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From?Vol. XLIV, No. 2, "Green Our World!",? June 2007

Imagine the scene: the year is 2027 -- China is responsible for 15 per cent of the world's energy consumption; California has imposed permanent water rationing; relief agencies warn that late rains again raise the spectre of widespread hunger in southern Africa; and cases of malaria are being reported among holidaymakers in Greece and Turkey.

It is impossible to predict exactly what the future holds, but given the current knowledge of climate science, this picture is certainly not unrealistic. If it becomes a reality, it will significantly affect what "doing good business" is going to entail in 20 years, as a diverse set of drivers begins to act more forcefully on the political and economic landscape, radically altering the world in which we live and work. There is no doubt that the effects of climate change will become harder to ignore.

Atmospheric carbon dioxide (CO2) concentration, approximately 280 parts per million (ppm) before the industrial revolution, has increased to around 380 ppm today. Each doubling of the greenhouse gas (GHG) concentration raises the Earth's equilibrium temperature by about 3° Celsius. GHG emissions are rising globally and the Earth's temperature, under "business as usual" trends, will likely increase by between 2°C and 4.5°C by 2100. The Intergovernmental Panel on Climate Change suggests that in order to prevent a 2°C rise -- the widely accepted threshold for unacceptable and unpredictable change -- global emissions growth would need to peak by 2015 and then decline fairly sharply to reach the 50 per cent cut required by 2050.

Climatic changes will have direct impacts on companies, for example, on infrastructure and investments. Legislation will become more far-reaching and extensive as electorates wake up to the problem and Governments react to the consequences of changing weather and the costs of adaptive action. The seeds of a regulatory framework are already in place, the best known initiative is the Kyoto Protocol, committing ratifying countries to reduce their CO2 emissions over fixed periods of time. However, political progress is also being made in many other contexts.

Despite federal absence from the Kyoto process, many American and Australian states, as well as world cities, are developing policy frameworks to address climate change. For example, California Governor Arnold Schwarzenegger recently signed Assembly Bill AB32, which places a cap on the state's GHG emissions and creates a clear path for a market-based system and other mechanisms to bring the state's emissions back down to the 1990 levels by 2020 -- one of the possible regulatory approaches is the introduction of a "cap and trade" scheme. The emergence of emissions trading, which puts a price on carbon, is one of the strongest trends in tackling GHG emissions. Trading systems enable participants to reduce emissions at the least cost, giving them the option to buy reductions from elsewhere when their own abatement costs are high. The European Emissions Trading (EU-ETS) scheme, a very prominent example, traded over $19 billion in 2006.

There are many other similar schemes evolving. The Regional Greenhouse Gas Initiative system in the United States, for example, brings together northeastern and mid-Atlantic states to reduce emissions from electric power generators via a regional trading scheme. In the United Kingdom, there are plans to extend emissions trading beyond companies that pass the threshold for the EU-ETS and to launch a domestic scheme where energy users with over £15,000 a year electricity bill would have to join. Even those companies not covered by regulation are looking to flexible, market-based solutions. For example, HSBC and BSkyB recently became the first major bank and the first media company, respectively, to go carbon-neutral. They effectively reduced carbon emissions to zero by improving energy efficiency, sourcing green power and then purchasing "carbon offsets" through the growing voluntary carbon market.

It is clear that the operational need to manage the risks associated with regulation, reputation and changing weather patterns will inevitably make the climate change issue increasingly prominent on the corporate radar. But it is short-sighted to think that defensive action will be the main driver of change over the next 20 years. The flip side of risk is opportunity, and as carbon pricing evolves and consumer awareness increases, new markets are already opening up. Even at a basic level, reducing emissions can result in significant cost savings. The Climate Group's 2007 report, Carbon Down, Profits Up, shows 27 companies, including BP, BT and HBOS, reporting direct cost savings as a result of actions taken to reduce emissions. On average, these companies have cut their GHG emissions by 18 per cent, with energy efficiency one of the most beneficial investments they have made. A recent paper from McKinsey supports the report's message, showing that 25 per cent of the actions required to stabilize atmospheric GHG levels, including fuel efficiency and building insulation, can be made at no net cost to the economy.

For those companies placed to play an active role in developing products and services that will form the building blocks of the low-carbon economy, the opportunities are potentially even greater. The Climate Group's report, In the Black: the Growth of the Low Carbon Economy, showcases the rapid growth already experienced. Data gathered from four countries (Germany, Japan, United Kingdom and United States) and four key areas (low-carbon power, energy-smart products, low-carbon vehicle technologies and low-carbon financing/carbon markets) provide a growing body of evidence of the increase in revenue, profits and jobs being generated by companies taking the lead in providing climate change solutions. This generates exciting interest from investors and financial institutions that recognize the companies' growing need for capital and opportunities for value creation. For example, the market capitalization of the 85 largest renewable energy companies reached $50 billion in 2005, double that of 2004. In 2006, investments in renewable power reached $71 billion, up almost 50 per cent from the previous year. With the worldwide market for wind, solar, geothermal and fuel cell energy estimated at $200 billion in 2020, it is no surprise that dynamic companies are looking to establish themselves in this field.

Finally, increasing public awareness about climate change also creates a significant and growing opportunity for consumer companies. Research carried out by The Climate Group in 2005 found that 28 per cent of consumers in the United Kingdom and 19 per cent in the United States are strongly concerned about climate change, supporting a potentially much larger market than for organics or fairtrade products when they first took off. Furthermore, the group showed a latent demand for products, services and brands that would allow them to reflect their climate change concerns in their spending. However, significant barriers to action were also identified, particularly around convenience and fairness.

Against this backdrop, The Climate Group launched in April 2007 "We're in this Together", a groundbreaking partnership of famous brand-name companies committed to offering simple, inexpensive low-carbon solutions to consumers. It aims to help every household in the United Kingdom to reduce emissions by 1 tonne, a total of around 24 million tonnes over the next three years, more than the combined household emissions of Scotland and Wales. B&Q, Barclaycard, British Gas, Marks & Spencer, 02, Royal & SunAlliance, BSkyB and Tesco have all united behind the campaign and are providing effective ways for people to take action. Tesco is committed to selling 10 million energy efficient light bulbs in 2007 -- a fivefold increase on 2006 -- and is offering them in stores and online at half price, while B&Q offers half-price loft insulation. As demonstrated by all campaign partner companies, helping consumers to overcome barriers to individual action can unlock new growth and drive brand differentiation, as well as help achieve ambitious sustainability goals.

Over the next 20 years, companies taking a lead on climate change will not only make a direct contribution to emissions reduction, but will have the credibility and standing to invite staff, customers and suppliers to follow them, based on what they do, what they have pioneered, or the products and services they offer. It is these companies, recognizing the synergies between cutting GHG emissions and increased productivity and revenue, that will be the new future in business.