The "Capital Light" Approach to Climate Change

Some companies are approaching climate change with a "capital light approach," according to an article by Dr. Rory Sullivan, an internationally recognized expert on climate change and investment, and a member of the Ethical Corporation advisory board. Sullivan adds that with a capital light approach, "any investments need to be modest and provide quick returns in terms of cost-savings or boosts to brand and reputation." In other words, focus on the low hanging fruit.

Sullivan says that while the capital-light approach to climate change is "clearly a sensible business strategy" companies also need to think bigger. He lists three key issues regarding the capital light approach to climate change policy:

1. The capital light approach searches for immediate or very short-term returns or benefits, and may choose these over actions that provide longer-term benefits, thus longer-term implications of climate change are ignored.


2. The capital light approach means companies tend to focus on efficiency (or doing more with less) as the primary driver of value creation. However, that means product and service development, experimentation and innovation might be viewed as too expensive, long term and distractions from the bottom line.


3. The capital light approach tends to harden into a general reluctance to invest in any part of the business, and can leave companies vulnerable.

Sullivan also lists two areas where changing mindsets regarding climate change policy is important:

• The single biggest opportunity companies have to future-proof their businesses and create longer-term value is when they invest capital either into new projects, products or upgrading existing equipment.


• Making effective decisions builds on information, knowledge and expertise.

Perhaps the amount that the world's biggest corporations spend on climate change will increase in the near future. In 2010, a survey by Ernst & Young of 300 global corporations with $1 billion or more in revenue annually showed that the majority (70 percent) plan to increase spending on climate change initiatives from 2010 to 2012. Almost half project spending from 0.5 percent to over five percent of their revenue on climate change initiatives.

This year's Ernst & Young survey found that 66 percent of top global corporations with revenues $1 billion or more annually said they have already launched an enterprise-wide climate change program, and 16 percent expect to do in next two years.

Maybe the severe weather some parts of the world are experiencing, such as the hurricane which recently hit the East Coast, will propel companies to spend more on climate change initiatives. Torsten Jeworrek, Munich Re's CEO, warned in January that severe weather shows the need for businesses to address climate change risks. "The severe earthquakes and the hurricane season with so many storms demonstrate once again that there must be no slackening of our efforts to analyze these risks in detail and provide the necessary insurance covers at adequate prices," Jeworrek said.

Tune in to see whether businesses will heed Jeworrek's warning.

Photo: Wikipedia