Are Financial Incentives Needed To Fight Climate Change?
- In general, companies have a large negative impact on the environment, with just 100 companies responsible for 70 percent of the world’s greenhouse gas emissions
- While most businesses have the resources to create solutions to climate-related problems, they don’t have the financial incentives to prioritise these solutions, finds a new study from Durham University Business School
- To solve this problem, financial incentives are needed to encourage companies to invest in green policies
From carbon emissions to waste generation, companies’ actions have a significant effect on the environment. In fact, just 100 companies have been responsible for more than 70 percent of the world’s greenhouse gas emissions since 1988, according to a report from the Carbon Majors Database.
Knowing this, we, as consumers, expect companies to actively work towards reducing their negative environmental impact, satisfying the ESG goals of investors and instilling pride in the brand. Some do this, placing sustainability at the heart of their operations. Outdoor clothing company, Patagonia, for example, gives all of its profits to organisations fighting climate change, or Dr Bronner’s, a soap company, manufactures environmentally-friendly personal care products.
The road to tackling climate change is paved with good intentions – or greenwashing if you’re a pessimist. The number of companies setting net zero emissions targets has risen by 40 percent since June 2022. Now, half of the world’s 2000 biggest listed companies have set a target to get to net zero by 2050.
To ensure companies’ targets are credible and deliver on promised emissions reductions, the UN laid down detailed criteria in its Race to Zero campaign. Companies must cover all greenhouse gas emissions, start to cut them immediately, and include an annual progress update of short and long-term goals.
Unfortunately, only a fraction of the companies which have taken part in this meets the UN’s guidelines for what constitutes a quality pledge.
Why is this? It may be a lack of financial incentive, according to a recent study from Durham Business School.
Financial incentives and their impact
Green incentives are financial benefits to encourage projects and investments that reduce environmental harm. These can be in the form of government cash grants or tax incentives. Companies need these financial incentives, in addition to regulation, to make sustainability efforts a higher priority, writes the MIT Sloan Management Review.
For example, to help achieve the goals set by the European Green Deal, the EU has set out a number of initiatives and proposals to make Europe a climate-neutral continent by 2050. As part of this, they will use EU funds to finance clean tech innovation, manufacturing and deployment.
Green innovation strategies don’t always boost performance
Would you pay more for a product that has a better environmental impact? A recent survey from McKinsey found that 70 percent of consumers surveyed would pay five percent more for a green product if it met the same performance standards as a non-green alternative.
In this way, having a green innovation strategy can make companies more competitive, a new study from Durham University Business School found, but unfortunately, this does not necessarily translate to increased turnover or performance.
The study analysed more than 12,000 Spanish firms between 2008 and 2016, relating the green innovation strategies over the past nine years to the changes in performance, measuring turnover growth, employment growth, and labour productivity.
The researchers found that adopting green innovation strategies doesn’t always translate into a positive impact on firm performance in these criteria. This means that businesses investing in green innovation strategies in hopes of a large profit may be disappointed.
What’s the solution?
Although most businesses have the resources to create solutions to climate-related problems, they don’t have the financial incentives to prioritise these solutions, says Dr Becker, an Associate Professor in Strategy and Innovation at Durham University Business School, and researcher on the study. Instead, companies would rather focus on profit-maximising activities than environmental ones.
To solve this, policymakers need to step in and create the missing financial incentives, advises Dr Becker.
He suggests that environmental and innovation policy intervention is needed to create the market incentives needed to encourage firms to invest in green innovation strategies.
Governments should have specific policies to support companies who are successfully investing in green policies and initiatives, he says. Firms developing green product innovation strategies may, for instance, be supported by the procurement of new green products by governments to stimulate demand for new green products.
“Day by day, it is becoming drastically more important for us to innovate new green solutions,” says Dr Becker. “Climate change is already having a huge impact and will continue to become more profound unless we are able to tackle rising temperatures and changing ecosystems through new innovation.”
Do you agree that financial incentives are needed to help the fight against climate change? Let us know in the comments below!
Interested in this topic? You might also like this…