Stranger than Fiction? Business Drives a New System of Climate Governance

By | July 22, 2020

This post is the latest in our special issue: “Climate Change and Financial Markets – Risk, Regulation, and Innovation.” To learn more about the special issue and the work of the Global Financial Markets Center around climate change and financial markets, please read the special issue’s introduction here. And to review all The FinReg Blog posts that touch on climate change, go here.


If aliens landed outside Maybury, England tomorrow seeking to understand our society (rather than destroy it), there would likely be plenty of head-scratching moments (or perhaps antennae or elbow scratching, depending upon the biological particulars). Surely one of the most confounding issues would be why the enormous risks of climate disruption have been discounted so greatly. Many dynamics are involved in driving us off this cliff: the political and economic power of carbon-intensive industries, tribal-cultural divisions within countries like the United States, and temporal discounting of long-term problems against short term costs, to name a few.

But one challenge isn’t talked about enough: we often think too narrowly about the solutions. If you asked the average, informed American about the best approaches to address carbon pollution, I bet the solution that would garner the most votes is new public policy. In fact, professional pollsters are already way ahead of me. Results support the view that government policy is what will save us all from climate change.

In this case, the people are not wrong – ambitious public policy aligned with the latest climate science would make an enormous impact. An appropriately high carbon fee with complementary policies to avoid unjust pollution hotspots and measures to support workers and impacted communities would go a long way toward addressing the confusion of aliens and the alarm and concern growing among the public.

But here’s the rub, at a time when politics in the United States (and elsewhere) are dysfunctional and Congress is paralyzed, it doesn’t seem wise to put all of your eggs in that broken basket. Worse still, because the public has lost faith in government to address big problems (or never had faith to begin with), linking climate solutions so strongly with government action can lead to public disengagement. This happens due to despair at the likelihood of government inaction or because of ‘solution aversion’ among those concerned about both climate disruption and big government.

This doesn’t mean that a strong effort to advance national climate policy isn’t important – it is. In fact, it is vital. And there are hopeful signs of progress including the rising priority of climate action within key progressive constituencies and within the public as a whole, a recognition of the intersection of the climate crisis and other priorities like economic inequality and institutional racism, and recent hard work on smart public policy solutions.

Even so, we should heed the wisdom of Pete Townshend and not count on a political window in 2021 that may only open a crack. A diversified portfolio of interventions is needed.

That said, opportunity costs matter. What other efforts are worth taking a bet on? Could any others operate at the scale of nations or take a systems approach to setting science-based goals, supporting implementation, and driving accountability?

Business-driven climate governance

There are no silver bullets in responding to the climate crisis, but would you believe that a field of activity has emerged over the last decade that is driving hundreds and even thousands of companies into a system of climate governance that has many of the elements we would hope for in public policy? Joining this system isn’t mandated by law, but rather can be understood as a form of private governance. In an article published this month by the Environmental Law Reporter, I explore this system and the companies and lower-profile civil society groups that have helped it to emerge.

Full disclosure: until a year ago, I worked for one of these organizations, so these aren’t unbiased observations. But after working inside the engine room for several years, it was time to step back and look at the system as a whole. What I found was a collection of activities that had largely emerged from the bottom up, but were now beginning to operate as a system with many of the functions you’d hope for in climate public policy: (1) assessing and disclosing emissions data; (2) science-based target setting; (3) implementation support; (4) policy engagement; (5) tracking progress on meeting goals; (6) holding actors accountable; and (7) coordinating efforts.

How much does it matter?

The potential impact is significant – even on a scale of nations. According to a 2018 study by Data Driven Yale, if the 2,100+ companies with at least one publicly reported climate commitment were to successfully achieve their goals, global emissions would be reduced by 3.4 gigatons of carbon dioxide equivalent (GT CO2e) annually by 2030. This is equivalent to cutting U.S. emissions by 60% from current levels.

Increasingly, this system isn’t just the product of a thousand flowers blooming; several key initiatives are driving impact. For example, the Science-Based Targets initiative (SBTi) now has over 900 companies in the pipeline to adopt climate goals aligned with a 1.5°C or 2°C global temperature trajectory, including goals for their extensive supply chains. If the SBTi were to scale up to 2,000 companies, an independent study found that this alone could catalyze 2.7 GT CO2e of annual emissions reductions by 2030 (equivalent to nearly thrice the annual emissions of Germany, the largest economy in Europe).

Why is this happening?

Perhaps the most interesting question in this growing field is ‘why?’. Without the heavy hand of government sanction, why are so many companies marching down this path? Like with Facebook, it’s complicated. An elaborate mix of factors is driving more companies to move into this system and beginning to hold them accountable: public pressure through civil society organizations and employee groups, business-to-business pressure through market access and procurement contracts, and even evolving norms reshaping a corporate social license to operate.

What’s the role of the financial system?

The financial system is playing an increasingly prominent role, too. To varying degrees, three traditional pillars of the financial system (investors, lenders and insurers) are all part of the story. Investors, both directly and through civil society groups that they advise, are having the greatest impact. In 2015, the Financial Stability Board, which advises G20 governments on risks to global financial markets, created the Task Force on Climate-Related Financial Disclosures (TCFD) to develop voluntary climate-related financial disclosures which could inform lenders, insurers, and investors. TCFD identified three types of climate risks for business: physical risks (to infrastructure, agriculture, real estate), transition risk (for carbon-intensive business models that could result in ‘stranded assets’ or obsolete business models, products and technologies) and liability risks (from compensation claims).

In the face of these risks, private investors are beginning to act. For example, in 2017, a group of investors launched Climate Action 100+, currently representing 450 investors with $40 trillion in assets under management. Climate Action 100+ is focused on changing the behavior of 161 companies with the highest greenhouse gas footprint. The group is working with Transition Pathway Initiative to develop data-driven tools to track company adoption and performance against climate targets and other metrics. In 2020, BlackRock, with $7.4 trillion in assets under management, joined Climate Action 100+ and announced plans to prioritize investment decisions aligned with climate action and sustainability, including exiting holdings in thermal coal and ramping up climate positive investments. At about the same time, State Street made similar commitments to use voting power to drive environmental performance.

Some insurers and lenders are beginning to become a force for driving this new private climate governance system, but on the whole, the story here is mixed. On the positive side, Zurich Insurance Group announced a 2-year initiative to work with clients generating more than 30% of their revenue or 30% of their electricity from oil sands or coal to develop transition plans to change these practices. And Zurich will no longer underwrite or invest in companies with these levels of fossil fuel practices. But Zurich is the exception rather than the rule; few insurers (in their role as investors) have joined Climate Action 100+.

Lenders have an even more checkered history. A 2019 report by Sierra Club, Oil Change International, and Rainforest Action Network reviewed 33 global banks for fossil fuel investments. It found that these banks had lent or underwritten $1.9 trillion in fossil fuel projects from 2016-2018, “dominated by the big U.S. banks, with JPMorgan Chase as the world’s top funder of fossil fuels by a wide margin.” The report found some improving trends, including 21 of 33 global banks placing some restrictions on coal financing.

In addition to motivating other companies to take climate action and to hold those companies accountable, the financial sector is needed to drive new models for deploying capital against corporate climate strategies. Some progress is already apparent, including initiatives like the Global Innovation Lab for Climate Finance which is piloting instruments promoting collaboration among public and private investors. BlackRock is preparing to launch a $500 million climate fund linked to the broader Climate Finance Partnership. Other players, like S&P Dow Jones Indices, are developing tools to help investors identify companies aligned with global targets like 1.5°C or the Paris Agreement. These efforts are encouraging, but more attention is needed in designing approaches to aligning capital against the implementation of science-based corporate climate targets.

Where are the gaps?

There is much to be encouraged about with this emerging system of private climate governance, but there also are many risks on the horizon. First, all elements of this system aren’t developing at the same pace. Corporate target setting and emissions reporting are outpacing initiatives fostering target implementation, including targets related to finance, as noted above. Second, driving accountability within this system relies heavily on publicly available information that actors like investors and civil society organizations can use to hold companies to their commitments. More progress is needed to promote efficient and robust information flow.

Also, although this is beginning to change, companies have traditionally been reluctant to promote consistency between their direct climate commitments and engaging with public policy to unlock bigger opportunities. According to a 2013 study, even among a subset of companies predisposed to sustainability, only 30% aligned “traditional government affairs activities, such as lobbying, with their corporate responsibility commitments, such as reducing GHG emissions.” This must change, given that the current political gridlock around climate action in the United States and elsewhere is at least partially the making of corporate actors and associations themselves.

Another significant risk is if companies fail to connect the dots between growing concerns about racial and economic justice and their efforts to address climate change and sustainability. This isn’t just an issue for corporate sustainability. Within traditional environmental civil society, environmental justice has rarely received the attention needed. If private sector efforts are to take their place as a primary system for transforming society in the face of climate change, they must be seen as a legitimate exercise of governance, including by addressing global and national dimensions of justice. Thus far, most initiatives driving private climate action do not incorporate justice requirements, nor are their leadership or scope representative, geographically or culturally.

Even so, there are some promising examples of companies like Apple creating programs to support their developing country partners as they implement Apple’s supply chain goals. A few U.S. companies are beginning to see the connections. In 2017, Southern California Edison and the Greenlining Institute launched a partnership to “craft and support state and local policies and programs to improve air quality for underrepresented communities and bring clean energy technology investment, ‘green’ jobs and job training to them.” To ensure legitimacy and meet the moment, existing private climate initiatives should evaluate both their strategies and implementation to identify and address justice, while new efforts should be specifically built to fill this important gap in the current system.

What’s next?

The collective private sector effort to address climate change is at a critical crossroads. Target setting and participation have reached new standards of ambition that are impossible to ignore. A 2019 study by Natural Capital Partners found that 23% of the Global Fortune 500 have made a public commitment to be carbon neutral by 2030, use 100% renewable power, or be in compliance with a science-based target. This represents a nearly four-fold increase since heads of state reached the Paris Climate Change Agreement in 2015.

Even so, key questions remain unanswered, including:

  • Which private initiatives work well and why?
  • What are the most cost-effective emissions reduction strategies for companies to take individually?
  • What organizational behavior and business process innovations are likely to reap the most impact?
  • Does direct corporate climate action make it more or less likely that companies will engage in public policy advocacy on climate change?
  • How can future public policies be designed to build on and accelerate steps that companies are already taking toward science-based goals rather than force entirely new corporate approaches?

To reach its potential, this field of private activity needs to be treated like the ‘system’ it is becoming. While leaving ample room for creativity and innovation, more work is need to coordinate efforts, reduce inefficiencies among initiatives and crowd in more investment from both private and philanthropic sources. A research and action agenda is needed to bring companies and civil society organization together with experts from universities to address questions like those above and others and chart a collective path forward.

While enduring in its anguish and uncertainty, 2020 has helped teach us to question assumptions and look closer at how society really works. To adequately face the looming climate crisis, we cannot rely on public policy alone; we will need all stakeholders and levels of society to do their part. If it can unlock new financial flows to implement existing targets and connect the dots between climate and justice, the emerging private climate governance system can take its place as one of society’s primary strategies for building a safer future.


Lou Leonard is the Dean of the Falk School of Sustainability & Environment at Chatham University.

This post is adapted from his paper, “Under the Radar: A Coherent System of Climate Governance, Driven by Business,” published in the Environmental Law Reporter, 50 ELR 10547 (July 2020) and available here.

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