How climate risk went from the boiler room to the Board room
When the US first left an international agreement to reduce greenhouse gas emissions – rejecting the Kyoto Protocol in 2001 – it was met largely by apathy and acceptance by CEO’s and business leaders. Fifteen years later however and the business world’s reaction to President Trump’s withdrawal from the Paris Climate Accord this year could not have been more different. Leading US companies like Walmart, Google and Mars have joined states, cities and civil society groups in the ‘We are still in’ coalition. It aims to demonstrate the enduring US commitment to the climate accord, regardless of official government policy.
So why are business leaders rushing to action?
In large part it’s because it has become clear that climate change presents serious risks, and creates major opportunities, for nearly every industry. For example, its influence on extreme weather has seen one of the most damaging hurricane seasons in living memory. In addition to the human suffering, storms in the US caused an estimated $70 billion in damage and brought Texas’ oil refining industry to a virtual standstill. Outside of the US, the World Resource Council warns that South Asia faces $215 billion in costs per year from flooding by 2030.
Public policy, consumer demand and technological innovation are driving a shift towards a low-carbon economy; it is increasingly clear to most CEOs that no business will be immune to the damages brought by extreme weather and climate change. The need for all companies to have a plan in place to manage the risks and grab the opportunities means that, according to new data from environmental disclosure platform CDP, 98% of the world’s biggest companies now have board or senior management level responsibility to manage and report on climate change.
Shareholders have also added their weight to recent developments. For example, the world’s largest asset manager, BlackRock, has made it a top engagement priority to ask companies how they are assessing the risk that climate change may pose to their operations. UK fund house Aviva recently announced that it will vote against the Board of any portfolio company that fails to publicly disclose the risks posed to their business model by climate change.
New tools to measure success
For CEOs wanting to actively manage climate risk, new tools and metrics are also emerging to steer their companies through the low-carbon transition.
Perhaps most significant was the publication of the final recommendations from the FSB’s Task Force on Climate-Related Financial Disclosure (TCFD) led by financial heavyweights Mark Carney and Michael Bloomberg this summer. With the backing of the G20, the TCFD laid out a universal framework for corporate reporting on climate-related financial risks. It is a move that aims to elevate climate risk to the senior management team, and specifies the need for Board responsibility, of any business. It is also forward-looking, creating the rationale for businesses to grasp the reality of transition risk as economies shift from high to low carbon based energy systems, and how they can address the strategic reality of a low-carbon future.
Its key recommendations are that all companies, and investors, report against the same four core areas:
- Governance: Climate related risks and opportunities, board and senior management engagement in climate issues.
- Strategy: Actual and potential impacts of climate-related risks and opportunities to the organisation’s business model.
- Risk Management: The processes used to identify, assess and manage climate-related risks.
- Metrics and Targets: The tools to measure, asses and manage relevant climate-related risks and opportunities.
The framework is designed to be adoptable by all kinds of sectors and businesses – from mining to media, multinationals to medium-sized enterprises. In September, the UK Government officially endorsed the recommendations and the French government called for them to become mandatory – an indication that all senior executives should familiarize themselves with the recommendations’ components and metrics.
A second tool that is growing rapidly is the emergence of Science-Based Targets (SBTs), i.e. emissions reduction targets in line with the level of decarbonization required to keep global temperature increases well below 2 degrees Celsius, the central aim of the Paris Agreement on climate change.
An analysis of just over 1,000 major companies by CDP earlier this year found that 151 companies have adopted SBTs, a 61% increase in just the past year. For example AkzoNobel, the Dutch chemicals giant, plans to source 100% of its energy from renewable sources by 2050 and has introduced a carbon pricing policy which includes a ‘social cost of carbon’ of €135/tonne of CO2 – significantly higher than the 2018 average of projected by analysts. Such policies mean AkzoNobel is well-prepared for shifting consumer preferences and a tightening regulatory environment as the world transitions towards a low-carbon economy.
Not every business will be able to reduce emissions at the same speed, but ultimately all have to get to the same destination. Science-based targets provide a common framework to work towards, and internal carbon pricing is a valuable tool to get there.
Just good business
Business leaders increasingly realise that climate risk is not an abstract concept to be considered in isolation. Rather, it’s about creating a business model that will be profitable also in the future, and that is focused on longer-term value creation. The transition to a low-carbon economy is driving innovation across sectors, and the large number of blue chip companies on CDP’s Climate A-list demonstrate that it is more than possible to combine sustainability with profits.
Latest posts by Paul Simpson
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