There’s no question that the private sector is a critical player in addressing climate change. It’s responsible for the vast majority of greenhouse gas emissions — and, for the most part, they have the resources to shift to sustainable models.
It’s worth celebrating when companies reduce their emissions, but governments are too reliant on these voluntary — and unpredictable — efforts to tackle climate change.
Until the private sector is required to take regulated, effective and measurable climate action, Paris Agreement goals will remain out of reach. When we are talking about exceeding tipping points for the planet, which has catastrophic outcomes for the wellbeing of humanity, simply hoping that business leaders do the right thing isn’t adequate.
Still, the private sector has made a lot of progress through voluntary action. Analysis of 338 companies participating in the Science Based Target initiative showed that companies that voluntarily committed to setting a science-based target reduced their average annual Scope 1 and Scope 2 emissions by 6.4 percent over five years. This is not only more than the .85 percent increase of global energy and industrial process emissions, but more even than the annual 4.2 percent reduction required under the SBTi’s criteria to meet 1.5 degrees Celsius-aligned warming scenarios.
When the private sector takes action, governments show more confidence to put bold policies in place. World Resources Institute’s work with Ambition Loops shows there can be a confluence between voluntary corporate action and increased ambition from government policy.
But the private sector can be quick to invoke their voluntary action as proof that there’s no need for government mandates. In just one example, a 2019 brief from the U.S. Chamber of Commerce’s Project Go stated that “more regulatory requirements” are not warranted when it comes to reporting on environmental, social and governance (ESG) impacts because of the voluntary action taken. But companies themselves tell me that the ESG environment is like the Wild West, and someone needs to take control and bring some sense to it.
The same applies to the climate situation. If the government doesn’t require companies to take climate action, limiting emissions to sufficient levels will be impossible. Companies can, independently, make consequential strides toward reducing emissions, but the government has a unique role that is needed to ensure a green transition.
First, voluntary programs can’t arbitrate on the thorniest issues such natural resource and carbon output allocations. The private sector shouldn’t arbitrate the needs of a candy company and a vegetable grower competing for the same resources. These are decisions of government and politics, not of businesses or scientists.
Second, voluntary programs slow down or even grind to a halt when they hit the barrier of increased cost or decreased profit. The companies that have reduced emissions have done so, in large part, by addressing low-hanging fruit: Reducing waste, improving efficiency and emphasizing sustainability. But the reality is that some companies need to shut down profitable lines of business for the world to meet Paris Agreement goals. At the very least, many companies need to transition fossil fuel-based lines of business, however profitable they might be, to options that are sustainable. Too often, companies celebrate the addition of new “green” lines of business, while leaving unsustainable lines in place.
There are examples of successful transitions to sustainable business. Danish company Ørsted, once an oil and gas giant, is now the world’s largest developer of offshore wind power. Enel, an Italian power company, committed last year to end coal generation within five years. But these are notable by how unusual they are.
Third, government can incentivize long-term investments into sustainable business practices. For some companies, particularly those that transition to sustainable business models early on, the cost of business will be higher. The first wave of companies to make a switch bear these costs alone and can suffer short-term but potentially unrecoverable competitive disadvantages. Well-crafted policies that require action in the private sector can even the playing field and remove competitive disadvantages for first movers. A recent WRI working paper with Ørsted identifies how governments can work at the private sector and financial systems level to incentivize long-term investments.
Finally, only a government can ensure a fair and equitable transition. Workers should not suffer because they chose a career decades ago in an industry that relies on fossil fuels. Governments have the power to ensure that people in those sectors aren’t left behind — that they get training for new roles and are fairly compensated.
With all of these benefits, why haven’t governments been more involved in ensuring that the private sector embrace a green transition?
One key reason is that government cycles are in some ways shorter than those of the private sector, forcing shorter-term decision-making. Governments do not have to produce quarterly reports, but in many countries around the world, the entire leadership team must argue their case to their citizen stakeholders every couple of years. Individual executives in a company may have to do so in front of their investors, but rarely the entire leadership team in one go.
From trade to global standing, governments are also in a competitive situation with other countries. Competition that is often tied closely with the very business interests we are asking them to challenge in the interests of sustainability.
These characteristics all add to the difficulty of government making progress. But just as we call on CEOs to lead us through the transformative changes we need, we must call on our government leaders to do the same. In parallel, companies that are serious about sustainability must embrace, not undermine, the role of government and mandatory action.
The private sector has a critical role to play in sustainability. But unless we believe investors are a better safeguard of our future than citizens, government leaders must not abdicate their share of responsibility.
Kevin Moss is global director of the Center for Sustainable Business at World Resources Institute (WRI).
WRI and Ørsted published the recent working paper, “Unlocking a renewable energy future,” and Ørsted provides financial support to WRI. The views expressed in this piece are solely those of the author.