Businesses can benefit from climate targets, but only if they adapt

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Innovative solutions and technologies, such as water pumps that require no external energy source, can contribute to economic transformation. [Climate KIC]

Aligning the global economy with the two degrees target can open up business to a vast reserve of untapped opportunities – if business leaders are willing to embrace the change, writes Bertrand van Ee.

Bertrand van Ee is CEO of Climate-KIC.

As the COP21 summit continues this week, science has set the scale of the challenge facing the negotiators. In order to initiate a pathway to keep global warming safely below two degrees Celsius, cumulative emissions must be cut from 3,745 gigatons of CO2 (GtCO2) to below 3,550 GtCO2, that’s the equivalent of cutting the combined emissions of the USA and EU in their entirety by 2030.

The two degrees trajectory is achievable, but reaching it requires a paradigm shift in the global economy. That shift represents a highly lucrative economic opportunity; already there’s a $5.5 trillion market for low carbon technologies and products and that’s just the tip of the iceberg. If, in a victory for rationalisation, negotiators agree an ambitious policy pathway that reconfigures our economy in-line with two degrees, it will unlock a blue ocean of uncontested opportunities for business.

Whatever degree of success the negotiations achieve, policy will not dictate the solution needed to capitalise on the opportunities of the low carbon economy. A single silver bullet will not be sufficient to bring about the systemic change required. We need an armoury of silver bullets to transform how we live, what we consume and how we do business.

Cutting-edge innovations that dramatically reduce carbon footprints, either by cutting emissions significantly or, ideally, completely, are being developed and implemented.

However, economic transformation cannot come from invention alone, it is also dependent on the adoption of new, innovative products and services across the economy. This diffusion of innovation is dependent on companies having an understanding of climate risk and of the opportunities for climate change to shape an actionable business case for purchasing new equipment, learning new ways of doing things or adapting existing capital to new business models and processes.

Our recent study showed that most European business leaders, (63%) acknowledge the regulatory and physical risks posed by climate change.  63% also believe responding to climate change would drive growth as demand for environmentally sound products and services increases. To address the identified risk and opportunity, 59% of businesses said they have a strategy to respond to climate change.

However, a surprising amount are not looking to innovation to secure their place in a carbon constrained economy. Only 3 in 10 see a large amount of scope to respond to climate change using innovative technologies and ways of working.  Even less (14%) believe there is a large amount of scope to evolve their business model to reduce resource consumption and carbon emissions.

Surprisingly, irrespective of climate change, over a third of respondents conclude that their market is not subject to external changes, so they do not need to incorporate any form of innovation.  This myopic thinking ignores the corner of business history littered with the decaying remains of business models that failed due to the disruptive impact of new technology; such as the American Locomotive Company and Betamax.

Innovation has played a critical role in most socioeconomic revolutions.  Climate change is no exception.  Science shows we need to reconfigure the economy in-line with the two degrees trajectory – and innovation must sit at the centre of the transition.  Scientists estimate that by deploying technology, business can potentially reduce the emissions intensity of industry by approximately 25%, with innovation reducing this by up to another 20%, before technological limits are approached in some energy-intensive sectors.

Seemingly, many European business leaders have been lulled into the false illusion that their operations can transition into the low carbon economy incrementally. Many have forgotten how to innovate, or are delaying innovation until they get a policy silver bullet.  That strategy doesn’t reflect their understanding of the material risk of climate change; or the realistic timelines to scale up radical innovations to turn the threat into an opportunity.

Our study also explores the causes of business’ addiction to incrementalism, as well as potential solutions to break that cycle.  There was a clear signal to the COP21 negotiators that business needs the certainty to internalise the challenge of climate change in order to apply innovation to responding: only 30% said climate change regulation encouraged them to develop new innovations to respond to climate change.

Given the global scale of the climate challenge, the study explored the role of industry collaboration for enabling businesses to tackle common carbon-related issues.  Two-thirds believe EU-level competition law has limited industry’s ability to collaborate and respond to climate change.  The rise of the sharing economy, championed by Airbnb, is a potent weapon in the carbon war.  One third of business leaders see the value in sharing best practice, costs and resources to improve efficiency and reduce emissions that would enable them to respond effectively to climate change.

Business now faces the choice, either to shape the needs and impacts of a zero carbon future, or to be shaped by it.  Education is needed to equip business leaders with the knowledge and skills to shift them to a larger, “system-level” approach.  Post COP21, they must actively place themselves on an innovation journey; creating channels for radical innovation to flow into their operations, making them more resilient and equipped to seize the opportunity that a zero carbon economy presents.