Two views: New Playing Field

The global imperative to reduce greenhouse gases is forcing governments and private enterprise to redefine “business as usual.” Our two experts discuss the world’s changing economic model.

What new obstacles are companies facing as they seek to address climate change?

Adrien Fourmon

Disclosure and transparency are two primary challenges companies must overcome as they undertake the fight against climate change. Under the United Nations Framework Convention on Climate Change (UNFCCC), companies will have to provide reliable, transparent and comprehensive greenhouse gas information relative to their activities. The reporting requirements will include information on emissions reduction efforts as well as on finance, technology transfer and capacity-building. This transparency and reporting system will enable better understanding of and progress on climate actions.

An unprecedented number of companies and investors are now actively addressing the climate change challenge—making climate action commitments, pledging carbon neutrality or net-zero emission goals, and disclosing credible action plans to back up their ambitions.

Julien Paulou

It’s true that demand for transparency and disclosure is more prevalent than ever, as witnessed by the recent announcement at COP26 of strengthened reporting rules for companies through the Corporate Sustainability Reporting Directive (CSRD).

I have also seen a more general shift—from the last 10 years, which I call the “decade of ambition,” to the next 10 years, which I call the “decade of implementation.” Corporations have done a lot of work, mostly on defining objectives, since the Kyoto Protocol was implemented in 2005. Today the world has only 10 years left to meet the emissions objectives laid out in Kyoto. Companies understand this and they know they must look beyond immediate returns and take environmental impact into account in their decision-making processes. 

The most successful companies will be those that anticipate the new dynamic. Construction companies, for example, must go beyond regulatory requirements and deliver buildings that are exemplary in terms of energy efficiency. Other companies will have to diversify their offers in order to steer away from carbon intensive activities.

Achieving emissions reduction targets will be difficult without binding legislation. Is the world making progress in this domain?

Adrien Fourmon

Climate change litigation is expanding, becoming a global phenomenon with plaintiffs seeking rulings that both private and government entities are being forced to address. For example, in France several environmental associations have sued the state for “climate inaction.” Two cases come to mind: “Grande Synthe” and the “Affaire du siècle.” In both these cases, the French government was convicted of failing to comply with the Paris Agreement. The government was given nine months to curb greenhouse gas (GHG) emissions such that they comply with the Paris Accord objectives.

Up to now, climate litigation has focused on companies that have contributed or continue to contribute to GHG emissions. Companies are also being targeted for failure to prepare for the effects of climate change. So yes, legislation aimed at inhibiting climate change is expanding around the world.

Julien Paulou

Progress is being made, but it’s not happening as quickly as everyone would like.

For example, the European Emissions Trading System (EU ETS), established in 2005, has been an effective tool to reduce emissions, but unfortunately its effectiveness has been hampered by persistently low carbon prices. 

Another obstacle to reducing emissions has been the phenomenon known as carbon leakage, which happens when production is moved to countries with less robust carbon standards. To prevent carbon leakage, earlier this year the EU presented the Carbon Border Adjustment Mechanism (CBAM), which proposes to equalize the carbon playing field by taxing imports to Europe of goods from countries with lower carbon standards. By way of example, half of France’s carbon footprint is outside of its borders. Under CBAM rules, countries that do not have carbon trading schemes will be subject to EU carbon taxation on goods exported to the EU. This mechanism is also designed to help protect European industry, although it can also raise competitiveness issues. Hence the need for global standards.

Which measures most need to be taken and why do we need the private sector to fund climate change action?

Adrien Fourmon

Finance and investment are two domains in which a commitment to fighting climate change is critical. During COP 26, nearly 500 global financial services firms agreed to align $130 trillion—some 40 percent of the world’s financial assets—with the climate goals set out in the Paris Agreement. This kind of action will have an enormous impact on the achievement of climate goals, including limiting global warming to 1.5 degrees Celsius.

Another important measure is the European Commission’s ongoing revision of climate action legislation as it relates to 2030 emissions reduction targets. Known as “Fit for 55,” the legislation package is aimed at limiting the EU’s emissions by at least 55% within the 2030 timeframe, and thereby positions Europe at the forefront of the fight against climate change.

Julien Paulou

While reducing emissions of existing facilities is important, new investment initiatives must take measure of their impact at every step. This means not only the building of physical infrastructure but the design of logistics networks, supply chains and companies’ very business models.

The emphasis will be on efficiency and prioritizing essential needs. There will not be enough green energy to go around, and companies will be looking to secure energy resources for their needs. In order to secure stable and reliable energy sources, some companies are beginning to either invest directly in their own energy production or sign agreements with providers of renewable energies. For example, BASF is buying shares in a wind farm in Holland, with a long-term power purchase agreement. 

This new and challenging economic dynamic effectively forces private enterprise to play a lead role in the fight against climate change. Under the new “rules,” it will fall to each company to assess its level of risk exposure. Some will feel stakeholder pressure more strongly than others. Transition risks, or risks associated with the shift toward a more environmentally responsible future, include a new range of things such as weather events caused by climate change and business risks such as pressure from clients, investors and other stakeholders.

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Adrien Fourmon
Head of Public Law, Energy and Environment practice, Jeantet Paris

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Julien Paulou
Director, Energy & Climate
Deloitte France