The three steps Boards must take on climate
By Michael Bateson, former Senior Analyst at Sancroft.
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Whilst the world gets to grips with vaccines, variants and other pandemic-related challenges, it’s undeniable that 2021 will also be a big year for climate risk. ‘Climate action failure’ ranked 2nd in the World Economic Forum’s globally-lauded 2021 Global Risks Report in terms of ‘likelihood’ and ‘impact’, second only on likelihood to ‘extreme weather’ – indeed a consequence of climate change – and on impact to ‘infectious diseases’, for obvious reasons.
It must be said that not even considering to evaluate the risks and opportunities that climate change poses is tantamount to negligent leadership. It does not matter what industry you operate in, climate will have an impact somewhere along your value chain which will matter to you and the future success of your organisation.
What’s worrying is that only a few seem to hold the necessary awareness, highlighted most recently by a survey from New York University’s Stern Center for Sustainable Business. The research found that a mere 7% of board members are ‘climate competent’, and that only three of the 1,188 Board members at the largest 100 US companies could boast climate expertise. In other words, an incredibly small number of those who need to be aware of climate change impacts are actually informed enough to act on it. Admittedly this study was US-focused, however when we look to the UK, we see a similar story. New research into the FTSE 250 found that over 90% of the index ignored climate-related factors in their most recent annual reports; indicating that either these organisations were unaware of the impacts, or that they did not consider the issue important enough to act. Quite frankly, neither explanation is sufficient and businesses must demonstrate they are taking a lead.
So what needs to be done?
There are three steps that Boards must take to act on climate change, all of which rely on engagement and participation from the CEO and executive teams.
Step 1: establish Board ownership of sustainability
Climate risks and opportunities are something that’re weaved throughout other roles – for example risk, operations, finance, procurement, sales and marketing – but without ownership at Board level, the climate response won’t be what it needs to be. Having a Chief Sustainability Officer prevents the responsibility being thinly spread over others’ remits, which makes it more likely to be acted upon. Of course wider Board education on the matter is crucial, however embedding responsibility with an individual will take it that one step further.
Such a role ensures that climate is integrated into core strategy and the business model, as climate risks and opportunities should be. Fundamentally, it demonstrates accountability and strength to investors and key stakeholders, helping to build trust and resilience in the organisation. Good examples here include Unilever, BT Group, SSE and Landsec, all of whom have established Chief Sustainability Officer roles whose remits include climate. It should come as no surprise that these firms were all commended by BITC’s recent evaluation of how the FTSE 100 are leading on climate and net zero. The work of the S30 – a new taskforce that brings together 30 of the world’s top C-suite sustainability leaders – is likely to become more prevalent in this arena.
Step 2: disclose carbon emissions and improve transparency
This is something which many already do – in part at least – for regulatory reasons. Scope 1 and Scope 2 emissions reporting has been the norm for UK big business for years, however the scope is increasing as all UK listed businesses are being mandated to disclose against TCFD (Task Force on Climate-Related Financial Disclosures) recommendations by 2022. The move aims to aid investor understanding of climate strategy and performance among big business, which will help build a more informed, carbon-conscious investment system.
Beyond investor audiences, the general public and media are fully on board with the climate agenda and should not be ignored. Ongoing Extinction Rebelling protests place constant pressure on the corporate world to act, with names like Shell unsurprisingly facing the brunt of the disruption. The Daily Express have even launched a Green Britain ‘crusade’ which is calling for a cleaner, more environmentally conscious Britain.
The common lesson across all this is that honest and open communication with your stakeholders is vital. At the very least, you need to satisfy regulatory and investor demands. But without customer buy-in, quality supply chain partners and social license to operate, the future is likely to be limited.
Step 3: make moves towards environmentally-positive supply chains
Demonstrating ownership by outlining commitments is just the first step in the process; it must be followed by credible action plans that filter down the value chain and actually build environmental resilience. According to HRH The Prince of Wales in the notable Climate Agenda webinar earlier this year, only 2.5% of the top 40,000 companies globally have strategies with approved Science-Based Targets that will help drive corporate climate action, and only 0.5% have targets in line with the Paris Agreement’s 1.5o target. ‘Biodiversity loss’ itself prominently featured in WEF’s 2021 Risks Report (5th in terms of likelihood and 4th on impact), highlighting the necessity to address this issue in tandem with climate risk. The coming years will reveal more about how businesses can effectively act, and the launch of the Task Force on Nature Related Financial Disclosures – a TCFD for biodiversity if you will – will help make this actionable issue for both corporates and their investors.
For now, the best first step is to take stock of exposure to biodiversity-related matters, asking questions like ‘How does our organisation and supplier base interact with biodiversity?’ and ‘What natural capital do we use or give back?’. Frameworks such as the Natural Capital Protocol are likely to be useful here. Once informed of your organisation’s material risks and opportunities around biodiversity and environment, then it’s time to strategise. Where can unnecessary harm be eliminated? Who can you work with to better your impact? What does your business and operating model of the future look like?
Round-up
Climate risk is here to stay and the impacts will get significantly worse if left unchallenged. Many in the corporate world have outlined their net zero ambitions and commitments to treating the environment more fairly, however without concrete actions – i.e. establishing Board-level responsibility, enhanced disclosure and credible action plans – we will not see the change necessary to either solve global environmental challenges or ensure that businesses are fit for the future. Inaction now can have dire consequences, not just for reputation, but for access to capital and fundamental risk management. The time to act – to understand your business and the role it can play in a net zero world – really is now.