Climate change - a business revolution?

The Carbon Trust, an independent company set up in 2001 with support from  the UK Government,  has issued a report based on independent research commissioned from McKinsey & Co. and Oxera, the economic consultancy, during 2008, on how tackling climate change could create or destroy company value.

This study was designed to test the hypothesis that a move to a low carbon economy could be revolutionary for a number of mainstream industry sectors and therefore should be carefully managed. We set out to quantify the level of opportunity and risk available to companies in different sectors depending on their situation and level of preparedness.

The researchers also wanted to understand why investors in many mainstream sectors are not yet significantly concerned by the implications of a move to a low carbon economy.

The report sets out a range of global carbon mitigation scenarios and related assumptions for the transition to a low carbon economy. It demonstrates how these assumptions and scenarios could affect projected company cash flows and therefore company value.

Based on these assumptions, the researchers found very significant potential opportunities and risks for current projections of company value. These vary by sector and depend on company response: whether they proactively seek out new commercial opportunities or fail to adapt to a low carbon economy.

Given the significant scale of potential impact, the report’s authors believe the investment community, companies and policy makers must urgently consider the impact of deep and sustained emissions reductions on their investment, strategy and policy decisions.

This should be based on their own analysis and views of the potential shifts in regulation, technology and consumer behaviour that could trigger significant change in carbon emissions and business value.

Key Findings of the Reasearch

  • Today, investment and business decisions do not put companies on a path to a low carbon economy. They appear to be in line with greenhouse gas concentrations rising to more than 700ppm CO2e1 compared to a target of less than 550ppm CO2e.

  • Tackling climate change could create opportunities for a company to increase its value by up to 80% if it is well positioned and proactive. Conversely, it could threaten up to 65% of value if the company is poorly positioned or a laggard. The scale of the opportunities and threats analysed - within six sectors that total approximately $7 trillion in market capitalization - are therefore very significant for investors and business managers.

  • The opportunities and risks are driven by shifts in consumer behaviour, technology innovation and regulation. Regulation is usually the key initiator of change although the cost of carbon is not the decisive factor in many sectors.

  • The impact of tackling climate change will, therefore, vary by sector. The report identifies four ways in which value could be created or destroyed: sector transformation, upward demand shift, downward demand shift and increased volatility - see Chart 1 

  • In response, strategic investors should discriminate between sectors and companies on the basis of their opportunities and risks. Businesses should incorporate climate change in their core strategy and investment decisions. Policy makers should work with business and investors now to create a policy framework which rewards early action and an efficient transition to a low carbon economy.

Chart 1 How climate change could create and destroy company value

The Full report is available here.

Source: Carbon Trust

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