Business Case
Greenhouse Gas Regulations:
Reframing Risk Management as Opportunity Realization

With a number of greenhouse gas (GHG) regulations emerging — including California’s AB32 — many companies are beginning to develop internal departments and strategies to manage the risk of impending climate regulation. Looking at emissions reductions solely from a risk-management perspective, however, can cost companies the opportunity to realize additional business value from their investments.

Emerging compliance markets

Legislative frameworks aiming to reduce GHG emissions and promote low-carbon paths to economic development are emerging around the world. Over 89 countries, representing 80% of global greenhouse gas emissions and 90% of the world’s economy, have already pledged to take action on climate change. The European Union has enforced an Emissions Trading System (ETS) since 2005, and California just launched its own regulatory ETS for companies operating in the state. Similar legislation is underway in Australia, South Korea, New Zealand and Canada, and is emerging in Brazil, China and Japan.

Many companies are gearing up to manage the inherent risks of new regulations. However, those thinking about these challenges solely from a risk-management perspective may miss the real opportunities proposed by the emerging low-carbon economy.

Private sector leadership: Moving towards the low-carbon economy

Emerging climate legislation reflects the undeniable reality that the world is moving towards a low-carbon economy; we have to decouple carbon emissions from economic growth, and we have to do it soon.

While inevitable advances in climate legislation do indeed pose risks for some emission-intensive industries, they present an overwhelming opportunity for the private sector overall: the chance to lead our global economic system in a more sustainable direction. And for the individual companies steering this collective paradigm shift, real business value can be generated.

Finding the opportunities: Private sector leadership in reducing emissions

Recent studies indicate that citizens and consumers support private sector leadership on climate change mitigation. Nearly four out of five Americans believe that climate change will be a serious problem for the United States, and over half of global consumers believe corporations are better positioned than governments to combat climate change.

And guess what? They’re right. Many of today’s best climate solutions are emerging not in risk-management responses to government regulation, but in opportunistic action by companies that are shaping global mitigation strategies.

One such example is private sector leadership on how natural carbon sinks — namely tropical forests — are valued and managed. Currently, deforestation causes 17% of annual global GHG emissions while also stripping the planet of valuable biodiversity and enabling ‘boom & bust’ development cycles that do not support poverty alleviation or business growth. Many companies realize that those three impacts — climate change, biodiversity loss and poverty — pose far greater risks to global supply chains and operations than emerging greenhouse gas regulations do.

Companies who see the opportunity in addressing these integrated risks within the framework of emerging climate legislation are therefore advancing international efforts to Reduce Emissions from Deforestation and forest Degradation (REDD).

Aiming to monetize the carbon storage services that forests provide, REDD is decoupling carbon emissions from economic growth in developing and emerging markets. By investing in REDD, proactive companies are not only shaping a new option to meet emerging GHG regulations, but also generating sustainable growth and value in the new and emerging markets in which they will sell, operate and source.

In other words, by taking a proactive, opportunistic and influential approach to climate legislation (as opposed to a reactionary, risk-managing and passive approach), companies shaping how we manage our natural carbon sinks globally are advancing effective climate-mitigation policies while generating tangible business value.

Conclusions

The time to resist greenhouse gas regulations is over. Without further commitments and action to reduce greenhouse gas emissions, the world is likely to warm by 4*C above the preindustrial climate by the end of this century — and, if that happens, the world as we know it will not exist to support business as usual.

Companies leading the inevitable transition to a low-carbon economy are not only advancing global action on climate change, but also helping shape their regulatory environment and generating tangible business value. Their individual actions are leading to collective innovations, and early movers will benefit most from new market conditions.