Business needs a reality check on who will pay for net zero

With COP26 continuing in Glasgow, Andrew O'Brien writes that when it comes to financing green strategies, businesses may need to make some tough decisions to put the planet before profits.

COP26 has proceeded so far with all the usual focus on which heads of state are attending, the personal dynamics between the leaders and communiques. The problem is that the power in tackling climate change has shifted considerably since the last summit in Paris. It is not world leaders as such that hold the power to tackle climate change, but business leaders. The Prime Minister has himself hinted at this repeatedly in recent weeks. In addressing G20 world leaders in Rome he said, "we all know that we have the technology… what we need to do now is to raise the finance".

Just take the UK as an example of the costs of transition. According to the UK Government's own net zero strategy, the new capital required will be around £650 billion. Of this, only 4 per cent is being provided by the UK Government. This means that the UK is dependent on private sector investment and finance for the whole climate transition. The numbers for the United States are equally staggering.

There is nothing wrong with private sector investment in delivering climate change. But read the fine print and all the signs are that this decade could create fissures throughout society and our economic system.

The Committee on Climate Change (CCC) is clear that the private sector will only invest if the investments are profitable. Of course, from a financial perspective that makes perfect sense. Why would businesses invest and lose money? On top of this, the CCC is also clear that the private sector will only invest if the right 'incentives' are put in place for that investment. For 'incentives', in the UK case, we should in fact read "subsidy". At the same time, we have heard repeatedly from the CCC and business leaders that the transition to a net zero future will lead to higher prices for some consumers, at least in the short term.

It does not a genius to see how this could all quickly unravel. Governments, particularly the UK, are depending on the private sector to deliver the investments required to achieve net zero. To make those investments, the private sector expects to make a profit and they are going to expect state subsidies to protect those investments and maintain profitability. At the same time, consumers are going to face a double whammy. Higher prices to support the costs of transition for companies and potentially higher taxes to pay for the incentives to the private sector to make the investments.

In a democratic system, this is not sustainable. Is it plausible that voters will tolerate higher taxes and higher prices, whilst profits for private firms remain constant or even increase? A rough calculation based on current rates of profitability mean that companies could make up to £60 billion from the green investment. Businesses and governments need to come an understanding about this before consumers and voters are alienated. The public will want to see that "we are all in this together" and that businesses are prepared to make sacrifices equal to those of consumers. If there is not a clear plan to share the burden, voters will simply demand the UK Government to drop investment into climate change. In a democratic society, you cannot achieve net zero unless the public is fully behind the project. So far, the gameplan is only designed to meet the needs of finance, ignoring the politics.

On net zero, business could learn from the social enterprise sector. The UK already has 100,000 businesses which trade to deliver a social or environmental mission, putting that mission ahead of a narrow focus on profitability. Many social enterprises do generate profits, but they are also accept a lower financial of return to generate a higher level of social or environmental impact.

Interestingly, the data shows that these businesses are taking faster action on tackling climate change. For example, 30 per cent of social enterprises have installed energy saving measures in the past twelve months compared to just 13 per cent of SMEs as a whole. This approach has not reduced the growth of the social enterprise sector, which has accelerated over the past decade.

At the moment, our plans to tackle climate change look like they have been designed without thinking through their political impact. Consumers and voters cannot be taken for granted in the race to net zero. Between people, planet and business something will have to give. The planet can't, people won't. It is up to business to adapt if we are going to deliver on current plans. If they don't, then expect governments to be forced into more heavy handed measures to deliver the transition.