Why good CEOs are buying carbon credits now
Securing a good supply of carbon credits is savvy business, here’s why…
The Paris Accord will bring ever-tightening emissions regulations in the next decade. Businesses that put off facing this challenge dramatically increase their costs and overall risk. Bloomberg now predicts the price of carbon credits could increase 3,000% by 2029 as companies who have procrastinated action scramble to offset liability and become carbon neutral.
This doesn’t have to be a scramble — it can be a real win on more fronts than just climate change. But only if corporations are realistic about future carbon emissions regulation.
#Jhonysjaguar, the inspiration for Savimbo’s project
“The earth is a fine place and worth fighting for.”
Membership in the Paris Accords is going to lead to tightening regulations on corporate emissions in the next decade. Governments like the US, China, and the European Union have signed legally binding, and publicly audited, commitments, and they are going to have to offload those commitments onto the industry. They will start doing this within the next five years based on the planning-horizon timelines.
Insurance and investment are the first industry players to move on a necessary standard, then enterprise businesses, and finally regulatory bodies. Insurance brokers like Lloyds of London have been paying premium costs for climate change for many years. Now in order to secure insurance, enterprise business is assessing the risk associated with being or working with high-emissions processes. They are also asking for voluntary emissions reporting, and clearer standards to help manage that risk.
Disclosed emissions bring transparency, but also scrutiny to those who are perceived to be the worst offenders. Governments have the shortest planning horizons, but even a heavily-divided US Congress passed the most aggressive climate regulation the US has ever seen this year. Why did they do this? Keep reading, we’ll explain.
If you’re a CEO, this article is for you — your business, your employees, and your stakeholders. Any industrial CEO who is not aware of, and taking aggressive action on their looming emissions risk will pay a steep price in three ways:
Enormous business disruption as they pivot when public and private entities refuse to do business with them
Having to pay a massive price to purchase carbon credits at the last minute in large quantities at unfavorable prices
Losing business from customers, employees, and suppliers because of poor public perception of their business practices.
We don’t like to talk about problems, without offering solutions. So let's define the problem with facts, and offer a clear solution.
Why the Paris Accords is leading to government regulation
As the IPCC reports, any global temperature rise above +2 C will be catastrophic to both the planet and the economy. Climate change is measurably causing real deaths, poverty, extreme weather events, ocean-front property loss, habitat loss, and animal extinctions. These are real effects — specific, measurable, and expensive.
As a result, 186 countries signed and ratified a legally binding agreement called the Paris Accords that mandates reporting for their carbon emissions. Its members are responsible for over 90% of global emissions. They agreed to keep climate change under +2 C above pre-industrial levels and strive for +1.5 C.
Paris Accord members pledged mandatory emissions reporting to track progress toward these targets. These public reports are subject to evaluation by experts — and peer pressure from other countries. Also, developed member nations (who contributed most to climate change) are expected to provide financial assistance to developing member nations to help them with the cost of the climate crisis and build renewable infrastructure. Although, currently the amount being pledged by developed nations is falling short of goals.
These are lofty aims. Unfortunately, current metrics show that we’re not doing enough, with studies suggesting we are headed towards a catastrophic +3C temperature rise. Even if every country managed to achieve their current Paris Accord goals we are very likely to go over the +2C temperature target by 2100.
This might seem confusing at first, but it's really important to recognize the Paris Accord isn’t static. Countries are expected to revisit their emissions targets every five years, examining the global budget of carbon that must be removed from the atmosphere and taking a fair share of the burden.
The Paris Accord is a living document, the current goals represent the starting point of any climate action, a warmup before the marathon. Much of the work in getting to carbon neutral by 2050 and then limiting climate change to +2C by 2100 still remains to be done.
And it's going to be expensive.
The worst corporate offenders will pick up the bill for all emissions
Climate change affects everyone everywhere, not just those unfortunate enough to be caught in disasters, poverty, and famine. Research shows that climate change is responsible for billions of dollars of health costs in the US. A 2018 study found that in the USA alone, failing to meet the Paris agreement could cost the economy up to $6 trillion over the next decades.
There is a clear financial benefit to a nation that meets its end of the bargain. While failing to meet the Paris Accord goals could reduce global GDP by 25% by 2100, meeting or exceeding them could add $19 trillion to the global economy in the next 30 years.
As the measurable real cost of climate change grows and emissions targets get tighter significant regulations and punitive measures (fines and taxes) are going to get passed to industry. After all, developed nations are shouldering a huge cost of climate change (economic, public health, developing funds, etc.) and these costs will need to be passed to someone.
Enterprise businesses are also wary of the potential costs of working with high emitters and are looking for ways to offset that risk. Voluntary carbon reporting might become another cost of doing business. The private sector typically looks a certain distance into the future when considering what risks it should be addressing today, this is called the business cycle and it is typically 5-10 years. However, one industry has to think much further into the future — insurers.
Professional insurers are very good futurists. To correctly price premiums on insurance insurers have to understand what could happen through the lifetime of their policy. For example, a baby born today will live past 2100 - and so you need some idea of what that world will look like to offer them life insurance.
There are many things that also last for many decades: buildings, natural resources, institutions, etc. All of these things typically require insurance to operate owing to existing regulations to limit risk to investors, employees, customers, etc.
Climate change is one of the biggest unknowns of this century and into the next. There are many types of claims that could be impacted beyond immediate losses from the weather. For example, when giving liability insurance to large oil firms you need to understand what the chances are they could be sued for emitting large amounts of CO2.
And emitters are big business. 19% of FTSE 100 companies are in natural resource and extraction sectors; and a further 11% by value are in power utilities, chemicals, construction, and industrial goods sectors. Globally, these two tiers of companies between them account for around one-third of equity and fixed income assets.
To understand these questions insurers look back into past data to extrapolate forward. This also means insurers are seeing a very real increase in claims climate change is costing them.
“Since the 1980s the number of registered weather-related loss events has tripled; and [losses] from these events have increased from an annual average of around $10bn in the 1980s to around $50bn over the past decade.”
While insurers do not want to drive change in the economy, it is in their best interests (and governments) to achieve a reasonably smooth transition from today to the goals of tomorrow. Large institutions have worked with the G20 to produce the TCFD. The TCFD is not a policy recommendation, but a reporting standard for the industry. It is intended to provide standardization and transparency so private organizations can make better decisions about risk and exposure when dealing with each other. In the very near future, your insurer is going to ask you for it or they might refuse to insure you.
Why good CEOs are becoming carbon neutral
Climate change used to be an opinion problem, you either believed or you didn’t. But now it’s a facts problem. You either look at the facts or you don't. Good CEOs don’t waste a lot of time on opinions — but they never ignore facts and neither does the market.
The harsh reality of climate change is that it will demand a massive change in world markets that very few are prepared for. Some markets will cease to exist while entirely new ones spring into existence. There will be winners and there will be losers.
“We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”
Data allows us to remove ourselves from the eternal debate between skeptics and evangelists. Valuations of companies that produce and use fossil fuels will dramatically change in the very near term because of the cost of doing business, paying for emissions, changing processes to avoid emissions fees, and tighter regulation.
There are three main costs that could be incurred, and corporations that fail to account for them will be paying a much higher cost in the next decade. Let us discuss them below:
Increased cost of delayed carbon accounting
To address the reporting standards of the Paris Accord, governments will need to pass laws requiring companies to disclose their emissions.
The USA has had a shaky relationship with the Paris Accord, but still, it recently committed $370 billion to climate action. Simultaneously, the US Securities and Exchange Commission announced plans to further regulate and standardize climate-related disclosures no doubt prompting panic for many compliance managers. Those mandatory reporting regulations get phased in between 2025-2027 for direct and indirect emissions.
Increased cost of delayed carbon credit purchase
Almost no company can completely reduce its emissions to zero and many are struggling to quickly make the reductions they need today. In both situations, companies turn to carbon credits for quick results. A carbon credit represents 1 ton of CO2 removed from the atmosphere and can be used to offset some amount of emissions.
There is such a demand for carbon credits that entire markets have sprung into existence to trade and supply them. But due to a lack of foresight from business, current market demand is far outstripping the supply. This is because the largest legitimate supply of carbon credits comes from growing trees, and trees grow slowly.
A recent report by Bloomberg suggests that the price of carbon credits could surge by 3000% by 2029, Credits that cost $6 today will cost $224 in 2029 as a result of increased regulation from both industry and governments. Also because companies put off buying credits, preventing their supply from scaling, and then tried to buy them too late creating a relative lack. A recent forecast by E&Y predicts carbon credits could cost over $250 a ton by 2050.
The cost of negative public perception
As we discussed, in the coming decades the US economy could lose trillions, and simultaneously the public will have to carry costs in the billions for pledged funds, healthcare, and disasters. People will demand answers and with increased transparency on which companies are the worst emitters, it will be very easy to point fingers. Many have already anticipated this coming crisis and are racing to become carbon neutral before legislation and public opinion catch up to them.
Between regulating governments, ever-conscious customers, and risk-averse suppliers it’s a game of musical chairs and good CEOs are securing their seats now.
Enterprise companies are anticipating increased regulation and many are taking steps to carbon neutrality today, reducing emissions where possible and offsetting where it is not. Enterprise companies are also proactively seeking sources of carbon offsets, have capital reserves, and secured lines of credit ready for surprises.
In some senses enterprise companies tend to look the furthest forward - they have the resources to do so. Enterprise companies have seen the reports and understand the cost and risk of inaction just don't make sense. But what about emerging companies, the little guy - what happens to them?
Why we’re cheering for David AND Goliath
Often, it tends to be communities that have contributed the least to global warming that seem to suffer the most. But these communities are often also leading the charge: deploying renewable energy, protecting their ecology, and rapidly reducing emissions. It is vital we uplift these communities, especially those of indigenous peoples who comprise just 5% of the global population yet protect 80% of its biodiversity.
“For too long, the communities most impacted by climate change haven’t had a seat at the table. That has to change, and we’re committed to being part of that change.”
Because we understand how to work with these vibrant communities to build viable economies for ecological restoration - we are rapidly building a massive supply of carbon credits. Our credits are meant for entities of any size that are doing the right thing, being proactive, and willing to invest in the communities that are doing the work.
We want to work with proactive enterprises to scale suppliers and be their insurance against surging carbon credit costs. Savimbo is a champion for the smallfarmer in the Amazon basin and anyone in the marketplace who will work with us. We want equity for all — we want to help everyone win.
Don't worry big business we love you too - with Savimbo the future can be a big win for everyone. Just work with us we want to scale your supply.
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Written by Drea Burbank, MD. CEO and founder of Savimbo, Drea is an MD-technologist.
