Business as an Indicator of Paris Agreement Success.

In late 2015 the United Nations Climate Change Conference was held in Paris. This conference acted as the 21st annual meeting of the conference of the parties (COP21) of the members to the United Nations Framework Convention on Climate Change (UNFCCC) and the 11th session of the meeting of the parties (CMP) to the Kyoto protocol. If none of these acronyms make sense, that’s alright. What matters is: this meeting of many national big-wigs concluded in the signing of the Paris Agreement. The goals of which are the following:

  1. Limit global warming to 2 degrees Celsius compared to pre-industrial levels and try to limit them to 1.5 degrees Celsius.
  2. Create the capacity to adapt to climate change and ‘green’ development, without compromising food production.
  3. Promoting sustainable and climate-resilient investment.

The Paris Agreement was signed by 195 member-states. The agreement has a bottom-up approach, allowing signatories to decide through Nationally Determined Contributions (NDCs) how they wish to work towards the goals they agreed on. This relatively voluntary nature of the Paris agreement gave it the ability to create consensus amongst its signatories.  As a control mechanism, NDCs are publicly announced and states must report on their status, subjecting themselves to reputational damage if they start to lag behind.

In this blog I would argue that the Paris Agreement is a signal, not the solution to our unhealthy relationship with fossil fuel. The goal of the Paris Agreement is, as its creator U.N.  Climate Chief Cristiana Figueres said, “Shifting the conversation from the prevailing narrative ‘we will if you will’ to the understanding that we can do it together was fundamental to securing the Paris Agreement.”. This agreement, whilst having some ability to inspire more climate-sensitive policymaking by states, may cause the much more durable and impactful change of bringing on board businesses and investors, setting a new course for sustainable development. 

This multi-level impact of the Paris agreement can be illustrated using the withdrawal of the United states of America. On June 1st 2017 the newly elected President of the United States declared that the US’ withdrawal from the agreement*.

The decision to start the withdrawal process was met with large amounts of criticism from domestic politicians, business leaders (such as Apple CEO Tim Cook) and the international community at large. Apart from criticism concerning the accuracy of the reasoning behind this choice, it was argued that combatting global warming was the ‘right thing’ to do. There are 8 states (out of 50) and many cities publicly diverging from the policy set out by the federal government, remaining committed to the course set out in the Paris Agreement. Secondly, and more importantly for this blog, the business sector seems to continue investing in greening their businesses.

Investors have, contrary to the path desired by the federal government, also greened their praxis and have started moving assets to more climate-friendly projects. Since the adoption of the Paris Agreement, investors with a cumulative wealth of more than three trillion USD have moved away from fossil fuel investments. This is done not only due to perceived risks posed by long term climate change, but also the risks involved in investor-response to climate-related information. This is part of a wider trend of increasingly ‘green’ investment from the financial sector.

Green investment has steadily increased over the past decade (source)

The Paris Agreement has sent a signal to the world that the path still to be traveled will have sustainability as an important aspect. This is independent of short term politics. Furthermore this might be the a rare case where the environment benefits from globalization and the associated increasing interdependence of states. As 99.5% of the noses point in the direction of the combating global warming, the US will be situated in a world concerned with sustainability. Through the many ties, whether they are economic, social or cultural, that the US has with the world beyond, it will have to adapt. This effect can already be seen in the lack of impact the US’ withdrawal has had on the clout of the climate agreement.

*A nuance that should be considered when looking at this action is the withdrawal mechanism included in the Paris Agreement. The US has to go through a four year withdrawal-process, officially exiting the agreement on November 4th 2020, one day after the next election cycle. Consequently, the next president (who may or may not be Trump) will have the final say.