Arriving home after a whirlwind week in the snowy Swiss mountain village of Davos at the World Economic Forum, those of us engaged in the climate change discussions are feeling positive but pragmatic about the challenges ahead. Just over a month after a global climate agreement was reached in Paris, what happens next was one of the key issues discussed by the public and private sector leaders huddled in Davos.
The Paris Agreement heralds a new era of political will, with nations agreeing unanimously that the global economy needs to undergo a transformation that is urgent. To decarbonize the economy to the extent intended under the Agreement will require widespread sectoral reforms - from finance and energy to technology, agriculture and infrastructure. While many are still celebrating the success that was Paris, the reality is that the real work is just about to start. The pace set by the Paris Agreement requires global peaking of greenhouse gas emissions in the next five to ten years. That's a rapid shift from business as usual. The national plans put forward by countries that sit behind the Agreement only deliver half of the decarbonization needed, even if they are successful (PwC). Governments have been asked to increase ambition and revise plans in 2018, and the periodic five year ratcheting will continue from there. It's a process that allows nations to choose the speed of travel. But we now need to ask what would it take to get nations and business to move faster?
The stark reality behind this political timetable is that massive systems change must accompany it to make it a success. Systems change driven by new business innovation and investment, by technology and business model disruptors (like the $1 trillion by 20 Circular Economy), by new public-private collaborations (e.g. the Breakthrough Energy Coalition and Mission Innovation - a newly launched collaboration between billionaire philanthropists and governments), and by regulation that helps "make the maths work for going low carbon". How do we make these things happen, and how do we make them happen quickly enough?
Bold systems change in every sector is needed, and some of that was under discussion at Davos. But so too is the pragmatism of an orderly transition over the coming decades. One that recognizes in parallel the basic development needs of countries, including energy security and the income reliance of nations -- income required to build infrastructure, pay for schools and support healthcare, for example. A binary move to abandon industries is not realistic. But supporting an ordered transition where capital, skills and technology are transferred from the "brown" to the "green" economy is.
The financial sector is one of the first in line for such a systems change. Two years ago in Davos, various leading investors, heads of national banks including Bank of England chief Mark Carney, and government leaders came together privately to discuss the challenge for the sector. This past week a similar discussion took place in Davos, but a lot has already happened. The G20 Financial Stability Board appointed Michael Bloomberg to chair a climate-related Finance Disclosure Taskforce and produce specific recommendations for voluntary and standardized corporate disclosure and leading practices by the end of 2016.
In parallel the market has seen increasing recognition by investors and regulators of the 'carbon bubble' with unburnable fossil fuel reserves valued at over $100tr out to 2050 (Citigroup) that are untenable if the Paris Agreement is to be met, yet valued on company balance sheets. The market is reacting: 61 investors to date have signed the Montreal Pledge committing to measure and disclose the carbon footprint of their investments annually, and over 500 organizations worth more than $3.4 trillion have committed to divest from fossil fuel industries and invest in climate solutions.
Raising and redirecting capital will be key. The IEA estimates that just delivering the current national pledges underlying the Paris Agreement will require $13.5Tr of low carbon investments by 2030. The true amount by 2030 will be greater, as the pledges themselves will rise in ambition. Regulators, rating agencies, shareholder groups, industry bodies, and governments must play a vital role alongside investors. Clear and consistent policy signals in support of the low carbon transition, clear standards, appropriate incentive structures, and new public private partnerships are all needed to unlock, de-risk and deploy this capital.
In the near term investment decisions will need to recognize that carbon pricing of one sort or another is either here, or going to be here soon. Companies, investors, international financial institutions and governments are beginning to look at internal carbon pricing. Responses range from internal market pricing to stress testing portfolios or investment decisions for a shadow price of carbon (see CDP).
Costs of low carbon solutions over time will go in one direction only - down. On the other side there is less certainty: fossil fuel subsidies are being targeted, fossil fuel reserves will not all be commercial, and the price of oil will continue to fluctuate. Much of the technology is already there to make the transition from a fossil fuel age to a connected low carbon bio-energy age. Developing countries can, with the right support, leap frog the carbon intensive industrialization and urbanization of the developed world. Decentralized renewable energy supported by mobile payments, for example, can leapfrog centralized infrastructure intensive grids whilst helping to achieve universal energy access in the most cost effective way. Meanwhile corporates are increasingly becoming huge off-takers as commitments to renewable energy use (e.g. RE100) have given confidence to financial markets that demand is there and growing fast. And expect to see further disruptors on the way - sooner than you think, all building the critical scale and competitiveness of low carbon energy technologies.
Underlying these investments and developments is growing evidence of a more long term shift in thinking amongst leaders in Davos this year. As PwC's Annual Global CEO Survey released this week shows CEOs are increasingly recognizing the part they have to play in driving change and reshaping their business' purpose. In the report, 71% of CEOs believe that within five years, their purpose will be centered on creating value for wider stakeholders, beyond shareholders. Only 27% believe it will centered on shareholder value. It also shows that 87% expect to prioritize long-term over short-term profitability. If the Paris Agreement regime on ratcheting up climate ambition is to work, business will need to be at the heart of the transition, investing, advocating, collaborating, and innovating. In the shadow of the headlines of stock market turmoil, downturns and oil prices, the business response to the Paris deal is perhaps another example of how leaders are shifting their thinking beyond the current crisis or issue, towards building long term values based organizations.
So leaving Davos this week, I'm optimistic that the leaders assembled in the discussions on climate change are beginning to recognize the different context created by the Paris Agreement. Whilst much of the discussion is focused on political and economic stability in the near term, the long term transformation required by all is now undeniable. Now the focus turns to pace of action, and to identifying the real game changers.