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What Fuels Reluctance on Climate Change Action?

This is an excerpted transcript of an SMS webinar on “Alliances in Sustainable Development & Environment Preservation” hosted by the SMS Cooperative Strategies Interest Group. It has been edited for grammar and clarity. Find the full recording at this link.

Key Insights:

  • Climate change is one of the most salient, pressing issues
  • Academic and business leaders can orchestrate the implementation process with individuals, with organizations, and with governments
  • Incentives, coordination, and governance are issues at the heart of what management scholars can study to make an impact


Speakers:
Jim Hall, University of Oxford
Richard Threlfall, KPMG
International

Moderator:
John Mawdsley, HEC Paris

John Mawdsley: So if we think about climate change, we all know it’s an urgent and emergent phenomenon in some ways. But we’re still seeing a reluctance and collaboration between different actors, maybe along the supply chain and across different industries to drive this change faster. So we’d like to ask you, why do you think we see this? Why do we have this reluctance? And how can we change this? What are some of the tensions that you observe from an industry perspective and from an academic perspective?

Richard Threlfall: You started by saying this is this is an urgent matter…and I still don’t think people realize just how urgent it is. We’ve passed this week the point at which the carbon clock forecast is that we are now under six years of drought, in under seven years before we reach the point at which the global warming of the world is one and a half degrees above pre-industrial levels. One and a half degrees doesn’t sound like very much, does it? But I think probably most of those who have joined this conversation will recognize that actually, it’s a really serious matter to go one and a half degrees because we start to get into the territory where humanity may well lose control of the ability to control the escalating effects of climate change, and we end up in uncharted territories. So I think it is really serious.

I think it’s really good that I’ve observed over the last year, in particular, our corporate clients with whom we engage at KPMG really waking up to climate change being a serious issue. It’s now a top board issue for nearly every major company in the world, but I don’t think that sense of real urgency is there. I’m actually not sure that there is a reluctance within industries, within supply chains, and with ecosystems of industries to grip this collectively. I don’t think there’s a reluctance.

I think my hypothesis is that we are missing the two things that those ecosystems need in order to be able to collaborate effectively. Firstly, I think we are missing the governance. Largely, we have established the corporate environment over the last 100 years, or even 200 years, maybe since the Industrial Revolution, where competition really reigns over collaboration. That’s even enshrined in, you know, the way in which many governments try to restrict the collaboration that takes place between companies because it’s considered that what’s in the best interest of consumers is a competition. So in many cases, the structures in order to provide collaboration between industries within the same sector just don’t exist or not mature enough to exist. [My second point] is that even where some of that collaboration has started to take place, there isn’t really the yet the aggregation of data and the analytics of data at an aggregated ecosystem level that allows those players to be able to understand how they minimize their carbon impact collectively between them. Now, we’re making huge progress in that space. I mean, we’ve done some really interesting things over the last year with certain industry groups, for example, with the sugar beet industry in Australia, where they have collaborated, and where data has been captured on a platform in a transparent way that everyone can see what’s going on.

Jim Hall: [This is] just my starting point, both around urgency, and specifically in relation to the question. Challenging this framing in terms of reluctance is a line though my two further points, which I think flesh things out in slightly different directions. In terms of the question, saying that maybe there is some reluctance to see collaboration. I don’t think that’s the case. I agree with Richard on that.

I think there’s there’s a very strong sense of motivation, within business and within academia, which is where I’m located, but also within governments. In most places around the world, all are motivated in the same direction now. But we’re not seeing action fast enough because there are a number of very significant residual barriers. I would characterize the two most important barriers being complexities: coordination issues and incentives issues. And if we sought those two things out, then we will get action on a much faster pace.

The coordination problem is a really tricky one. So I’ve worked on systems all my life and I try and push back as often as I can. We can score this one up into a series of sub-problems which are reasonably self contained, and establish some targets for each of those silos to do as best we can to solve this thing…because if we can, it’s just simpler. There are certain things in relation to net zero which literally you cannot.

[As an example], hydrogen only works if it’s a way of decarbonizing heavy industries, steel cement walls, noting also that it’s a feedstock for fertilizers, which don’t emit in their production in the way that the [process] does, but also decarbonizing heavier forms of transport and as a storage fuel for dispatchable electricity via hydrogen turbines. None of those things will make sense on their own, but if you put them together, you’ve probably got a decent case behind you. Another one would be around community heating: unless you get builders, local authorities, planners, and developers thinking together, you’re not going to make the most of all the waste heat, which is being created in lots of cities around the world and has ended up going into the atmosphere. From time to time, there are coordination problems. I think the coordination problems also exist in the realm that we’re talking about in terms of: how do you get many actors? How do you solve the information barriers met, which people need to know what other people are up to, what they’re doing, and what the opportunities are. So that’s one thing.

The other thing is around incentives, if we sorted out incentives in the way economists would like us to do with the carbon tax, maybe in some second best ways in relation to regulation and financial disclosure, and so on. If we get more aligned incentives, which means that the value cascades to the innovators to the actors in this system, who are trying to do something and if they can see some return for the good things they’re trying to do, then they’ll be more ready to work together and accelerate solutions.

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Richard: The incentives in this are clearly key. Of course, it’s not just about adding incentives like carbon taxes, its all about removing the negative incentives that sit already in industries that actually encourage or subsidize the use of fossil fuel and carbon-intensive approaches.

John: Let me just push on this point a little bit then because in terms of incentives and coordination, [the] incentives specifically you both were talking about was these kinds of incentives almost from the government. Is there going to be a carbon tax or is it going to be something else that basically from the outside that incentivizes firms to work in a particular way? In academia, we still do a lot about incentives within the organization and how to solve coordination problems, how to deal with information barriers, and so on. Do you have any particular thoughts on how we can push incentives within organizations to improve on certain climate change metrics to achieve carbon neutrality by a certain date? Or is it something that is basically driven by external factors?

Richard: Well, I think I think there’s both a piece around the role of government and the position that government takes is, which is fundamental. There’s a massive role of government opposite a regulator, but there’s also a massive role of government as a procurer and buyer of services, which in most societies is very, very significant. There is also the role of government as a legislator. There are lots of different ways in which government can shift the position for companies.

What’s interesting is that government is not the sole determinant of the incentive on businesses. I would call out the other two that I think we’ve been seeing, [which are] coming to bear more quickly in many cases than government action over the last couple of years. The first one is incentive through private finance. We were in a position a couple of years ago where the conversation was around impact investing. The proposition in the market was that you would somehow take a lower return in order to do good, but you should do that for a proportion of your portfolio. We’ve completely moved beyond that. Now, I think it’s now pretty much universally accepted that we’re heading into a world in which the most sustainable investments are also going to be the ones that hold the highest returns. Of course, the extreme version of that is investments in assets which are seen as being very significantly carbon emitting in sectors, like coal-fired power generation, that the risk for investors now is those become stranded assets and that people lose a lot of money on them. I think we’re already in a world where companies that are evidently sustainable in their activity are both able to access money more easily and at a better rate than they could than if they were not sustainable. So that that clearly is a very significant incentive on businesses.

The other incentive is around the behavior of individuals interacting with those businesses, whether that is as a consumer or as a potential or an actual employee within the organization. I’d say that we’ve seen quite a significant shift…it is remarkable the extent to which as we try to engage with [these thoughts], whether it’s at a university level with university students coming to join us for the first time or whether it’s for those that are further on in their careers. This is above being able to explain how we see our purpose as a business, and articulating that purpose in the context of doing good for planet and society, is a very, very high priority for a very, very significant proportion of individuals who expressed an interest in coming to work for [KPMG]. I don’t think that’s unique to us. I think this is becoming prevalent across across all industries. So that force is very significant on on companies as well, which is what sometimes leads me to the slightly bold statement. I think that businesses that don’t get a grip on this agenda and don’t really believe in it will be out of business in the next decade. Because ultimately they won’t be able to get the money, they won’t be able to get the people and they won’t [be able] to sell their goods.

Jim: If I might just jump back on one of those points, which was Richard’s assertion around sustainable investments. Of course, the hiatus we’re seeing, in particular in gas prices at the moment will be held up as the counter argument to that. Of course, this was due for the most part to an unpredictable, geopolitical shock, though I think people who subscribe to portfolio theory would say that: “Well, shocks of one form or another are going to happen inevitably. In that case, I’m always better with a more diverse portfolio.” Yet on the other hand, things have been particularly disturbing for sustainable investors. Because…more or less, by default, what it meant was their funds loaded up on tech, which was absolutely fine up until this year and now that has bombed as well. So you’ve had a flipping between tech and oil and gas, which means that this year, sustainable investments haven’t looked all that clever at all. So…when one looks at the prices of renewable energy, what recently happened in the latest round of auctions for electricity supply in the U.K., with another drop right across the piece including in floating offshore, then, I’m with you on the direction of travel, that sustainability will be cheaper. We’ve just got to be a little bit awake to what has happened recently because that argument is going to take some factoring.

Based Upon:

Cooperative Strategies Dialogues: Alliances in Sustainable Development & Environment Preservation. Webinar recorded on July 26, 2022. Hosted by SMS Cooperative Strategies Interest Group. Full recording available at this link.

Jim Hall is Professor of Climate and Environmental Risks in the University of Oxford and Director of Research in the School of Geography and the Environment.

Richard Threlfall is Global Head of KPMG IMPACT at KPMG International.

John Mawdsley is an Assistant Professor of Strategy & Business Policy at HEC Paris. His research seeks to understand the drivers and impacts of strategy and performance in human capital intensive firms relating to those firms’ client relationships and professional workforce. Adopting a demand-side approach, he focuses on the role of relational market ties in buyer-supplier relationships for portfolio-level supplier outcomes.

This webinar was also co-organized by Martin Hanisch, Assistant Professor at University of Groningen, and Sameer Bhatnagar, Partner at KPMG .