What's the Role of Business in Confronting Climate Change?

The 26th annual United Nations Climate Change Conference of the Parties, also known as COP26, ended with a hard-fought pact that called on businesses and governments to meet their climate change goals faster.

The event followed an August report by the Intergovernmental Panel on Climate Change that not only amplified the reality that climate change is rapidly intensifying, but signaled a responsibility and opportunity to change course.

We asked Harvard Business School faculty affiliated with the Business & Environment Initiative what role business leaders should have in addressing climate change, and what business opportunities could emerge from efforts to mitigate and adapt to it. This is what they said:

Lauren Cohen: Fund environmental innovation

Lauren Cohen

The recent IPCC climate report highlights two central findings:

1. There are considerable “unknown unknowns” in the future of climate change, and that these unknown unknowns may in fact represent the largest drivers of both climate change, and optimal solutions to address it.

2. And that governments alone—along with ultimately unenforceable pledges by those governments—will be insufficient to solve these challenges, necessitating an even larger role for private markets than first thought.

Combining both findings, we need to create a flexible system that can adapt and allocate capital nimbly as these unknown unknowns arise and take prominence. The best way to do this will be through a combination of flexible ex-ante incentives, along with ex-post mechanisms to reallocate resources quickly. Namely, sequential, staged-round funding in environmental innovation should form a bedrock of all solutions proposed, from public to private capital funding.

Lauren Cohen is the L.E. Simmons Professor in the Finance & Entrepreneurial Management Units.

Boris Vallée: Make decarbonization profitable

Boris Vallee

Two words come to my mind when thinking about business leaders and the climate crisis we are facing: responsibility and opportunity. Businesses have been a large source of carbon emissions themselves, and maybe even more importantly, businesses have been (and often still are) advocating for actions and behaviors that are highly carbon intensive. Then, there is also mounting evidence that certain business leaders have been actively concealing important research, lobbying to undermine regulatory efforts, and attempting to influence the scientific consensus and the public opinion on the impact of human actions on climate.

The responsibility of the business world in the situation we are in is therefore immense and unquestionable, and reminds us that capitalism is a means and not an end, and should be treated as such.

But by the same token, businesses can have a disproportionate impact in addressing the current situation, as capitalism is an extremely powerful engine that can operate with agility. If enough will is put into aligning profit with decarbonization, business leaders should be able to drive large scale impact while generating an abundance of profitable business opportunities. The awareness to the need for this alignment is rising among both business leaders and investors, but we need to turbocharge it if we want to have a shot at avoiding the worst.

Boris Vallée is the Torstein Hagen Associate Professor of Business Administration in the Finance Unit.

John Macomber: Combine forces to increase impact

COP26 in Glasgow makes it clear that global political leaders will not be able to coordinate a big worldwide response to climate and economic pressures. Therefore, society will need to make choices at every level and in almost every location—from homeowner to business to investor to government—about what to protect, when to plan for rebound and recovery, and what assets—and individuals—to not protect in the face of river flooding, wildfire, storm surge, and drought.

Business leaders, including capital providers, can work to preserve shared value so that we the people aren’t all hurt by chaos in the decades ahead. This involves thoughtful benefit-cost analysis that looks into a future where the exposures are uncertain, and also not evenly distributed.

The best investors, operators, innovators, and policymakers will assess probabilities of the perils as they evolve over time. They will fully count the value of co-benefits in public health and environmental justice as they filter their opportunities in construction, finance, engineering, sensors, and climate risk modeling.

Crucially, the most competitive districts and cities will figure out ways for many sources of capital to combine forces, region by region, toward coordinated long-view responses. This will lead to measurably better results for whole communities than can obtained just by diffuse investments in scattered pockets of resilience. The laggards, in contrast, will see value destroyed and they will fall behind.

John Macomber (@cleantechcities) is a senior lecturer and co-author of Healthy Buildings: How Indoor Spaces Drive Performance and Productivity.

Business leaders have two roles in this extraordinary moment. The first is to move as fast as possible to reduce greenhouse gas emissions from their own operations and from their supply chains. It’s increasingly clear that many firms can cut their emissions by as much as 50 percent relatively quickly and see a strong return on capital as they do so.

Trane Technologies, for example, has committed to taking a gigaton of carbon out of their customers’ operations by upgrading their HVAC equipment—and is confident that everyone will make money in the process.

The second is to support effective climate regulation. Decarbonizing the world’s economy requires rebuilding not only the entire electric power industry, but also transportation, infrastructure, construction and agriculture. Action by individual firms can take us a long way, but we won’t solve the problem of climate change without building real partnerships between the public and private sector to ensure that everyone has the skills—and the incentives!—to reduce their emissions. Climate change threatens the health of the entire economy. Business can lead the way by insisting that politicians act now to ensure our future.

Rebecca Henderson (@RebeccaReCap) is the John and Natty McArthur University Professor and author of Reimagining Capitalism in a World on Fire.

Joseph Lassiter

Rapidly lowering fossil carbon emissions, while incredibly important to many, must not allow us to ignore the urgent immediate needs of much of humanity. The world needs abundant quantities of clean, 24x7x365, reliable, geopolitically secure and affordable energy NOW to revitalize and redesign the stagnant industries in the developed worked and to relieve and redress the human suffering in the developing world. There has to be a politically realistic path from the realities of the present to the promise of the future that meets the urgent, immediate concerns of those whose voices are often too easily downplayed or even ignored in the drive for a net-zero future.

Joseph Lassiter is the Senator John Heinz Professor of Management Practice in Environmental Management, Retired.

Shawn Cole: Bolster impact investing

Shawn Cole

Business leaders should embrace evolving capital markets, and seek to communicate to investors how their businesses will navigate the upcoming climate transition. We are seeing significantly greater commitment from both asset owners and asset managers to engage with management to seek meaningful change.

This was perhaps most clear recently when Engine No. 1, a new impact investing firm with a tiny stake in ExxonMobil (less than $50 million), succeeded in a proxy contest to place three new directors on the board of what was once the largest corporation in the world. They couldn’t have succeeded without the support of BlackRock, State Street, and Vanguard.

While disclosure is and will continue to be important, businesses must dramatically reduce their carbon footprint to stave off the worst effects of climate change. Companies with compelling strategies will attract capital on attractive terms.

Shawn Cole is the John G. McLean Professor of Business Administration in the Finance Unit.

Max Bazerman: Lead with moral conviction

Max Bazerman

Moral leaders have an obligation to accept science, and identify the role that they are playing in climate change. Moral leaders have an obligation to consider factors beyond profit maximization. Those other factors should include the rights of future generations. And, moral leaders have an obligation to think about how they can change not only their own behavior, but how they can influence the behavior of those whom they lead.

Max Bazerman (@BazermanMax) is the Jesse Isidor Straus Professor of Business Administration and author of Better, Not Perfect: A Realist’s Guide to Maximum Sustainable Goodness.

Lynda Applegate

The planet is in trouble and we need a combination of science, technology, community relationships and innovation to fix it. I have been conducting research and developing curriculum materials on innovative approaches to addressing the climate change crisis through a combination of sustainable energy technology innovation and partnership ecosystem development approaches since 2015. One of my earliest cases explored the launch of Hyperloop Transportation Technologies through a partnership ecosystem that included entrepreneurial startups, government agencies, and scientists.

More recently, I completed a case on the launch of a Conservation Innovation Center through a partnership ecosystem led by nonprofit conservation firms (including the Chesapeake Conservancy and the Lincoln Land Trust), technology companies (including Microsoft’s and the Environmental Systems Research Institute’s AI for Earth initiative), government agencies (including the Department of Agriculture and Forest Services and the US Department of the Interior), prominent nongovernmental organizations (including The Nature Conservancy and the National Parks Conservation), and the World Bank.

Another recent case examines the launch of Powerley, a new technology start-up that was launched as a partnership between DTE—an electric utility in Michigan—and Vectorform—a digital innovation consultancy and software platform provider. The Powerley case deals with how to create a platform to link the “voice of the consumer” to data from smart grids and other smart home/smart city data sources. These cases emphasize the need for partnerships and innovation as core to solving the climate crisis.

Lynda Applegate is the Baker Foundation Professor and the Sarofim-Rock Professor of Business Administration, Emerita.

Lynn Schenk is director of the HBS Business & Environment Initiative and Dina Gerdeman is senior editor of Working Knowledge. [Image: iStockphoto/AsiaVision]


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