Download Climate change, the environment, and enterprise

Climate change, the environment, and enterprise Professor Gordon L Clark, Director, Smith School of Enterprise and the Environment, University of Oxford April 16th, 2014; revised June 22nd, 2015 Thank you very much for your invitation to speak today. And thank you, for your kind words of introduction. It is a pleasure to be here. I very much appreciate the opportunity to talk about issues of great significance for humanity, our respective countries, and most importantly, coming generations. When I think about climate change, the environment and enterprise I always think about what kind of world my son Peter is going to inherit, and the kind of world that his children might encounter. In many respects, climate change is all about intergenerational equity. Today, I discuss climate change in relation to key aspects of our environment. In doing so, I briefly consider the recent IPCC report (Intergovernmental Panel on Climate Change report) on climate change and then move on to how major companies conceptualise climate change in relation to their use of the environment. As you will see, I believe that the IPCC report must be taken seriously even if there remain fundamental issues to be resolved in terms of understanding, scientifically, how the global climate system functions and how we can take our scientific understanding of the global climate system and apply it to individual regions and indeed specific countries. The significant scientific challenge and the challenge to the scientific community, is to demonstrate how, conceptually and empirically, we can bring these issues down the spatial hierarchy to nation-­‐
states so as to inform political leaders as well as the community. Bringing climate change to ground is an essential step in mobilising a common concern about the future well-­‐being of humanity, and their respective societies. A great deal is said about climate change by governments, research institutions, the media, and the social media. It is now one of the staples of public debate, in developed countries East and West and in countries that are vulnerable to significant environmental events, whether those be earthquakes, typhoons, droughts, and even massive flooding. Curiously, climate change is often denied as something real, or something that is highly likely. And yet, at every turn, climate change is invoked to explain the occurrence of environmental events that don’t seem “normal”. We must be careful not to overemphasise single events; there is a significant random factor in the weather. For example, in the UK during January of last year we experienced a volume of rain that had not been witnessed for more than 300 years. Was this evidence of climate change? It’s hard to say. It is telling, however, that the historical record provides evidence of rainy Januaries, dry Januaries, warm Januaries, cold Januaries, and so-­‐called average Januaries. What we do know is that people have a tendency to overemphasise current events over long-­‐term trends. We have now had a series of IPCC reports each of which concluding that climate change is occurring, and that human activity is a significant contributor to climate change. What do we mean by climate change? Simply, we normally refer to the upwards trend in the average global temperature: that is, the trend estimated over many thousands of years with and without human occupation. There is overwhelming agreement in the scientific community that the average global temperature is increasing, will inevitably increase by 2°C by about 2050, and could rise by 4°C by about 2100. There are, of course, forecasts that suggest that the average global temperature could increase beyond 4°C to perhaps even 6°C in about 150 years. 1 There is overwhelming agreement in the scientific community that the increase in the average global temperature is largely due to human activity. Indeed, it is widely accepted that CO2 emissions since the Industrial Revolution have been the principal contributor to the increasing average global temperature. I have no hesitation in accepting these conclusions. But I also recognise that there is considerable uncertainty over the path of increasing average global temperatures beyond 2050. What will life be like with a 2°, 4°, or 6° increase in the average global temperature? Well, there are some quite obvious implications that follow. For example, the melting of the Arctic and Antarctic ice caps will contribute to increasing sea levels. As the oceans warm, they will expand. This will also contribute to increasing sea levels. As the oceans warm, nutrient levels will change, fish stocks will be depleted, and increasing acidity will eat away at vegetation and the living havens that give the fish habitats in which they thrive and prosper. These are fairly simple and straightforward conclusions, justified by reference to our current scientific understanding of the interplay between climate, oceanography, biology, and species survival. If alarming, we should recognise that it is difficult to make precise estimates of the likely local impacts of a 2° compared to a 4° compared to a 6° increase in the average global temperature. What we do know is that some regions of the world will be more adversely affected than others, and that human life, as we know it, is not likely to survive a 6° increase in the average global temperature. We also know that adapting to the increase in the average global temperature will require considerable human ingenuity and institutional flexibility. Indeed, for social scientists this is one of the most remarkable aspects of the global climate change process. Two obvious questions are presented by global warming. (1) Given the scientific evidence, why has humanity been so slow to respond thereby reinforcing the increasing trend in global warming? (2) How could we, or should we organise ourselves so as to mitigate (the best option) global warming or (more likely) adapt to global warming? Let’s not underestimate human ingenuity. After all, humanity has survived and prospered over thousands of years. But we’ve done so by responding to and adapting to changing climatic conditions which have not been the result of our own actions. Furthermore, we have done so on an incremental basis, depending upon a fairly rudimentary understanding of local conditions rather than a scientifically informed and comprehensive understanding of the whole planet. Moreover, unlike our forebears, we are now very much aware that incremental adaptation may be insufficient. Indeed, incremental adaptation may be self-­‐defeating in that unless we take aim at the long-­‐term horizon, short-­‐term responses will simply make inevitable the worst case scenario. Let me make this more personal. We forgive one another when the actions we take lead to regrettable results if we could not reasonably foresee the consequences of our actions. But we blame one another, indeed sanction one another, when we take actions that lead to regrettable results that could have been foreseen. Neglecting to do the obvious is not easily forgiven or forgotten. So, if we know that our current actions carry adverse consequences for future generations we have a moral obligation to do our best to choose actions that have the least impact on the welfare of future generations. Climate change is a moral issue as much as it is a scientific and/or social scientific issue. Not surprisingly scientists, wonder aloud why political leaders have not done more to anticipate the consequences of the worst case scenario. There are all kinds of explanations for inertia and the wilful disregard of the obvious. Some blame the world’s leading industrialised countries for not taking immediate steps to organise a response to global warming. Others blame the developing economies of Asia for their disregard about the obvious costs to humanity, in general, of their 2 particular growth trajectories. Yet others wring their hands believing that one country, or even a group of countries, cannot make a difference to global warming if other countries take advantage of their willingness to make sacrifices on behalf of future generations. These dilemmas can be modelled using game theory, informed by realist assumptions about human sentiment and behaviour. So, for example, it is widely believed that human beings are, at base, profoundly selfish—concerned only about their immediate well-­‐being and are, at best, indifferent about the welfare of others in distant places. I find this type of argument unconvincing. Yes, there is no doubt that people can be selfish. Yes, people can exploit others particularly if they think they can get away with it. And yes, people can be myopic. But, research in cognitive science and behavioural psychology suggests that people are, by nature, cooperative and collaborative. Indeed, people intuitively recognise the costs and consequences of opportunism for themselves and others. Likewise, people intuitively recognise the advantages of collaboration and cooperation for themselves as well as their families and communities. These fundamental aspects of human nature must be at the very centre of our common commitment to dealing with global warming whether we focus upon mitigation or adaptation, or both. I want to turn to the connection between climate change, the environment, and enterprise. In doing so, I suggest that there are good reasons to hope that large enterprises can play a significant leadership role in responding to global warming. Why focus upon large enterprises? In many developed economies, East and West, large enterprises are the chosen way we organise economic activity. If private, we nonetheless require these enterprises to carry through their activities in relation to the laws of the land as well as our expectations as regards proper behaviour. If public, large enterprises carry a variety of objectives some of which are entirely about economic efficiency while other objectives seek to combine this with social aspirations. Indeed, the public-­‐
private divide is somewhat arbitrary in that many countries rely upon large enterprises to create income, distribute wealth, and material well-­‐being. I recognise, of course, that we tend to idealise certain forms of the modern corporation distinguishing, for example, between Anglo-­‐American corporations and continental European corporations. I will leave this issue, for the moment, and return to it in my conclusion. At the Smith School of Enterprise and the Environment, one of our objectives is to better understand the role and significance of enterprises in promoting innovation with respect to the stewardship of the environment. Indeed, when we talk about the environment we sometimes refer to it as societies’ natural capital. That is, just as operating plant and equipment are capital, so too are the environmental resources needed to produce goods and services. In a similar manner, if we care for and maintain the operating plant and equipment of a corporation, so too we should care for and maintain the environment. Thus, when we talk about the sustainability of a corporation we can reasonably talk about how best to maintain corporate capacity while, at the same time, investing in environmental resources so as to sustain their role and significance in the production of goods and services. One of the core commitments of the Smith School is to better understand how and why companies care for and sustain their natural capital. With respect to global warming, it is clear that many major corporations have become very self-­‐
conscious of their carbon footprints. Even if not, there are now sufficient public and private institutions that are more than willing to measure the carbon footprint of major corporations and publicised findings. In this respect, the remarkable increase in our knowledge of corporations’ carbon footprints is due to the confluence of three reinforcing factors. 3 First, corporations themselves become very aware of the possible costs and consequences of their carbon footprints should governments introduce carbon-­‐pricing. Second, some corporations have come to realise that their activities are so reliant upon the carbon economy that they bear much of the responsibility for global warming. Third, even if they were to disregard their carbon footprints, there is increasingly a market for this information; bondholders, shareholders, and stakeholders have claimed a legitimate interest in corporations’ carbon footprints. In some sectors, there is now a race to the top in the sense that those companies dependent upon carbon for their productive activities have sought to demonstrate that they are “better than average” in terms of carbon intensity. We have inherited an industrial and institutional formation that is carbon dependent. Just as the industrial revolution was hundreds of years in the making, it is difficult to imagine how major corporations could radically, overnight, transform their productive activities from carbon-­‐dependent to something else. Nonetheless, as corporations become more self-­‐conscious of their carbon footprints, as the price of carbon assumes greater significance, as shareholders and stakeholders respond to increasing information about carbon dependence, and as the public through social media become more aware of the issue and more likely to campaign against carbon dependency, there is little doubt that major corporations will seek alternatives. Not all companies are likely to be so responsive or innovative. Indeed, we might expect innovation to be a follow-­‐the-­‐leader process of change and imitation. What is clear from our research is that the public expects a great deal from the largest companies—those in the public spotlight, and those who are believed, rightly or wrongly, to have the resources and capabilities consistent with innovation. The carbon issue is very challenging for most process-­‐based companies. It is less challenging for those companies that don’t produce products so much as services―for example, information technology companies such as Google, Microsoft, Facebook, etc. So, we can expect that those companies and those industrial sectors that rely upon carbon will see their ‘value’ discounted in the future relative to those companies and sectors that are either less carbon dependent or more able to adopt different types of technologies consistent with a low carbon footprint. This type of market pricing and discounting always accompanies industrial transformation. In this case, however, it is arguable that public awareness of carbon foot-­‐printing is likely to accelerate industrial transformation. We might reasonably ask whether governments and regulatory agencies ought to take a more active role in promoting disclosure and transparency of these issues. Importantly, major corporations have also become very much aware of their reliance on natural resources that are either directly or indirectly affected by climate change. For example, global warming has significant implications for the long-­‐term availability of water, biodiversity, and energy. To the extent that global warming can be shown to cause, or be correlated with, a greater frequency of water shortages in some regions of the world, then managing water use and its sustainability over the long-­‐term may well be a key ingredient in realising the long-­‐term value of those companies and industrial sectors dependent upon water as an important ingredient to production. If we combine a concern about long-­‐term water security with likely increasing claims upon existing water resources by other industrial activities and an increasing population then you can see that in some regions of the world water will become, or has even now become, a fundamental driver of corporate value. Not surprisingly, we have seen instances where companies have become remarkably efficient in their use of water, water capture through the production process, and the stewardship of water resources other commercial activities, communities, and whole nations. I should stress that corporate water efficiency has various dimensions. It depends, for example, on what can be done over the short term in terms of increasing the efficient use of water within the 4 existing configuration production. There are many instances where companies have modified their production systems so as to improve eco-­‐efficiency, reaping immediate benefits from creative management and efficient use of capital. Over the medium term, the retention and recycling of water, through its capture and purification has made a significant difference to its use in water-­‐
stressed regions of the world. This often requires significant investment, going beyond the adaptation of existing capital equipment to changing the productive process itself. More fundamental, have been long-­‐term investments in the collection, transportation, and use of water. For example, instead of relying upon public or community water resources, in regions of the world where the infrastructure is either inadequate in the face of increasing variability in rainfall—or simply of such poor quality in the face of competing demands on increasingly scarce resource —
companies have had to transform their production systems. In conclusion, let me make two points. Most obviously, responding to climate change is the challenge of the 21st century. Perhaps uniquely, when considered over human history, it is a challenge that is simultaneously local and global. There will not be any region of the world that will not be adversely affected. Standing still, and waiting for clarity on the precise dimensions of climate change and the costs and consequences of alternative courses of actions, is not an option. Perhaps less obviously, but just as important, we need to mobilise enterprises to be agents of innovation in responding to climate change. Whereas some commentators believe corporations are the problem, we need to enlist them in fashioning solutions. Who else has the wealth, the knowhow, and the capability and resources to make a difference? 5