Leading Indicators for the Low Carbon Economy

Climate change and the transition to a low carbon economy presents both risks and opportunities for businesses. Driven by investors, customers, the nongovernmental organization community, or because they want to be climate leaders—organizations track metrics to identify how climate change effects their products, services, and bottom line. However, while many metrics provide insight into how a company’s financial statements will be affected by climate change, they provide a weak perspective on the world’s general trajectory in the low carbon economy transition. This lack of insight leaves organizations with little information on how climate change could change their business in the medium to long term, leaving them non-resilient and unprepared. Some organizations are emerging as proactive players in the low carbon economy transition by tracking leading indicators and identifying tipping points for taking action. Organizations use this information to make informed investment decisions, diversifying their business to ensure profitability in the long term.

Leading Indicators and Tipping Points

In this context, leading indicators are metrics that viewed alone or combined allow an organization to identify and track trends in the world’s transition to the low carbon economy. Leading indicators are a holistic view of how fast, or slow, the transition is taking place. They can also indicate a reversal of the low carbon economy transition. A tipping point is similar to a point of no return. It is the point where the momentum of change has built such that going back to a previous state is no longer possible. To try and reverse would require too many resources and be too costly.

Tipping points are less definitive than leading indicators but assist organizations in determining the likely direction of events or factors. An organization that is tracking leading indicators can identify tipping points, enabling them to make informed decisions related to new business opportunities and investments, or perhaps, when to divest.

An Example for the Energy Sector

Based on known technology trends, a world that has fully transitioned to a low carbon economy will likely have new electricity production capacity from renewable sources. Smart grids, demand side management, and energy storage provide flexibility to electricity networks. Transmission assets and network infrastructure offer interconnectivity for highly efficient use of production resources. To fully shift away from carbon intensive power sources and overcome the intermittency characteristic of renewable resources, jurisdictions can trade power between regions to balance systems. A highly interconnected power grid is one that maximizes its renewable resource potential.

Tracking a leading indicator related to interconnectivity can provide insight into the stability of the electricity grid to fuel the low carbon transition. Understanding how this metric signals an effect on an organization (and identifying its tipping point) is key to unlocking its power. Energy sector players must understand how increased interconnectivity effects their products and services now and in the future. It must also recognize that if such interconnectivity presents a risk to their business, it also presents an opportunity. Understanding these options early, and monitoring this leading indicator over time will ensure organizations can stay ahead of the low carbon economy transition by mitigating risks and unlocking opportunities proactively.

Be the Driver of Tomorrow

Organizations that analyze leading indicators stay ahead of the trends, mitigate risks before they become material, and uncover opportunities to diversify business practices and products. They are prepared for both the transition and physical risks of climate change because they track the indicators that provide meaningful insight. Organizations have the ability to unlock the power of scenario thinking and leverage recommendations of the Task Force on Climate-Related Financial Disclosures to be proactive rather than trying to catch up to trends that are mature. Organizations that take action now can be the leaders of today and the drivers of tomorrow.