For the past decade or so, there has been a lot of debate in policy circles on how to get governments and the private sector to work together more collaboratively in order to catalyse the transition to green growth. The good news is that in that time many factors have come together to make this more of a reality. Governments, including in developing countries, are increasingly committed to a low-carbon future; there is, in theory, adequate capital available to finance the transition; and there has been a recent boom in the technology needed to make green growth more affordable and feasible.
The missing element, then, is better co-ordination and cooperation between the private sector and governments to make this possible. In order for that co-operation to be most effective and efficient, both groups need to take some crucial steps on their own. Fundamentally, however, without sufficient political will on the part of governments and long-term thinking and commitment on the part of private-sector actors, transitioning to a low-carbon economy will be difficult if not impossible.
In order for the private sector to commit to the long-term investments necessary for a low-carbon world, there needs to be a greater understanding of the risks associated with unsustainable economic practices and major climate events, a greater understanding of the opportunities presented by sustainability and green growth, and the need to build strategic partnerships between companies on sustainability issues and with governments to limit risk and capitalise on opportunities.
As the adverse effects of climate change continue to increase, so do volatility, vulnerability and unpredictability for the private sector, particularly for resource-intensive industries. At the same time, climate change can also present opportunities for businesses to employ methods that maximise efficiency, and thus cut costs, as well as access to new markets. Through wise strategic planning, business can turn these risks into opportunities, but it requires long-term thinking. It requires integrating risk management and sustainable practices into core business values.
Taking these steps, particularly being an early mover in doing so, will allow businesses to lessen risk and increase long-term profitability. As we have seen, however, businesses do not always take these steps on their own; rather they behave according to incentives and/or competition. This is where the importance of the aforementioned strategic partnerships with governments and within the private sector come in. Businesses will not adopt sustainability in a vacuum: policy, peer pressure and market forces must influence them to do so.
Nearly everyone agrees now that the transition to green growth must be led by the private sector. However, it is impossible for the private sector to provide the sufficient amount of capital and investment without an amenable policy environment to encourage it. Businesses still view many green and low-carbon investments, particularly in developing countries where these investments are needed most, as unacceptably risk-laden. It is the role of governments, therefore, to put in place strategic policies that mitigate financial risk and encourage business to embrace sustainability and green investment.
There are numerous effective strategic polices that can accomplish these goals, and they will differ from country to country depending on a given country or region’s economic conditions and advantages. However, no matter what the specific policies and regulatory actions are, they should be clear, consistent and transparent with defined goals of creating an enabling environment for green investment so as to strengthen investor confidence. Unstable and conflicting policies only send signals to businesses that the investment risks are too high. Furthermore, the use of fiscal instruments, whether it is the introduction of a carbon tax or an emissions trading scheme, should be implemented with the goal of necessitating the incorporation of environmental full-cost pricing.
To recap, businesses need to rethink their notions of risk to incorporate climate change and place sustainability as a core business value, and governments need to enact stable, consistent, and coherent policies that remove barriers, encourage green investment, and encourage the types of reporting and full-cost pricing that will enable businesses to in turn rethink their definitions of risk. This will help create a sort of virtuous, reinforcing circle of rational, pro-market business choices and wise, strong policy choices.
Yvo de Boer