Climate Action

In recent memory, the world has seen profound changes in almost every facet of business and society, and the change is ongoing. Though it’s taken center stage — with good reason — the pandemic isn’t the only urgent issue facing humanity. In a torrent of contemporary challenges, COVID-19 accelerated some changes that were inevitable, brought the need for others into stark focus and served as a backdrop for the constant flux of an evolving world.

The business community has a starring role to play in every major issue of our time, and the opportunities and risks in each are significant. Taking an active role in shaping the future is more important than ever as leaders navigate and co-create the “next normal.”

Whether we will have the Roaring ’20s or the Groaning ’20s remains to be seen, but strong leadership will be essential as companies learn from the past, confront urgent issues head on and plan for the future.

“This isn’t about hampering global growth; this is about capturing the next wave of global growth.” - Michael Lenox, Tayloe Murphy Professor of Business Administration, Senior Associate Dean and Chief Strategy Officer
 

Climate Action

The issue of climate change has come into sharp focus since the Paris Agreement of 2015, which roused multilateral action to limit the average rise in global temperatures to 2 degrees Celsius above pre-industrial levels. The world’s leading climate scientists warn that further increase would be catastrophic for hundreds of millions of people in terms of risk of drought, floods and extreme heat.

The Paris target has been adopted by most nations and, in recent years, the pace of action has accelerated sharpy. Economies that account for half of global gross domestic product have made a commitment to achieve net-zero emissions by 2050. This is a legally binding target in the U.K., France and New Zealand, while China, Japan and South Korea have made similar but not cast-iron guarantees. Meanwhile, in the U.S., President Joe Biden laid out a $2 trillion plan designed to take climate action and spur economic recovery.

This is a massive challenge, and net-zero will only be possible with help from business. Michael Lenox, the Tayloe Murphy Professor of Business Administration at Darden, says that rapid progress is crucial, with emissions needing to fall by 45 percent by 2030 relative to 2010 for a net-zero future to be viable.

Lenox, who also serves as senior associate dean and chief strategy officer at Darden, says that success will depend on greening energy sources, reducing emissions from industrials, agriculture and buildings, and electrifying transportation.

While conventional wisdom suggests that achieving climate goals could shave 1 or 2 percent off global GDP, Lenox presents a more optimistic picture, saying there are net benefits to the world economy. “This isn’t about hampering global growth; this is about capturing the next wave of global growth,” he says, in terms of business opportunities and risk mitigation. One study suggests limiting global warming within 1.5 degrees Celsius could result in accumulated global benefits of $20 trillion.1

Some progress has been made toward these aims, especially in the power sector, with a notable reduction in coal-fired power capacity across the world, excluding China. In the U.K., the energy sector’s emissions have fallen nearly two-thirds since 1990. And elsewhere, 17 countries are legislating for the phasing out of vehicles powered by the internal combustion engine.

But Lenox suggests the gains have been driven more by market dynamics and less by government policy. “We’ve seen a substantial reduction in emissions in the U.S., primarily driven by the switch from coal to natural gas — but that’s driven by commodity prices and natural gas being so much cheaper because of the fracking boom,” he says, noting a similar scenario in renewables, with the cost of wind and solar power coming down, making them more competitive with fossil fuels.

Lenox says businesses have a crucial role to play in the transition to a green economy in terms of innovation and investing capital and curbing their own carbon footprints.

He says the commercial sector is the engine of innovation that will invent the technologies that will help bring down emissions, citing electric cars in particular: “This will be a game changer.” He also notes the importance of companies that are developing innovations such as renewables, green cement and sustainable agriculture.

“There are huge opportunities either for incumbent companies or entrepreneurs to innovate new tech that can lead the march to a clean future,” Lenox adds, pointing out that adoption of such practices by multinational corporations can lead to downstream pressure for change across the global value chain. Greater uptake of green technologies might also help to lower costs in the long run, he adds.

“And, increasingly, you will see the ESG investing community requesting that companies disclose and mitigate their climate risk,” says Lenox, highlighting the financial incentive for climate action. “Consumers are also concerned about climate change.”

Meanwhile, Lenox calls on companies to commit to targets such as sourcing renewable energy and electrifying their vehicle fleets.

They also might find success in encouraging the workforce to maintain habits developed in the pandemic. “When you get a recession like we’ve had, it tends to lower emissions globally,” he says. “But this has probably bought us no more than an extra year.” While this is only a minor reprieve, what would make a difference would be sustaining practices to which the masses became accustomed.

“Remote working, fewer commutes and less business travel are all things that could lower the carbon footprint of businesses,” says Lenox, suggesting these trends will linger. “There’s also some hope that the crisis has underscored our shared humanity, and it might lead to greater collective action on climate change.”

That said, he also notes some thorny trade-offs, including the threat of fossil fuels becoming economically unviable and the resulting layoffs and bankruptcies. “We’re already seeing a bubble burst in fracking in the U.S. These are secondary, market-driven risks,” Lenox says.

If companies don’t voluntarily move toward net-zero targets, regulators are likely to force their hands, potentially through carbon pricing, using market mechanisms to discourage behaviors that lead to carbon emissions — which could wipe significant value from corporations. Companies who don’t pursue a net-zero goal also risk reputational harm and reduced access to the capital markets, Lenox points out.

Moving early to mitigate climate change can bring many substantial benefits for businesses, especially negative-emissions technologies, Lenox adds. The services sector also stands to benefit from advising clients on how to achieve net-zero emissions.

The coronavirus pandemic may have delayed some progress, he admits, but many governments are looking to build their economies back up in a greener fashion, deploying funds to assist the recovery based on low-carbon principles.

The need for an acceleration of such efforts is obvious. A huge amount of work lies ahead, but Lenox is cautiously optimistic about the future. “It’s going to be really tough. It will require leadership at all levels and a collaborative effort between business, civil society and the state.”

The preceding appears in Acting in the Present, Shaping the Future: Leaders in Unprecedented Times, a white paper produced by Darden Executive Education & Lifelong Learning. 

Lenox is a faculty leader of the Darden Certificate in Business Strategy, the three-program noncredit certificate that will give you the confidence and skills to assess industry and organization structure, develop a plan to grow your firm, and formulate and recommend business strategy.

• 1Marshall Burke, W. Matthew Davis and Noah S. Diffenbaugh, “Large Potential Reduction in Economic Damages Under UN Mitigation Targets,” Nature 557 (May 2018): 549–553, https://doi.org/10.1038/s41586-018-0071-9.