“If we are to have any chance of reaching the Paris Agreement goals, we will have to reward those who play the game and penalize those who do not”

In an article  on the Le Monde website, finance expert Laurent Babikian proposes rewarding companies who make efforts to decarbonise and penalizing those who don’t. What are your views?

 

Climate: ‘The most effective way of reaching the Paris Agreement would be variable price business models’

To achieve the Paris Agreement, greenhouse gas emissions (GHG) would have to fall by around 4% a year until 2050, compared with the current global increase of 1.2% a year.

By way of comparison, they fell by 7.6% when the world came to a halt during Covid in 2020. If we want to achieve carbon neutrality by 2050, we need to put capitalism at the service of this objective by placing collective interest and the ‘commons’ above individual interest.

In fact, by seeking to maximize value-creation for one category of stakeholders – shareholders – neoliberalism ends up disservicing all the others by remunerating them at a much lower relative value and does not allow Corporate Social Responsibility (CSR) to play its original role as a social and environmental stabilizer.

According to the Janus Henderson Global Dividend Index, which measures dividends paid by the world’s 1,200 largest listed companies, 2023 was a record year for profits, dividends and share buybacks. At the same time, with a rate of 6% in January 2024, European unemployment reached its lowest level for decades. Germany (3.1%) and the Netherlands (3.6%) have even reached full employment. However, according to Eurostat, the rate of people at risk of poverty was 22% of the European population in 2022, and this rate was even 25% among young people.

All time-high profits

In short, Europe is close to full employment and, despite this, the number of people at risk of poverty is very high. This means that even when people are working, they are getting poorer, while companies are making record profits. How can companies be proud of their CSR [Corporate Social Responsibility] commitments under these conditions?

In fact, it simply means that work is not being paid at a fair price and that it is high time to reflect on its true value in a social context that is likely to become increasingly explosive.

Instead of paying skyrocketing dividends to their shareholders, wouldn’t it be more reasonable for companies to invest massively in the energy transition now, in order to smooth out future profits and dividends?

And what can we say about those who, instead of fighting inflation, have taken advantage of the prevailing geopolitical chaos to indecently increase their margins at the expense of wages, contributing to the double-digit inflation of 2022 and causing an unprecedented fall in the purchasing power of their own employees?

A truly sustainable economy in Europe

In this context, which is cruelly lacking in ethics, the introduction in the EU of ambitious directives, such as the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the Capital Requirement Directive (CRD), should enable the emergence of a truly sustainable economy in Europe.

The CSRD will lead to the emergence of ESG reporting based on double materiality and will be standardized across the EU, which will considerably improve market transparency on environmental, social and governance data.

The CSDDD will require companies to change their practices to identify and mitigate human rights and environmental risks throughout their value chain. It will make a transition plan aligned with a 1.5°C world mandatory. Despite a lot of procrastination, it should be voted on by the European Parliament in April.

Under the supervision of the European Central Bank, which has already announced substantial fines in the case of non-compliance, the CRD will require European banks to implement a transition plan explaining how they will transform their loan book to meet their obligations to achieve a net zero economy.

Rewarding those who play the game

These directives will enable CSR to express itself fully by treating all stakeholders more fairly, because they will be valued for their real impact on society and nature.

Furthermore, in 2027, Europe will create the European Single Access Point (ESAP), which will bring together all the financial and ESG data reported by European companies. This will enable all stakeholders to easily monitor the results of companies’ commitments to sustainable development.

If we are to have any chance of reaching the Paris Agreement goals, we will have to reward those who play the game and penalize those who do not. The most effective way of doing this would be to introduce variable price business models.

What might this look like?

A company will pay more to a supplier who aligns with 1.5°C and less to a supplier who does not, in order to encourage them to align. The good news is that companies will have direct access to this information through ESAP. A company will sell its products at a lower price to a B2B customer who allows it to reduce its emissions and at a higher price to a customer who does not.

Higher valuations

Similarly, with sustainability-linked loans, a company could obtain cheaper funding from its bank if it meets certain pre-determined environmental targets, and more expensive funding if it does not. Finally, a company could pay less tax on its profits if it makes a positive contribution to the Paris Agreement, and vice versa.

In conclusion, the era of fixed-price business models must come to an end. We need to be innovative in the way we design contracts, in a world that will become increasingly turbulent and in which long-term forecasts will no longer have much meaning.

With its Green Deal, the European Commission is courageously implementing new economic rules that will strengthen European businesses’ resilience to climate change, and therefore reduce the risk taken by investors. Sooner or later, this will translate into higher valuations for companies that have made progress in achieving their climate objectives.

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