Climate change presents enormous challenges for the world, and for organizations that are accustomed to doing business in an environment on the verge of radical transformation. The United States' decision to withdraw from the Paris Agreement has added a new complication. Global Network Perspectives asked experts across the Global Network for Advanced Management about impact of climate change—and the U.S. withdrawal—in their regions.
Andrea Masini, Associate Dean, MBA Program, HEC Paris
What are the long-term risks—both for business and the environment—in your region from climate change?
Firstly, climate change produces risks to the ecosystem. A recently published report by the European Environment Agency suggests that all European regions are vulnerable to climate change, although impacts vary by region. Some regions may experience positive effects, for instance as a result of improved conditions for agriculture. However, the majority of regions will be negatively impacted.
Southern and southeastern Europe is the most exposed area. That region may experience adverse impacts including increases in heat extremes, decreases in precipitation and river flows, droughts, lower crop yields, forest fires, and loss of biodiversity. Coastal zones in Western Europe are exposed to floods and possible storms. Marine ecosystems are vulnerable to increased ocean temperature, increased acidification levels, and the spread of oxygen-depleted dead zones. Arctic ecosystems are not immune either: they are exposed to the melting of land and sea ice produced to higher air and sea temperatures.
Business risks are a direct consequence of the above changes to the ecosystem. They are both industry-specific and general. For instance, in mountain regions, lower precipitations and decreases in river flows may cause a reduction in the hydropower potential or a decrease in ski tourism. Companies in the real estate sector—and indirectly in the insurance sector—are exposed to climate risk owing to the long-term nature of their investments.
Companies are exposed to climate risk even more generally, both directly and indirectly. Even though climate liability and carbon pricing affect primarily firms in carbon intensive sectors (e.g. energy, primary metals, or power generation), they have potential repercussions on a firm’s entire value chain, as companies subject to direct impacts may pass these costs down their supply chain. Floods and storms may disrupt suppliers, displace manufacturing, and even reduce consumption levels. Similarly, the increased cost of maintaining road infrastructure in regions exposed to rock falls and landslides may cause an increase in the cost of logistics.
Finally, businesses are exposed to climate risk even in a more general manner, because the future cost of capital for borrowers will depend on how exposed they are climate risks and on the risk mitigation strategies they can put in place. It is not surprising that EU regulation now requires pension funds to consider environmental risks in their investment strategies.
CB Bhattacharya, Professor of Marketing, Pietro Ferrero Chair in Sustainability, and Founding Director of the Center for Sustainable Business, ESMT Berlin
What impact, if any, could the United States leaving the Paris Agreement have on your country or region?
This decision has a direct impact on the strategic position of the United States as the world superpower and its role as the architect of the international order. We can already see that China is taking initiative and making a move towards the leadership of the world. Immediately after Trump’s announcement, we have seen Chinese and European leaders side by side criticizing Trump’s decision. Chinese Premier Li Keqiang said that “fighting climate change is a global consensus” and pledged that China would remain committed to the Paris agreement. Similarly, Angela Merkel said "the cooperation of the European Union with China in this area will play a crucial role, especially in regards to new technologies." Germany is also willing to take initiative; Merkel said, “We Europeans must really take our fate into our own hands. It became clear at the G7, when there was no agreement [on climate] with the USA, how long and rocky this path would be.”
In the EU, there are also some suggestions to induce a carbon tax at the border for all the goods that come from the U.S. This would be a major hit to the companies in the U.S as the EU is the United States’ number one trading partner.
However, as the world’s largest economy and second-largest CO2 emitter, this agreement just cannot function without the contribution of the U.S. This is a given. The EU and the rest of the world will suffer from the dire environmental consequences of this unfortunate decision. On the other hand though, the rest of the world can do so much to hurt the U.S economy. This will be a lose-lose situation for all.
Albert Ahenkan, senior lecturer, university of ghana business school
Ghana and the Paris Agreement
There is no doubt climate change has become central to Ghana’s development agenda. It has significant and undisputable implications for Ghana’s development, and poses complex challenges for policy makers. Ghana is more vulnerable to the impacts of climate change due to its low adaptive capacity to respond economically and politically. Ghana’s priorities for COP 21 include mitigation, adaptation mechanisms, capacity development, technology transfer and finance to limit greenhouse gas emissions and ensure sustainable growth.
As part of the COP21 process, Ghana submitted intended Nationally Determined Contributions (INDCS) in the context of the county’s national development priorities, circumstances, and capabilities. These became binding Nationally Determined Contributions when a Ghana ratified the Paris Agreement. Ghana is expected to mobilize nearly USD 22.6 billion investment from both domestic and international public and private sources. Out of the USD 22.6 billion investment, USD 10.11 billion (representing 45% of the total investment) is needed for mitigation whereas the remaining USD 12.42 billion is needed for adaptation. Ghana pledged to mobilize USD 6.3 billion (28.3% of total investment) domestically whereas the USD 16 billion (72.7%) will be expected to come from international sources, including the Green Climate Fund. The Paris Agreement therefore underscores the importance of adequate support, capacity building and international cooperation to help developing countries to strengthen its mitigation and adaptation efforts.
LULI PESQUEIRA, Lecturer and Researcher on Sustainability and Social Innovation, EGADE Business School, Tecnológico de Monterrey
What impact, if any, could the United States leaving the Paris Agreement have on your country or region?
The United States leaving the Paris Agreement could impact the development and transfer of new clean energy technologies across the region, as well as the development of regional markets for renewable energies and the transition to low carbon economy. In the particular case of Mexico, these effects could be greater as it could bring a halt to an agreement already established between Canada, Mexico and the U.S. to share key information in areas such as low- carbon electricity, carbon capture and use, clean energy technologies, energy efficiency, climate change adaptation and emissions reduction in the oil and gas sector. In order to advance these and other objectives, frontrunner organizations will need to move ahead of government-led efforts and continue to push efforts geared towards climate change mitigation and adaptation. In this sense, collaboration between academic institutions in different countries, as well as coordination through international NGOs, will be key in advancing the current global agenda. One example is the Renewable Energy Buyers Alliance (REBA): a collaborative platform created by non-profits World Wildlife Fund (WWF), Rocky Mountain Institute, World Resources Institute, and Business for Social Responsibility (BSR) that is helping grow corporate demand for renewable power and helping utilities and others meet it. Initiatives like REBA exist to make the energy transition easier by helping companies understand the benefits of moving to renewables, connecting corporate demand to renewable energy supply, and thus creating a market that is able to meet the needs of corporations and is in line with the reduction targets set globally.
Kenneth Hartigan-Go, Associate Professor Department of Strategic Management, Head of the Stephen Zuellig School of Development Management, Asian Institute of Management
Businesses are dependent on the infrastructure of the state, and the long-term effects of climate change could dramatically increase the costs of maintaining their current value chain. The acquisition of commodities is an issue that businesses should be concerned about since climate change will affect the sources of such materials. The majority of the goods arriving in the Philippines are shipped, and unstable weather conditions could make the routes of these vessels treacherous given the idiosyncrasy of typhoons in the region. They key for businesses is to develop cost-efficient and resilient systems that will enable them to reduce their waste products and aid in slowing down the rate of climate change. If their stubbornness to adapting to climate change resilient persists, the cost of maintaining their operations under a very hostile environment could force them to close. Small and medium-sized enterprises would be the most affected by this and so they must come up with creative, cost-effective solutions in order to survive.
The Paris Agreement was a significant global agreement for signatory countries to signify that they stand by each other to support a common goal. In acts or agreements like these, the international community is responsible in policing each other with regards to the pledge they made and purposely keeping away from such agreement only alienates that country from the signatories. That said, the absence of the United States in the Paris Agreement may be quite a headline, but in terms of impact to other nations, it will probably be minute. More than anything, the agreement is for the benefit of the signatory’s country and the world. Even if the U.S. may not be part of it, all the other signatory nations see its importance and will most probably honor it. If anything, all the US did by not being part of this agreement is alienate itself for their own supposed personal goals of helping their own citizens first.
Martin Hall, Emeritus Professor and Senior Scholar in Residence, Solution Space, University of Cape Town Graduate School of Business
As with other countries, South Africa is at risk from the consequences of climate change. Significant parts of the country are hot, dry, and drought prone. Further increases in global warming will put commercial agriculture at risk across sectors that range from large-scale maize production to the wine industry and niche food production.
In particular, poor communities, farming in both rural areas and within the margins of South Africa’s cities, will be at risk. In terms of household income, South Africa is now the most unequal country in the world, with persistently high unemployment, with about half the population under the age of 25 and with a significant number of economic migrants and political refugees from other countries in Africa. Climate change and its consequences will further exacerbate economic marginalisation and political instability.
With some notable exceptions, the private sector has been slow to respond to the frequent warnings about climate change, and to the series of international accords and aspirational targets for reducing carbon emissions and global warming. The mining sector is now investing in renewable energy— prompted by the endemic crisis in state-supplied electricity. Parts of the food retail industry have promoted climate-friendly options for high-income households. However, South Africa has comparatively low levels of regulation for environmentally-friendly construction, air quality, pollution, and similar areas of concern. South African businesses are often criticised for short-term profit taking. These challenges are exacerbated by continuing inward migrations to South Africa’s three large urban areas: Johannesburg and Gauteng; Durban; and the greater Cape Town area.
Joaquín Garralda, Professor, IE Business School
In principle, apart from criticism at the political level of Trump’s unilateral decision, it seems that states and companies will continue to comply with the Paris Agreement. So, will Trump’s decision have any impact? One result could be more obstacles, partly in the form of tariffs for products from the United States. If India and China also decide to abandon their commitments, we could see more lobbying to consider environmental dumping grounds for reducing imports from countries that do not meet their commitments. There is unlikely to be a domino effect, considering the statements of leaders in favor of their commitments to the Paris Agreement. However, as restrictions on international trade are politically sensitive and have many unintended outcomes, we may see greater transparency, with equal environmental standards for all. This would make it possible to compare the traceability of a company’s efforts to protect the environment, leaving the market to reward or punish individual companies. In short, regarding the position of the United States, the best solution would be for the market to set the trend and not the decisions of a politician who thinks only in the short term.
Todd Cort, Lecturer in Sustainability, Yale School of Management
It may be tempting to argue that the US will therefore fare better than many nations in the face of increasingly severe climate change impacts. But the world is now too connected to disentangle and isolate the economic impacts of climate change and the US can expect the same stresses on food, water and other resources.
Leaders have a responsibility to create and honor commitments, companies and investors have a responsibility to more climate friendly investments, employees have a responsibility to nudge and push their companies to be agents of change, parents have a responsibility to educate their children and individuals have a responsibility to be aware and take action.
You’re also starting to see a significant increase in the number of big financial institutions asking for more sustainable investment options, because their individual clients are asking for it as part of their portfolios. In addition, you’re seeing more people in the private equity realm offering impact-investing opportunities in areas like renewable energy and energy efficiency.
For a long time, people thought that if you invested in green financial products, you would give up some financial return. Most of the data that I’ve seen on how publicly traded stocks perform suggest that, in fact, the companies that have stronger environmental records do slightly better than the companies that don’t. Why is that? Many people think that it’s because having good environmental programs in place is an indicator of good management, and good management means you usually make more money. They don’t waste raw materials. They don’t create unnecessary liabilities.