What are the implications for the US leaving the Paris Agreement?
Stuart Dalheim, Shareholder Engagement Manager and Kristina Friedman, ESG Senior Research Analyst at Calvert Research and Management, a leader in Responsible Investing, note that pulling out of the Paris Agreement surrenders the U.S. government’s leadership position on climate change.
The accord, signed in December 2015 by 195 countries, sets the goal of limiting warming to a maximum of two degrees Celsius and to phase out fossil fuels in favor of renewable energy sources.
They go on to add: At Calvert, we think this decision is a grave mistake by President Trump, given the consequences the planet already faces and the increasing threats from flooding, heat waves, droughts, and rising sea levels. However, this action is not a surprise given the Administration’s previous policies and statements.
So while this action undermines progress to address climate change, and may relinquish U.S. leadership on clean technology development to other countries, the Administration’s policies will not change the underlying science, nor the impacts of climate change, and global companies, countries, and localities will continue to act.
Cities, states, business driving progress toward the low carbon economy
With the federal government effectively clearing the field, more attention will likely be given to the actions of individual U.S. states, cities and private sector actors. For instance, global investors increasingly understand the risks and opportunities presented by climate change – as indicated by the Sustainability Accounting Standards Board (SASB) Technical Bulletin on Climate Risk and the Task Force on Climate Related Financial Disclosures. In addition, recent shareholder proposals at ExxonMobil, Occidental Petroleum and PPL Corp., for example, earned more than 50 percent support – record breaking support on climate risk resolutions for oil companies and electrical utilities.
There is also good news from U.S. states. Approximately 21 states have greenhouse gas goals and more than 40 have renewable energy goals. Just recently, the Nevada assembly approved a bill that would require the state to reach 80% renewable energy by 2040 – it awaits the governor’s signature.
States now can take further steps to support the growth of corporate renewables procurement by:
- Removing barriers to corporate deployment of renewable installations,
- Expanding energy choice options, and
- Ensuring an adequate market exists for renewable purchasing through both utilities and third-party programs.
Investment will continue to play an important role. According to the Climate Bonds Initiative, the U.S. green municipal bond market was $30 billion at the end of 2016. About $10 billion are labeled green bonds, while the rest are bonds financing climate-aligned assets that do not carry an explicit green label. Primarily used to finance transportation and water projects, this represented a 50% increase in the green municipal bond market compared to 2015.
Companies incentivised to stay the course
Many U.S. companies will still face external pressures to respond to climate change and promote sustainable programs. The World Economic Forum 2017 Global Risk Report ranks failure to mitigate and adapt to climate change as one of the top five risks in terms of impact, a known issue that many businesses are planning to manage.
The lack of U.S. involvement in the Paris accord doesn’t mean businesses are free to ignore the issue. States may require companies to meet certain standards to operate within their borders. In addition, anyone doing business overseas will need to consider the clean energy regulations in the areas it plans to operate in.
There are other business reasons for companies to go green besides societal concerns about climate change and air pollution. The risk and volatility of fossil fuel prices and energy costs may drive firms to rely more on renewable energy, particularly as the cost declines. Companies perceived as lagging peers on this issue are also at risk for reputational damage, as a majority of global citizens are concerned about climate change. Finally, businesses will continue to see opportunities for growth as the clean energy job market continues to expand.
So while the U.S. decision to withdraw from the Paris Agreement is unfortunate, other groups – states, companies and investors – will continue leading the march towards addressing the critical challenge of climate change.