However, the fundamental fact is that we are still consuming natural capital — the limited stock of natural resources on which business and society depend for well-being, security and prosperity — at an alarming and unsustainable rate. Nearly half of the world’s 1,200 largest companies would be unprofitable if they had to pay their fair share of the $3.4 trillion environmental and social costs of their resource consumption and pollution in 2015.
The good news is that our State of Green Business Index — a review of corporate sustainability performance over the last five years shows — without a doubt that many companies and investors genuinely understand the fundamental importance of sustainable business and are taking action to reduce environmental impacts.
During 2016, the CEO of ExxonMobil, Rex Tillerson, pushed for a tax on carbon emissions, joining a growing chorus: So far, more than 1,200 companies have either set an internal price on carbon or committed to using one, according to the CDP. Setting an internal carbon price helps companies better understand future policy scenarios and informs the capital allocation process — for example, in decisions regarding investment in carbon-efficiency projects.
These insights should help companies prepare for business in an environmentally constrained world by guiding them towards low-carbon, resource efficient technologies and business models.
The Natural Capital Protocol was launched in 2016 to extend these benefits across other environmental and social costs not yet fully priced by the market. A growing number of companies are adopting this approach and putting “shadow prices” on a range of natural capital impacts and dependencies, from carbon and other pollutant impacts to water and other natural resource dependencies, to inform decisions and get ahead of the regulatory trend.
2016 was also a pivotal year for sustainable finance. Total assets invested that consider environmental issues have grown 77-fold since 2010 and now exceed $7.79 trillion in the United States. Investment focused on renewable energy and technology was more than $285.9 billion in 2015, and China recently announced that it will invest $361 billion in renewable energy by 2020. By then, renewables will make up half of all electricity generated in China. The growth of innovative financial instruments also accelerated, with the total value of the green bond market doubling in 2016 to $81 billion.
Investors are increasingly divesting from the fossil fuel industry. The latest thinking is that if climate policy is effective it is likely that many assets in industries reliant on fossil fuels could be impaired or worthless — known as “stranded assets.” Investors do not want to be exposed to the risk that equity holdings lose value as a result of action to tackle climate change. The amount of assets under management that investors have committed to divest from fossil fuel companies reached a record $5 trillion in 2016.
Last September’s G20 Summit, under the leadership of China, concluded that the adverse effects of climate change threaten economic resilience, growth and financial stability, and capital markets are best placed to finance the transition to the low-carbon economy, given the scale of investment required. The synthesis report called for accelerated integration of green finance into markets to finance a range of environmental initiatives, from pollution control to climate change mitigation. This was the first time that G20 Leaders referenced the importance of greening the financial system in the summit’s annual communiqué.
There are also positive signals in the key performance indicators of sustainable business among the world’s largest companies. Corporate carbon emissions are at a five-year low, down more than 10 percent since 2011. Water use is following a similar trend. Water pollution has fallen even more quickly, down more than 25 percent since 2013. Total waste generation is down 11 percent. Two thirds of U.S. companies and four-fifths of global companies now disclose data on their environmental impacts. Overall, the cost of natural capital impacts has fallen by more than 15 percent since 2013.
But it is important to reality-check these findings. Reductions in natural capital impacts have taken place alongside falls in corporate revenue, suggesting that decoupling economic growth from resource use and pollution remains challenging for most companies. Although more than half of companies have targets for reducing carbon emissions, they account for only a fraction of the annual reduction needed by 2050 to keep global temperature increases to less than 2 degrees Celsius, as committed to under the Paris Agreement. Moreover, less than a quarter of companies are disclosing carbon emissions embedded in the goods and services they purchase and the capital investments they make — so-called scope 3 emissions — which account for around 90 percent of indirect emissions.
In December, the recommendations of the G20 Financial Stability Board’s Task Force on Climate-related Financial Disclosure provided a clear signal to companies and investors to ramp up climate risk reporting. The international body, chaired by Michael Bloomberg and comprising senior figures from business and finance, states that climate change poses a serious risk to the global economy. It recommends that all organizations, including companies and financial institutions, provide information about climate risk and opportunities in their approaches to governance, strategy, risk management, metrics and targets.
The recommendations further advise companies to integrate climate-risk management in forward-looking business strategies and financial planning, such as scenario analysis to align with government commitments to 2-degree Celsius energy transition pathways. Investors are advised to disclose the greenhouse gas emissions associated with each fund or investment.
The shifts in climate action are compelling. Companies will need to embed sustainability at the heart of business strategy to deliver shareholder value, while ensuring that their relationship with society is a positive one.
The challenge of 2017? To identify business models that decouple growth from resource use and pollution. Rigorous measurement and disclosure will be key.
This blog introduces the annual State of Green Business report published by GreenBiz and Trucost.