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As physical climate risks intensify, new research from Imperial’s Centre for Climate Finance and Investment reveals how climate adaptation and resilience measures can be financed to protect businesses in London and the UK from these threats

Main image: Korakrich Suntornnites / iStock via Getty Images Plus

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What's holding back the green transition?

Mirabelle Muûls — Mon, 11 Nov 2024 12:21:54 +0000

What's holding back the green transition?

Mirabelle Muûls Mon, 11/11/2024 - 12:21

12 November 2024

New research from Imperial Business School reveals what’s stopping businesses from taking action to protect our overheated planet.

A wide commitment to reach net zero climate goals by 2050 requires a concerted effort from industry and business to make drastic cuts to emissions, consume less and introduce cleaner ways of producing. But this requires major investments.

While multinationals such as Apple have already set zero emissions goals, smaller companies can find it harder to commit. Modest as their individual impact is, combined, they make a substantial difference.

Switching to cleaner ways of doing business requires money and expertise – and we wanted to discover what exactly is hampering progress. How easy is it for smaller firms to find the funds for cleaner technology and methods? How crucial are managers when implementing greener strategies? How important is it for firms to set goals to limit their use of energy and water, and reduce pollution?

Better environmental investments

Our early analysis revealed that firms differ significantly in how much money they can borrow, and the competence of their environmental leadership. Both these factors affect corporate carbon footprints: less money means fewer green investments and better management makes for better environmental investments.

We’ve looked in depth at nearly 11,000 companies in 22 European emerging economies, collaborating with the European Bank for Reconstruction and Development. Our information came from a vast wealth of records including the European Pollutant Release and Transfer Register, which holds information on emissions and pollution for industrial facilities, as well as bank data. Crucially, face-to-face surveys with business managers yielded detailed insights into firms’ investments in green technology, the quality of environmental management and availability of credit.

We delved deep into the data and used econometric tools to show that it was indeed credit access and green management practices that prompted a shift in environmental performance.

Nearly all growth in energy demand and greenhouse gas emissions in the coming three decades will come from less developed economies

In order to measure the availability of finance at the level of individual firms, we looked at where banks’ branches are located, and what constraints they were placed under, particularly during the credit squeeze that followed the 2008 global financial crisis.

We also looked at whether corporate knowhow about greener practices tends to spread within regions. Managers in areas that have experienced extreme weather such as flooding, heatwaves and fierce storms tend to be more switched on about the need to improve their businesses’ climate performance. They are also more open to better management, and these insights trickle down among firms.

This work reinforced our initial findings. If businesses can’t borrow the money, they’re less likely to invest in more climate-friendly, but costly, green machinery and vehicles, our analysis shows, or in more efficient heating, lighting and cooling. Only 12 per cent of businesses invested in generating their own green energy. We found too that access to finance is less crucial for “low-hanging fruit” improvements such as energy-efficiency measures.

Weak and ineffective green management appears to hamper most types of green investments.

Why focus on emerging markets?

Nearly all growth in energy demand and greenhouse gas emissions in the coming three decades will come from less developed economies, research shows. These are the countries that desperately need investment to clean up their polluting industries – green investment at this stage could ensure a cleaner transition in the future. It’s a cost-effective way to help fight climate change.

Our analysis also warns against false claims. Although economic decline can herald a short-term drop in emissions, thanks to less activity, the picture is bleaker in the longer term. This is true of the global financial crisis and also of the pandemic – the economic fallout from the crisis damaged longer term green investments because cash was hard to find.

Firms differ significantly in how much money they can borrow, and the competence of their environmental leadership

In areas where banks were hardest hit by the global financial crisis, we showed that carbon emissions were 5.6 per cent higher than they would have been, had banks not deleveraged in the wake of the event. We also find that companies’ weak green management has resulted in emissions 2.3 per cent higher than they might have been with better expertise. And the scarcity of credit in some areas means emissions have been 4.5 per cent above where they would be, had they been able to borrow more cash.

Investing in the environment

Our results provide hope. Some actions are relatively cheap to implement and could lead to businesses cutting emissions – if they set out and stick to an environmental strategy, for instance, and fix clear green targets. Competent managers can also help raise their firms’ green investments and have an impact across a wide range of issues such as emissions, pollution and cleaner practices.

Weak and ineffective green management appears to hamper most types of green investments

These results offer environmental policy makers a broader mix of options beyond the established carbon taxes and carbon markets. Targeted policies could include further requirements to measure and declare emissions and environmental impacts. Development banks could boost credit lines for green investments – more access to finance ensures that businesses invest significantly in the green transition.

Not only should businesses invest in innovative new tech, but also adopt cleaner production technologies that already exist. And stronger environmental leadership within companies would help businesses make more progress towards green goals. These are opportunities that developing economies can’t afford to miss.

This article draws on findings from "Managerial and Financial Barriers to the Green Transition" by Ralph De Haas (European Bank for Reconstruction and Development), Ralf Martin (��ý), Mirabelle Muûls (��ý) Helena Schweiger (European Bank for Reconstruction and Development).

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Evie Burrows-Taylor — Tue, 10 Sep 2024 10:50:27 +0000

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Evie Burrows-Taylor Tue, 10/09/2024 - 10:50

20 September 2024

Our researchers delve into some of the critical aspects of climate change such as sustainability, energy, and carbon credits. Join us as we explore some of our most popular climate-themed articles

1. Why are businesses falling short on climate goals?

At the beginning of 2024, the world reached a sad milestone, completing an entire year in which average global warming exceeded 1.5C. In this article, we explore why, despite efforts to improve, large corporations are still playing a major role in this rise in global temperatures.

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Why are businesses falling short on climate goals?

Marcin Kacperczyk — Thu, 18 Jul 2024 13:55:21 +0000

Why are businesses falling short on climate goals?

Marcin Kacperczyk Thu, 18/07/2024 - 13:55

23 July 2024

Despite efforts to improve, large corporations are still playing a major role in the rise in global temperatures. Here, Professor of Finance Marcin Kacperczyk explores why.

At the beginning of 2024, the world reached a sad milestone, completing an entire year in which average global warming exceeded 1.5C. This was, of course, unwelcome news for the 196 nations and territories who pledged “to limit the temperature increase to 1.5C above pre-industrial levels” in the 2016 Paris Agreement.

However, to pin the blame purely on states would ignore the parallel impact of business. According to the Carbon Majors Database, the majority of CO2 emissions since the Paris Agreement are directly linked to major corporations. Even if many of those are state-owned, we cannot disregard the key role businesses can play in slowing global temperature rises.

This is not to say companies are not trying. There is a growing culture of environmental transparency and setting climate goals among businesses. So, why are we still failing to keep global warming under control?

Unrealistic targets

Our research explores some of the reasons behind this. We found that most corporate carbon pledges have a short horizon, with almost 50 per cent specifying a target just five years away, and only six per cent setting a target date of 2050, suggesting that many have limited scope to make a real impact. Additionally, 72 per cent of companies with pledges have been falling behind on those commitments, and will need to accelerate their reductions in order to meet their targets.

One possible explanation for this is a lack of market penalties for failing to hit milestones. In 2023, for example, in the wake of soaring oil profits, BP announced it was cutting its 2030 target for reducing oil and gas production from 40 per cent to just 25 per cent, and actually saw its share price increase significantly after the announcement.

The majority of CO2 emissions since the Paris Agreement are directly linked to major corporations

However, this is just one example, and doesn’t explain the root cause. Another possible reason we explored is external energy supply shocks, such as those that arose from the Russian invasion of Ukraine. If this were the main cause, we would expect to see similar commitment failures across all companies, but this is not what we observed.

This suggests that overpromising and unrealistic targets are the real problem for many businesses. Digging deeper into the data, we found that, while no particular industries had a significantly higher rate of failures, there was a link with the length of the carbon pledge, the overall level of emissions, and each company’s sales growth.

Risk factors

Specifically, we first observed that companies making long-term pledges experience lower rates of failure, on average. This seems counterintuitive, as we might assume longer-term pledges face greater uncertainty. However, our findings suggest that gradual, long-term routes to decarbonisation are more realistic and practical to achieve.

We also found that companies with higher emissions levels are more likely to fail, and by bigger margins, than those starting from a less polluting position. Given that we did not observe a strong link with specific industries, this suggests it’s the already best-in-class companies that are most likely to commit and stick to ambitious decarbonisation goals.

Finally, we found companies with higher sales growth were more likely to fail to meet their own targets. This implies that an unexpected surge in sales – and the corresponding upscaling of production – can derail a decarbonisation pathway, and companies that set targets without accurately predicting their own future growth potential are more likely to fail to meet them.

A new approach to decarbonisation

However, none of these risk factors are inescapable. For a start, businesses can make their decarbonisation commitments more robust by stress-testing them before announcing them. This would mean analysing whether targets could still be met during adverse events, and determine what adjustments would need to be made to avoid falling behind.

Alternatively, companies could simply acknowledge – publicly – that they may fail to meet their commitments in certain circumstances, such as external price shocks, unexpected sales growth, or technological changes that reduce the potential of particular carbon reduction innovations. Being upfront about this would increase credibility, particularly if alternative plans were set out clearly.

Long-term routes to decarbonisation are more realistic and practical to achieve

In support of long-term targets, companies could include measurable interim targets. This reduces the risk of management teams leaving carbon commitments to their successors, particularly if their remuneration is partly tied to meeting the interim targets. Some companies, notably energy giant Enel, have taken financial incentivisation even further, releasing sustainability-linked bonds that pay out more if the company fails to meet a specified decarbonisation target.

Whatever tactics companies choose, it’s clear a new approach is needed. Our research suggests that we have seen, in the years since the Paris Agreement, the birth of the first generation of commitments, with an emphasis more on signalling than detailed carbon reduction plans. The next generation of commitments must be more robust, impactful and – crucially – achievable, in order to really slow the rate of global warming.

This article draws on findings from "Behind Schedule: The Corporate Effort to Fulfill Climate Obligations", by Joseph E. Aldy (Harvard University), Patrick Bolton (��ý), Marcin Kacperczyk (��ý) and Zachery M. Halem (Director of the Climate Center at Lazard).

Sustainability

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Do carbon markets work?

In 2005, the European Union created the world's first and largest market-based carbon policy. Here, we look at how it's going.

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