local business decisions through domestic policy changes? How will regulations and consumer preferences evolve in upcoming years and decades?

Even with all the lack of clarity, it’s worth noting that both Secretary of State John Kerry and President Barack Obama chose to use a significant portion of their public addresses on December 12th to address the business community. The relevant portions of their speeches appear below.

US Secretary of State John Kerry:
(found from 52:50-53:43 at http://unfccc6.meta-fusion.com/cop21/events/2015-12-12-17-26-conference-of-the-parties-cop-11th-meeting/statements-by-groups-and-parties-on-agenda-item-4-b

“We are sending literally a critical message to the global marketplace. Many of us here know that it won’t be governments that actually make the decision, or find the product the new technology, the saving grace of this challenge. It will be the genius of the American spirit, it will be business unleashed because of nations saying to global business in one loud voice we need to move in this direction. And that will move investment that will create new greater research and development. And the next great product will come that will change our lives.”

President Barack Obama:
(found from 5:10–5:42 at https://www.whitehouse.gov/photos-and-video/video/2015/12/12/president-delivers-statement-paris-climate-agreement)

“Moreover, this agreement sends a powerful signal that the world is firmly committed to a low carbon future. And that has the potential to unleash investment and innovation in clean energy at a scale we’ve never seen before. The targets we’ve set are bold. And by empowering businesses, scientists, engineers, workers, and the private sector – investors – to work together, this agreement represents the best chance to save the one planet we’ve got.”

I sincerely thank Duke for the opportunity to spend dedicated time with the UNFCCC negotiations this fall and follow the private sector’s evolving perspective on the climate negotiations.

Thinking about debt, measures of financial risk, and more differential effects of climate change.

I just saw my first article linking climate change to credit ratings. The opinion came from Standard & Poor’s Marko Mrsnik and Dr. David Niklaus Bresch of the world’s largest reinsurer – Swiss Re. (http://www.iccwbo.org/News/Articles/2015/The-impact-of-climate-change-on-sovereign-ratings/).

[For those students who, like me, are early in their learning curve re. financial risk, credit ratings, and the implications of various financial indicators, here’s my cartoon version of the system:
Many nations use sovereign debt to partially finance government operations. For investors, sovereign credit ratings can signal security of investment in that nation (both directly in terms of purchasing bonds and indirectly when pursuing some sort of project in that country).
Rating agencies like Standard & Poor’s, Fitch, and Moody’s, as well as analysts at insurance organizations like Swiss Re, study how various kinds of risk impact the likelihood that debt will be repaid. Debt securities (including national sovereign bonds) are then rated (in the case of Standard & Poor’s, with a published credit rating) to signal the security’s level of risk.
That level of risk has large implications for whether and when those debt securities are attractive to investors. Standard and Poor’s ratings range from AAA: Prime, to D: In default. Ratings below BB+ are considered non-investment grade/high-yield/junk bonds.]

In their guest blog for the International Chamber of Commerce, Mrsnick and Bresch reflect on Standard and Poor’s “first-ever informed estimates on climate change’s impact on economic and individual sovereign ratings factors” using data from Swiss Re on the risks and damage data resulting from tropical cyclones and their effects (storm surges and floods).

The findings suggest “climate change will exacerbate the negative sovereign rating impact arising from 1-in-250-year natural catastrophes by 20% on average,” resulting in an average decline in sovereign ratings of 1.2 notches.

What does this mean for countries? Climate change is predicted to have highly differential effects based on both geography and income. Sovereign nations in the Caribbean and Southeast Asia are at high risk, and low-income countries are, in general, also at increased risk.

These trends correspond largely to current credit ratings (data from 2012 included below – individual ratings have changed slightly but geographic trends hold).

Standard & Poor's Credit Rating 2012

Take away: in addition to all the other environmental and human risks, those countries most at risk from the effects of climate change are also those countries most likely to have their sovereign debt further downgraded, making it harder for those nations to raise financing for infrastructure projects and attract foreign investment.

The impact of climate change on credit ratings is not as large as many other factors, including government corruption and political unrest. Still, it seems worth considering whether further integration of climate risk into measures of financial risk can be an effective way to further spur government action and to better align political and private sector interests when it comes to climate change.

Expected Business Community Positions at COP 21

Happy afternoon in Paris on the first day of COP 21! So proud to know a few great Duke Nicholas/Sanford students in attendance this year, and I’m very excited to follow your news over the next two weeks.

I’ll be tracking the business community’s response to the negotiations. To kick off my series of upcoming posts, I’ve outlined a few things I think we can expect from the private sector.

  • Call for clear signals to the private sector on the future of climate policy. The International Chamber of Commerce has strongly urged the UNFCCC to make unambiguous statements on climate action goals in order to send a clear signal to businesses about the scale of investment required in upcoming years. Greater certainty will enable companies to pursue strategies and business opportunities in the context of carbon goals and, eventually, a price on carbon. Without that certainty, companies fear volatile regulatory environments and are less likely to make meaningful investments in less carbon intensive practices and clean technology.
  • Promotion of party consultation with the private sector on INDCs. The ability of individual nations to achieve their mitigation goals will depend in large part on industry ability and willingness to actively pursue lower carbon practices. There is also a need to ensure that INDCs accurately capture the activities of the private sector to prevent either inaccurate claims or additionally issues of ‘double counting’ the contributions of non-state actors towards climate goals. There may be calls for incorporation of language to that end in the preamble, Article 3 (Mitigation – role of the private sector), Article 9 (Transparency – clarity on private sector role in national action), and the description of INDCs under the Draft Decision.
  • Strong advocacy around enabling environments for private investment – especially IP protection. The transition to less carbon-intensive economy requires huge investment to transform current industry practices. Even greater private sector investment is required to delink the burning of fossil fuels and economic growth. The business community position is often framed as the protection of ‘competitiveness,’ a stand-in description for pro-business policies including intellectual property protection, good governance (low corruption), and low entry barriers in new markets. These issues, especially the question of IP protection, are central to the negotiations over technology transfer and, to some extent, climate finance.