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13th April 2016


Government & the private sector: Climate Change and market failures

Newsletter


Acre gathers top energy leaders at the Foreign Office

Hot environmental topics were at the forefront when 24 of the most influential energy and sustainability leaders gathered at a breakfast roundtable hosted by Acre. Jane Dennett-Thorpe, deputy head of science from Department of Energy and Climate Change (DECC) was warmly welcomed as speaker at the innovation forum event held at the Foreign Office in Whitehall.

Senior Directors from commerce and industry in attendance included; executives from innovative and market leading global brands, an assortment of high profile thought leaders, and a number of directors representing heavy carbon emitters – one of whose operations are responsible for 0.7 per cent of all worldwide carbon emissions. Each has played a significant role in shaping international climate policy.

Consumer mindset

The discussion first touched on consumers and where sustainability sits on their purchasing agenda, an unfortunate conclusion being that the majority of individuals are not engaged in sustainability enough for it to influence their consumption habits, or that they are certainly not prepared to pay for extra for it.

This debate lead to the importance of choice editing, a strategy used to influence consumer behaviour and therefore purchasing decision by producing desirable products which are sustainable by nature, and removing others from commercial consideration through supply or price. These products have positive environmental benefits, although are marketed on other attributes which relate closer to the customer’s priorities. This approach can impact not just products, but product components, processes, and business models.

The struggle for business is to quantify the return on investment for these initiatives, something often necessary to support a robust business case and protect the bottom line. For example, the home appliances industry worked with the Government to successfully reduce energy use through the ‘Return to 30 Degrees’ campaign. However, no additional washing powder was sold as a result and therefore it had little financial benefit to the businesses involved.

Based on the lack of sufficient consumer interest, it is clear that the Government needs to provide incentives for businesses to reduce the impact of climate change and promote environmental awareness. As it stands, the primary incentive to do so is a desire to maintain a stable economic platform for delivering shareholder value, although this is hard to invest in as timelines and the effects of inaction are uncertain.

A conflict between policies needed to enable change Vs reality was highlighted, which to many of us wasn’t big news.

Engagement with Consumers

The group accepted that sustainability is often viewed by the public as disparate to the rest of the business world, and business by its nature cannot be sustainable. However, in reality, many of those attending had successfully incorporated sustainable principals into core business strategy. In order to curb this perception, language used in the industry should be less esoteric and more focused on the business value derived from sustainable operations.

It was promising to hear that the Duke of Edinburgh scheme, which is the world’s leading youth achievement award, is now teaching its students about energy efficiency. If businesses could support the Duke of Edinburgh programme and other similar initiatives it would improve energy literacy and the younger generation would become more engaged in the environmental agenda.

With a strong correlation between a company’s financial performance and sustainability performance, the business world should be increasingly focused on developing behaviour change programmes and driving a paradigm shift. This can be done through engagement and encouraging strategic, sustainable decisions. Much of current investment in sustainability is targeted on cost or efficiency measures which provide immediate financial return.

Unfortunately, as an upstream heavy emitter was inclined to point out, a more engaged consumer only improves the carbon footprint downstream in a supply chain, offering small incremental benefits. Addressing environmental issues in heavy industries is a far more difficult challenge, but with a far larger potential impact. This is where government should intervene and incentivise. However, as recently demonstrated with industries such as British Steel, a desire to remain competitive with Chinese manufacturing drives increasing deregulation of emissions in the industry.

Business

According to business, although the Government has outlined policies and strategies needed to be taken for a greener future up to 2020, more clarity is needed on what will happen after 2020. Non-sustainability leaders need to know whether the decisions made from a sustainability mind-set are going to provide a return on investment.

There is a significant need for business to be more vocal and create the right space for legislation. In the right legislative landscape, energy and sustainability strategy will influence core business objectives. If businesses are primarily making short-term sustainable decisions they will not have long term success.

A financial shift would be the biggest catalyst for change. Increased energy costs force big consumers to address not only their procurement and look at alternative, cleaner energy generation, but also the efficiency of their operations. A lack of financial incentive and uncertain government stance make it challenging for businesses to invest in sustainability. However, stagnant energy prices and benefits at the fuel pump should not be an excuse for complacency.

To be more effective, businesses should encourage sustainability engagement across trade and industry organisations. When communicating externally and lobbying for the sustainability agenda, businesses need to speak in a unified voice and champion cohesive sector strategies which commit to tackling their environmental footprint.

Government

At the heart of the conversation, emphasis was on government budgets and the increasing demands for business to actively tackle the big challenges facing society. However, we have to optimise the government / business relationship. The role of Government is to identify and address market failures in innovation, and to reduce the barriers faced by innovators.

The Government’s commitment to low-carbon innovation headlined in Paris, when Mission Innovation (MI) was launched with 19 other countries. One aspect of MI is a pledge to double research and development spend on the low-carbon transition by 2020.

It’s encouraging to see business taking a similar stance through initiatives such as the Energy Breakthrough Coalition, also launched in Paris by Zuckerberg, Gates and other billionaires, which is expected to unlock large amounts of capital.

Process innovation – or “doing things differently” is key to business innovation. For measures to work well, businesses need to help in shaping them. From experience, individuals in companies who do this well can be very influential. These are people who are given the space and time, and who are able to take a broader view.

It was summarised that the Government needs businesses to constructively engage in the detail and identify new opportunities where the Gov ernment could make a difference, and how it might be carried out.

Onwards

We all know the signs of climate change are detectable – extreme weather, ocean acidification, and food supplies, with issues such as flooding hitting us a little closer to home. Against this grim backdrop, COP21 in Paris is hugely important and an incredible success. For the first time, nearly 200 countries recognised the problem and agreed to take action. This sets the tone and the institutional infrastructure for the future, although the road is long and there are many miracles needed along the way.