COP26 for SMEs: 5 Things to Know
The news cycle has forgotten climate change recently, but we haven't!
COP26 in Glasgow was the latest UN climate summit where world leaders established new policy initiatives to combat climate change, and it's been a major topic of discussion. COP stands for Conference of Parties, which refers to an international meeting of representatives from different countries where they discuss environmental issues. COP26 is the 26th such conference that has taken place in November 2021. We believe 2022 is the year where there will be lots of small things SMEs will need to have an eye on that could have serious consequences. This year in Glasgow, 190 countries agreed to something called the Glasgow Pact which has set out a number of measures and policy initiative.
Expressing any scepticism over the merits of government climate policy can be a thorny issue. Despite this, we think it is important to demonstrate to you, the SME owner, some severe negative impacts of climate change policy that could cost you dearly but if planned for, can improve your company's resilience.
That being said, most threats present themselves as opportunities and we wouldn't go away without highlighting some of the positives of climate change policy.
Phasing Down Coal - Good for the planet not for your input costs.
In the Glasgow pact, it was agreed to phase out coal-fired power by 2050. Coal is the dirtiest and most carbon-intensive form of energy, so this is a major win for climate action. This will mean that businesses who still rely on coal-fired plants to generate electricity (or heat) will need to find alternatives in the next few years.
Whilst this is a welcome step for climate action, this step adds to a list of fossil fuel divestment measures already taking place that are not being replaced with either stable base load energy supply (like Nuclear or Gas) or extra investment in renewables. In addition to the lack of matched investment, the International Renewable Energy Agency estimate that the world needs to double its investment in power generation and energy infrastructure.
Alongside underinvestment, renewable energy is more expensive to generate and manufacturers are facing extreme uplifts in production costs whereas clean glass and steel cost around 20% and 30% more to produce respectively. Feeding this into global supply chains in construction, cars, and retail, these price increases are passed on to the consumer.
If we factor in the current energy insecurity (namely Gas supply) deriving from the Russia-Ukraine conflict and the fact that many advanced economies have already divested from fossil fuels, then those input costs will increase further and drive core inflation to distressing levels.
Climate Finance - What is it and will we be paying more in taxes?
Given the UK’s relative strength in financial services, a big focus of COP26 was how governments around the world could expand the scope of the UN's climate finance initiative which involves both public and private sector money. Governments are currently committing $100 billion per year to climate finance, but it is hoped that this could be increased significantly with the right policy measures in place.
Whilst this is all good news in theory where is the money going? It's not clear how much of this money will actually make its way to SMEs to help them acquire electric or low emitting vehicles, charging points and other green infrastructure. In addition to spending commitments the G7 and China agreed to set up the Loss and Damage Facility, a $500 million fund to help countries who are already struggling with the effects of climate change.
This is on top of other funds such as Green Climate Fund and the Adaptation Fund which have been criticised for being slow, opaque and not doing enough to help developing countries.
If these funds are slow to have an impact and more money is being committed by governments to try and address climate change, there are primarily two sources - your pension and your taxes.
On the pensions front, there are a lot of campaigns dedicated to lobby pensions funds to run only ethical Environmental, Social and Corporate Governance (ESG) investments. Make Money Matter is a campaign group that is trying to build pension holder pressure on pension funds to invest in ESG assets only. Unfortunately, some of the best performing equities and companies who are most likely to be key players in energy transformation are Oil and Gas giants like Shell and BP. Contrary to its aims ESG investing is more likely to slow down renewable energy adaptation whilst making your pension less valuable in the future.
On the taxes front, it's worth noting that COP26 is not explicitly leading to any increases in taxes and nor do any governments (especially elected ones) want to agree to anything internationally that lead to tax increases. However in the UK, we already are paying environmental taxes such as the landfill tax, air passenger duty and the climate change levy.
The UK government is introducing a new 'plastics tax' which will come into effect in April 2022 and is estimated to be worth £500 million per year. The purpose of this tax is to reduce single-use plastics such as carrier bags, straws and coffee which is welcome news.
The UK government is introducing a new 'plastics tax' which will come into effect in April 2022 and is estimated to be worth £500 million per year. The purpose of this tax is to reduce single-use plastics such as carrier bags, straws and coffee which is welcome news and these taxes are targeted and not creating any form of global pressure on SME tax burdens. If these taxes continue to have outcome shortcomings, then governments will seek to use more money from the wider pool of VAT, Corporation Tax and Income Tax receipts to expand climate budgets, this is where the SME tax burden will expand.
However, when we combine shortcomings of ESG investing, the poor performance of international schemes and a lack of SME focused schemes in the UK, the effectiveness of the UK government’s climate investments should be brought into question. It is right that you should be questioning the efficacy of the taxes you, your business and your employees are required to pay. If governments around the world fail to meet climate goals, then they will rely more on taxation.
Insurance - Loss and damage facility = higher premia.
The Glasgow Loss and Damage Facility proposed by the G7 and China is, politically, an important recognition of the need to repair historical environmental damage caused to developing countries due to the industrialisation of advanced economies. ESCAP estimates suggest potential losses from climate-related risks in Asia and the Pacific of $1.2 - $4.7 trillion. This is a large sum of financial loss and while governments have agreed to intervene, insurance companies will be left to cover these losses. Whilst there is an increased demand for non-life insurance services, the risk Insurance companies are taking mean that premiums are more likely to increase than decrease.
Insurers in the UK are acutely aware of damage and loss within the UK. AXA have developed the Coastal Risk Index (CRI) to assess the flooding and cliff erosion risks around the world. To maintain the same levels of coverage today, Insurance funds will require higher premiums to cover future losses and maintain profitability.
Whilst this may not affect your buildings insurance if you live on a hill in the middle of the UK, these increase in costs will spill over into your simple employers liability insurance, professional or product indemnity insurance and even cyber policies.
Carbon credit markets - Good for clarity but your tree-planting scheme might have been double counted.
The Glasgow Pact also outlined new international standards on regulating the carbon credits market including eliminating double-counting in carbon accounting practices. In this market, businesses can buy permits – or carbon credits – generated by projects that are cleaning up our atmosphere, to compensate for the emissions they haven’t yet eliminated. Scale is important and would make a real difference to companies like Shell who is investing in Greentech start-ups but is still drilling lots of oil. It may seem almost too big for an SME, but actually, the agreement on carbon markets helps in a few ways.
Improved standards will start to bring clarity on offsetting projects available to different industries and businesses in general. For example, many SMEs in the UK are already looking at Carbon offsetting through tree planting projects.
There’s scepticism around the quality of some carbon offsetting projects but, when done well, they support local economies and fund work that is making a real impact.
EVs - Slow but sure
The commitment of the COP26 attendees to accelerate the adoption of electric vehicles (EVs) is good news as this will have a direct impact on the fight against climate change.
Electric vehicles (EVs) are more efficient than petrol or diesel cars, and their emissions are much lower. The UK government has said it wants all new cars and vans to be electric by 2040.
This is an ambitious target, but with the right policies in place it is achievable.
The COP26 attendees recognised that EVs are not yet at a stage where they can completely replace petrol and diesel cars. However, they agreed to work together to speed up their adoption so that they can make a real contribution to tackling climate change. For businesses now, the tax incentives to run EVs are okay but could be a lot better, this is probably due to the fact that EVs are still expensive to produce and national charging infrastructure needs to be improved and standardised.
Inflation, Taxes, Crap Schemes, Insurance Costs, Adjusting to Current Offsetting
It sounds like we've listed a series of deflating conclusion to draw from Climate Change policy. This really isn't our intention, like all SMEs we want to do our bit for net-zero but with the exception of EVs, more threats than easy wins are emerging.
We all want a greener and more environmentally secure world, but it is very easy for business lobby groups and associations to promote and sell the importance of climate change and easy to ignore the serious medium-term pain SMEs in the UK are exposed to.
It is important that when budgeting, planning your investment decisions or selling, you have a full view of all the bumps ahead in the road to a net zero economy.