Catching Up On Climate Change? There's Still Time To Do It Right.
Being seen as a leader in climate action ensures better access to capital, favorable consumer attitudes and the benevolence of regulators.
From corporate boardrooms to mainstream news to social media — the topic of climate change seems to be everywhere. Climate change has become increasingly undeniable. Its risks and impacts have become mainstream public discourse. This has created requisite pressure from investors, regulatory entities, consumers and other stakeholders.
Many companies have taken climate change seriously for some time. Prominent among them are large, global players. Many are in industries whose revenues can be directly impacted by customer demands for a more proactive stance on several societal issues. One in five of the world's 2,000 largest public companies with a total of $14 trillion in revenue have already declared "net-zero" greenhouse gas emissions targets. They are committing to producing no more emissions than the amount that can be taken out of the Earth's atmosphere (or "sequestered"), for example, planting trees or even seaweed.
Ambitious declarations are a predictable reaction to the "carrots" and the "sticks" created by the influx of climate and ESG-conscious investment instruments into the market. Being seen as a leader in climate action can ensure better access to, and lower costs of capital, favorable consumer attitudes and the benevolence of regulators. Savvy multinationals have responded with gusto.
But outside the world of global corporates, companies large and small are struggling to catch up. For many companies Strategy DNA works with, the scientific and technological complexity of the myriad of issues surrounding climate change, the deep ideological divides around the most appropriate policies to address it and the sky-high levels of uncertainty around climate and economic predictions create the perfect storm as leaders try to chart their path in the brave new world of skyrocketing public interest — and mounting regulatory pressures.
Many corporate leaders are finding themselves in an uncomfortable position of lacking understanding of the specific impacts of climate on their strategy and operations. Planning for climate adaptation is also a challenge for many — particularly given the often-competing priorities within the broader ESG spectrum. And then, of course, just like with anything catching on so quickly, there is a lot of noise, constant change of direction and competing expert viewpoints.
Some mid-size and smaller companies are following the lead by proclaiming net-zero commitments of their own. Other organizations have chosen to adopt a "wait and see" attitude. This can be attributed to the time necessary to fully evaluate unfolding regulatory changes, the exact extent of the pressure wielded by stakeholder and investor communities and technological advances likely to impact the transition to a low-carbon future. Yet other companies, particularly in the mid-market, are only now waking up to the need to address these long-ignored issues. This can be seen as an effort to catch up to the leaders in climate change recognition.
Not all of this is about managing one's corporate reputation. According to CDP, a global platform used by companies to report on their carbon footprint and climate strategies, in 2019, 215 of the world's largest companies reported almost $1 trillion at risk from climate impacts, with many likely to hit within the next 5 years. The risks involve a multitude of negative impacts — from the prospects of new climate taxes to the potential infrastructure damage as the result of changing weather patterns, to the potentially massive disruption in the very economics across a wide range of "legacy" industries, especially those related to — or relying on — fossil fuels.
All of this seems overwhelming — and with your peers jumping on the bandwagon of climate, it is easier to feel left behind. If you are in this boat, it is completely normal. But this is not necessarily bad. It presents an opportunity to learn from decades of tentative climate change action by others and do it right.
Doing it right means complete integration of climate change concerns into strategy and operations, adoption of a risk-based approach to corporate decision making and installing the right governance structure. A comprehensive climate strategy will include not only measures to reduce GHG emissions, but also information on the risks and opportunities arising from climate change. Climate strategy should be integrated into the business strategy and supported by effective information gathering, monitoring and data verification processes.
Here are a few things to keep in mind as your company begins down this path:
- Start with what you have: Take a look at your operations, including the supply chain. Assess your carbon footprint and identify the areas where changing technologies, processes or procedures could bring you the most bang for the buck — both in terms of reduced carbon emissions, but also in terms of the good old dollars and cents. For many organizations, focusing on energy efficiency, fuel efficiency, improved transportation and logistics options makes sense from the economic perspective.
- Think through the climate-related regulations that are likely to affect your industry. With the heightened interest in everything climate-related, many of your peers are likely to be a good source of information. But you need to think critically – and importantly, focus on both risk and opportunities. While much of the coverage, especially when it comes to regulations, tends to be alarmist, your job is to consider the likely scenarios and preemptively develop your company's response to them. This does not have to be an exhaustive analytical exercise, but down the road, when push comes to shove, it will pay to be prepared.
- Keep in mind that not everyone with an ambitious net-zero goal is a leader. Not all lavish public statements hold water. And even when they do, much of what others are doing may not be the best option for your company, your market or your communities. Unquestioned climate leadership is likely an illusion. It is up to you to chart your own course.
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