This post originally appeared on Forbes.com.
Representatives from more than 180 countries are in Paris this week to forge a global climate agreement. If successful, the agreement will send strong signals to financial markets — and therefore to businesses and investors — about the direction of energy for the foreseeable future.
Many business leaders are showing their support. On Day 1 of the climate conference, the White House announced that 154 U.S. companies signed onto the American Business Act on Climate Pledge. At the same time, 27 investors, including Bill Gates, said they will put in money to bring new low-carbon energy technologies to market. That could be a very good call, since more than 1,000 companies have internal carbon pricing policies now or plan to implement them in the next two years.
So what does a new climate agreement mean for business? Potentially a lot.
Let’s delve into three questions that business leaders — especially in the energy sector — may be asking.
1. Will gas and oil companies innovate and re-invent themselves?
One of the toughest questions facing traditional energy companies is what does it mean to their operations if the world truly shifts to a low-carbon economy. The reality is that if we want to keep global temperatures from rising more than 2 degrees C (3.6 degrees F) above pre-industrial levels – the threshold above which the most extreme climate change impacts are projected – we need to decarbonize the world economy near mid-century. To do so, we will need progressive, accelerated change, starting with the phase-out of coal, followed by oil and gas, while building better energy storage capacity and investing in smart power grids. It’s important to set clear priorities and realize that the switch to zero-carbon energy is complex, with gas likely serving as a bridging fuel.
Mark Carney, the governor of the Bank of England, warned that fossil fuel companies cannot burn all their reserves if we expect to keep below the 2 degree C threshold. This week in Paris with Michael Bloomberg, Carney said it was reasonable to ask companies to think about their strategy to get to net zero carbon emissions.
This could pose serious financial risks to fossil fuel assets such as coal, oil and gas. Most scenarios to stay below 2 degrees include taking carbon out of the atmosphere, so technologies including carbon capture and storage need to be explored.
At the same time, government subsidies continue to favor fossil fuels. In the G20 nations, annual subsidies total $452 billion, nearly four times what’s been provided for renewable energy worldwide. To encourage innovation and a shift away from the fossil fuel industry, those numbers need to change.
If the coal industry is a harbinger, the oil and gas companies would do well to come up with ways to adapt to a low-carbon world sooner rather than later. To survive in the coming decades, energy companies will need to re-invent themselves.
2. Will renewable energy boom?
If the signals from a climate agreement are loud and clear, then the answer is yes.
On the opening day of the Paris conference, 20 countries announced a multi-billion-dollar clean energy fund and commitment to double clean tech R&D investment within five years. In conjunction with this announcement, Bill Gates, along with fellow entrepreneurs like Mark Zuckerberg, Jeff Bezos, Richard Branson and 23 more, formed the Breakthrough Energy Coalition, a private capital network aimed at long-term visionary funding of new clean energy technologies.
Renewable energy got another boost with the announcement of the International Solar Alliance of developed and developing countries, which aims to mobilize $1 trillion in investment for some 100 tropical countries with great potential – but often little start-up capital – to expand solar power generation and make it more affordable. This agreement, led by Prime Minister Modi of India, will help incentivize clean energy innovation, promote technology sharing and create new economic development opportunities.
According to WRI analysis, commitments made by eight major economies in the run-up to the Paris talks will collectively double global renewable energy production by 2030. Let’s keep in mind that even the most astute analysts tend to underestimate the speed of technological innovation in this area. The International Energy Agency’s World Energy Outlook has consistently raised projections for the penetration of renewable energy, as renewables’ capacity consistently outperformed IEA’s short-run estimates.
3. Will investors make the leap?
The shift to renewable energy will take more than just commitments. Investors and businesses need to decide what kind of future energy to pursue.
Conditions are ripe for expanding investment in low-carbon energy. Rapid growth and record-low prices for clean energy and energy storage technologies offer a prime opportunity to accelerate the move to renewable fuels.
Bank of America recently made a commitment of $125 billion in low-carbon business by 2025 through lending, investing, capital raising, advisory services and developing financing solutions for clients around the world. And Goldman Sachs made a commitment to carbon neutrality, while announcing it would expand its clean energy investment target to $150 billion in financing and investment by 2025.
Other major companies have signaled their support for climate action and an international agreement. More than 150 firms signed the American Business Act on Climate Pledge, including commitments to reduce their emissions. As the White House notes, these companies have operations in all 50 U.S. states, employ over 11 million people, represent $4.2 trillion in revenue and have a combined market capitalization of over $7 trillion.
Some companies are going even further, like those that have signed up to the Science Based Targets initiative (WRI is one of the coordinators). Over 100 companies have committed to setting SBTs, which would require them to adjust their operations in line with the 2 degree Celsius goal. 50 companies, with over $5 trillion in combined market cap have signed on to the Renewable Energy Buyers Principals. These companies and their combined 42 million megawatt-hour appetite for renewable energy are driving alignment in utility business models to allow renewable energy to become more affordable.
In short, as the climate talks proceed in Paris and beyond, business leaders should be watching and planning so they can take advantage of the sizable market opportunities presented by the transformation of energy systems.