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How Does Climate Change Affect Your Industry?

August 27, 2021

How to best address impacts from our rapidly changing climate is an issue that has permeated almost all sectors of the global economy, traversing industries and impacting all. Governments and businesses around the world are taking action to reduce greenhouse gas emissions and adapt to or mitigate anticipated climate change impacts. These initiatives  promise to drive emerging market opportunities and public demand to accelerate existing trends toward energy efficiency, jump-start alternative technologies, and prod changes in financing and tax policy.

Government mandates and a common understanding that achieving carbon neutrality will require a massive effort on the part of both the public and private sectors, are driving efforts across board rooms and in the operations of companies worldwide to achieve net zero carbon emissions as an integral component of future planning, both for compliance and operational purposes.

Measures to reduce carbon emissions, such as advancements in energy efficiency and the development of new energy technologies designed to mitigate emissions, the procurement of renewable energy, and the adoption of low-emission vehicles, are just a few of the new considerations that are a reality across industries such as transportation, retail, manufacturing, and sports. At the same time, those industries also are endeavoring to adapt their operating procedures to evolving climate change impacts from severe weather events like heat waves and droughts.

Morgan Lewis is partnering with our clients across these industries to identify the risks and opportunities from, and strategies to mitigate and adapt to, the effects of climate change on their businesses. Our lawyers are advising clients on energy and environmental regulation, government policy, litigation, taxation, project development and finance, investment, and commercial issues, all of which can come into play as clients identify how they will need to respond to our changing world. The following summarizes emerging developments in specific industries that could be central to addressing climate change in the near term.

Transportation

The transportation sector’s sheer size, accounting for nearly one-third of US greenhouse gas emissions—80% coming from passenger vehicles and freight trucks—means it faces intense scrutiny and has an outsized role to play in the mitigation of climate change. Solutions such as electrification and increased utilization of carsharing services and public transportation likely will be significant factors in reducing carbon emissions. Automobile manufacturers are intently focused on improving vehicle efficiency and shifting to less carbon-intensive sources of energy such as electricity and biofuels.

Federal and state governments also recognize the importance of reducing emissions in the transportation sector and have taken some actions and are contemplating others to incentivize (or regulate) manufacturers and consumers to move away from internal combustion vehicles. For example, California banned selling new gasoline-fueled cars within its borders after 2035. The Biden-Harris administration has also prioritized reducing vehicle emissions regulations and announced plans to deploy a network of electric vehicle charging stations across the country.

The aviation industry also has moved to maximize efficiencies and reduce emissions and, like the auto industry, it is researching more sustainable fuels such as plant- and waste-based biofuels and synthetic-carbon-based fuels. However, given current technology, many airlines have instead focused on utilizing carbon offsets to invest in carbon-reducing projects. Complicating this approach is the fact that offsets are not widely accepted in all regulatory systems. The European Union determined that member states may not use offsets to meet their 2030 climate targets, even though offsetting is a key component of one of the International Civil Aviation Organization’s (ICAO’s) programs, the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). While the US Federal Aviation Administration has implemented CORSIA as a voluntary monitoring, reporting, and verification program, thus far, it has declined to address the offsetting of emissions. The Environmental Protection Agency also has proposed stricter greenhouse gas emission standards to match the international standards adopted by ICAO. This rule would apply to certain new commercial aircraft and reflects efforts to require US-manufactured airplanes and their engines comply with international standards.

Financial Services

Insurance

More frequent extreme weather events place stress on the financial services sector. Since these events are often unpredictable and catastrophic, they affect the stability of banks and the ability of insurers to insure certain risks. Stakeholders consequently demand insurance solutions to mitigate risks from climate change. These risks can be physical and directly affect the insurance business, or they may be more transitional and affect insurers’ portfolios as assets are repriced. Unfortunately, while some insurers might rely on historical data for weather patterns to determine their policies, this data may not reveal the full risk, as a result of climate change-induced unpredictability. Insurers are evaluating adopting climate-specific stress-testing, building resilience by diversifying portfolios, and offering solutions that specifically address climate-related risk, such as parametric pricing.

Banks and Investment Funds

Banks and investment funds also are focused on climate change issues. Several large banks have committed to becoming net zero in terms of greenhouse gas emissions, and they have pledged to align their lending portfolios with the Paris Agreement’s goals. Investment funds focused partly on the environment have tripled their assets in recent years—reaching nearly $2 trillion globally—and billions of dollars’ worth of bonds and loans designed to fund green initiatives are issued on a regular basis. A combination of government regulatory and legal focus on climate change and pressure from shareholders to commit to a low carbon emission economy has prompted investment firms to respond. In 2020 alone, these firms started 579 new funds with environmental goals, and since early 2019, a net $473 billion has been invested in stock, mutual, and exchange-traded funds with environmental mandates. Many of the world’s largest banks and investors have taken notice of the shift toward green finance and others are sure to follow.

Retail and Ecommerce

Retailers are increasingly prioritizing sustainability and recognize that a company’s environmental practices provide an array of benefits. In addition to the reputational benefits and product and service opportunities in efforts to reduce carbon emissions, there can be financial incentives for retailers to enhance sustainability efforts. The US government offers tax incentives and funding through grant and subsidy programs. Shareholders and investors are also taking a harder look at environmental practices prior to investing or making consumer purchases.

However, the advent and widespread move to ecommerce also presents sustainability challenges. Transportation is a major source of carbon emissions in the United States and approximately a quarter of all transportation emissions comes from last-mile deliveries—vehicles that are bringing goods to consumers’ doors after they have been transported by plane or ship. Companies across the industry are working to reduce the environmental impact of online shopping, including offering the option to group packages and moving toward low-emission delivery vehicles.

Education

Universities are making concerted efforts to both mitigate and research the effects of climate change. Among the steps taken by many institutions: pledging to achieve net-zero greenhouse gas emissions from investments in endowment portfolios; divesting from fossil-fuel-exposed investments; increased reporting requirements on universities’ climate change efforts and increased accessibility of that data; and collaborating with peer institutions and nongovernmental organizations. To curtail direct impacts, universities also have begun entering into power purchase agreements to procure renewable energy or credits; transitioning existing transportation fleets to electric or low-emission vehicles and developing supporting infrastructure; constructing new buildings and transforming existing buildings to meet LEED certification; and establishing fellowships, management boards, and other positions focused on climate change.

Healthcare

Healthcare systems must rapidly adapt to a world where increasing numbers of individuals fall ill or are injured because of climate-related diseases and extreme weather events. The healthcare industry itself is also a significant source of greenhouse gas emissions (producing approximately 10% of total greenhouse gases in the United States), and hospital systems nationwide are working to reduce their carbon footprint and take effort to become resilient to the impacts of climate change.

Hospitals are among the most energy intensive buildings in the United States. Many are working to identify inefficiencies in existing infrastructure and implement climate-friendly solutions. Healthcare systems are taking measures such as: replacing fluorescent lightbulbs with more efficient LED bulbs; utilizing software to reduce the energy consumed by medical grade computers; installing energy-efficient air exchange systems; establishing power purchase agreements to source from renewables; and constructing and renovating buildings in compliance with LEED certification conditions.

It is also imperative for hospitals in at-risk areas to identify and plan for ways in which climate-change-related extreme weather events such as hurricanes, floods, and wildfires can disrupt operations. Hospitals are implementing climate-resilient designs including heavy insultation, distributed generation projects, and increased elevation for waterfront hospitals. Such changes are welcomed and encouraged by hospital insurers, who increasingly require reporting of climate-change-induced risk.

Hospital systems have had access to significant funding for climate-related projects, and some have successfully partnered with venture capital firms to issue green bonds, or received government grants, to fund climate upgrades.

Sports

Climate change presents both management and business challenges for the sports industry and significant opportunities. Professional sports teams and organizations, collegiate athletics programs, and international sporting events all must adjust their operations to accommodate at least some climate-induced challenges. Governing bodies and team administrations are working together to implement widespread pledges to reduce carbon emissions and construct sustainable arenas. And they are being recognized for the efforts with governing bodies evaluating a stadium’s green rating for events like the Super Bowl, and with potential company sponsors factoring in good environmental practices by teams in their partnership agreements.

In recognition of the risks posed by climate change and the positives from a business perspective, a number of sports leagues and organizations are pledging to reduce emissions or go completely carbon neutral. For example, soccer teams have taken steps towards carbon neutrality by inviting fans and players to plant trees and use low-carbon transportation, sourcing renewable energy, composting and recycling, and consuming plant-based foods. Formula One also plans to go carbon-neutral by developing synthetic fuel, sourcing only renewable power, eliminating single-use plastics, and making travel logistics as efficient as possible. Arenas around the world are implementing climate-friendly infrastructural changes such as LEED certifications, renewable energy sourcing, and locally sourced food options. Many are seeing their energy costs reduced over the long term with these efforts.

These measures present complex business management challenges; however, with innovative partnerships and technology, the sports industry can see both financial and cultural benefits from changes to their energy practices.

Energy

The energy industry, paradoxically, can be viewed both as a fundamental driver of human-caused climate change, and as a singular component of the solution. Electricity generation, still heavily dependent on fossil fuels, alone accounts for about 25% of the greenhouse gas emissions in the United States. As a result, both commercial consumers and producers of energy are confronting a period of profound transition that likely merits its own separate discussion. Briefly, however, companies in the multilayered coal, oil, and gas industries have found themselves encountering increasingly vocal demands to reduce emissions from their products—which, in many cases, may translate into mandates to keep the raw materials in the ground—while at the same time producing the energy required for a modern global industrial economy. To address energy transition, many major international fossil fuel companies  are joining forces to curb emissions by making significant investments in the development of low carbon and carbon free projects, such as renewable natural gas and blue and green hydrogen plants, carbon capture sequestration and storage facilities and large offshore wind farms.

At the same time, incentives for traditional renewable energy  generation may likely present opportunities for historic growth in the wind and solar sectors, as well as in subsidiary industries such as turbine and solar panel manufacture, transmission, and the energy storage technology critical to maintaining reliable supply. Challenges may include controversies and litigation over siting large central generating stations and ancillary environmental concerns, such as impact on fragile plant and animal populations. For decades Morgan Lewis has been assisting renewable energy companies, and ancillary industries, such as energy storage and transmission as well as traditional oil and gas corporations, with virtually all their legal needs.