Winning through the winds of climate change


Climate change is arguably the biggest threat humanity has ever faced. The issue is already having consequences for business today, and there will be increasing social, political and economic impact felt in the coming years. Climate change will be transformative for many industries and will affect nearly all businesses. As with any trend, those who see it, get ahead of it and shape it will be the winners.

Our scientific understanding of the phenomenon is now stronger than ever, and the latest predictions are even direr than earlier ones. If no action were taken on climate change, it is predicted that average temperatures would likely rise between 5 and 7°C over pre-industrial levels by the end of the century, with temperatures in many places rising even more.

Without exaggeration, this threatens civilization as we know it. It is one thing to hear such strong language come from fringe doomsayers; it is quite sobering when it's from the mainstream scientific experts. (Want a good investment tip? Short real estate in coastal areas of Florida.)

As the scale and severity of the problem have become more widely appreciated, climate change has prompted the most global, fastest growing social movement around an issue I have ever seen. Climate change is an issue that has captured the public's imagination, and catastrophic climactic events are now automatically, rightly or wrongly, associated with global warming.

If we simply look at the number of citations in the world's press as a measure of attention to a topic, we find that mentions of the term "climate change" have increased 10-fold from 2004 to 2009. As the physical effects of climate change are felt more and more, it is likely that the issue will continue to grow.

Social issues are quickly translated into political issues, particularly in more democratic societies, and the political agenda is already changing. There are three important trends converging at this particular moment that magnify the potential political effects of climate change as a driver of political change.

The first trend is a loss of trust in capitalism. With the financial meltdown and its effects on the global economy, trust in free market capitalism is at its lowest in decades, and there are increasing calls for greater and tighter regulatory oversight. There is a remarkable swing back in the pendulum from the extreme forms of economic liberalism that characterized the Reagan and Thatcher era.

The second trend is the increased state of flux that accompanied the election of Barack Obama and a Democratic Congress. The change in political regime in the US is creating significant political and legislative shifts in the US and around the world. The more fluid dynamics have created additional opportunities for new ideas, coalitions and legislation.

The third and perhaps most significant trend is the fundamental realignment starting to take place among diverse political agendas towards greater regulation. In the 10 years since the WTO conference in Seattle in 1999 when NGOs battling free trade took their protests to the streets, there has been an increasing awareness and frustration among citizens and corporations in developed, high-cost countries that they are being out-competed by low-cost producers in countries with lax environmental standards.

In an effort to level the playing field, corporations now find themselves sharing interests with the NGOs they once opposed, specifically around the subject of CO2 emissions and the agenda of the Copenhagen Climate Conference.

Political positions are evolving quickly. In many countries there is now competition among politicians who try to outdo one another in taking a tough stance on CO2. The United States, which for many years applied a brake to serious regulation, seems to be turning a corner. For example, there is now talk about imposing tariffs on Chinese goods linked to high CO2 emissions.

In the US, CO2 is increasingly being linked with economic competitiveness, and — and the biggest sacred cow in American politics — national security. The different branches of the military and intelligence communities are increasingly identifying climate change as a major issue of national security. Given these framings and alliances, the US can potentially shift its position on the CO2 issue very quickly.

We are already seeing a quickly evolving international regulatory context around CO2. The post-Kyoto regulatory framework is being raised, with the EU calling for a 20% unilateral cut in CO2 emissions by 2020, and with a commitment to a 30% cut by 2020 if there are broader commitments among industrialized countries. The EU has also called for a 60-80% cut by mid-century. Major multinationals and NGOs are partnering to push for stronger regulation. And there is a positive political feedback loop taking place as the issue continues to grow in importance.

What do these developments mean for the corporate executive? The key message is that there are going to be big changes, particularly regarding the pricing of CO2. These changes will come faster than most people think, and they will have a significant impact on how business is done. Those who have thought carefully about the ramifications for their production processes and strategy will be best prepared to take advantage of the opportunities the new regulatory framework provides.

Managers will need to map CO2 exposure up and down their industry value chain in order to better predict future costs. And they will have capital expenditure decisions to make that involve tradeoffs between CO2 and cost. A conclusion to be drawn is that it will be safer to err on the side of low CO2 emissions as the price of CO2 is likely to be higher than would be predicted under business as usual conditions.

Corporations will also need to think about the industries to involve themselves in. New, green technologies, the industries they give rise to, and the surrounding industrial ecosystems will create wide open spaces for new, exciting business opportunities to emerge. (To get a sense of the scale of the potential changes, consider that the oil industry alone across the value chain provides approximately 40% of the world's energy and is the largest industry in the world.)

In the context of such new market spaces and new technologies, a bias toward an identification of new opportunities rather than limiting oneself to current competencies makes sense.

Climate change and its accompanying regulatory changes will affect your life. Be ready and grab the opportunities.

About The Author

Michael Yaziji
Michael Yaziji

Michael Yaziji is Professor of Strategy and Organizations at Swiss Business School, IMD. He teaches in the areas of strategy, nonmarket strategy, stakeholder management, ethics and change management.