Abstract
Until fairly recently, the main approach to getting business to respond to climate change has been top-down efforts to regulate emissions and enact various forms of "carbon pricing." The aim of such efforts has been to make businesses "internalize" the costs associated with greenhouse gas (GHG) emissions. Governments are expected to set the environmental protection rules for companies in their respective countries, and markets are expected to adjust to the new regulations and carbon prices.
But this classical approach to economic policy does not work when applied to a global "public goods" challenge like trying to limit the extent and effects of climate change. Instead of a top-down approach, in which economic actors are forced to respond to regulations imposed on them, the Paris climate agreement of 2015 was reached using a bottom-up approach centered on the concept of Intended Nationally Determined Contributions (INDCs) — along with a process that ended up encouraging the participation of all economic actors, not just governments.
The authors provide an account of how the Paris agreement was reached, and why the "Portfolio Decarbonization Coalition" under the auspices of the United Nations is the most important of several private-sector initiatives that are changing the way corporations operate. Thanks in large part to the PDC, investors can now undertake meaningful corporate governance action on climate change. With GHG emissions from a particular companies' operations now much easier to measure, objective performance metrics on GHG emissions can now be set by boards and verified by shareholders. And current decarbonized indexes can be used as performance benchmarks for asset managers' compensation, which can be tied to return outperformance relative to a "decarbonized" index.