Experience tells us that there isn’t always an obvious business case for doing the right thing or for moving too far ahead of your market. Taking a leadership position on sustainability issues can seem risky, particularly when your actions could add to your direct costs or put you at a short term competitive disadvantage. There is also considerable political and market uncertainty at the moment, which means that many businesses are adopting a wait-and-see approach before making big decisions.
It is therefore helpful to outline some of the reasons why rational and experienced senior leaders at large corporates, across a number of different industries, have been willing to commit to science-based targets without worrying unduly about undermining long term company value.
One major reason is to get ahead of regulatory risk. With the window of opportunity to avoid dangerous climate change getting ever shorter, indications are that governments could take an increasing strong regulatory position on climate change.
In many countries this has already resulted in increased costs to business as a result of climate change policies indirectly increasing the costs of energy. Those costs become even higher when that energy comes with an additional carbon price, through either taxes or cap-and-trade schemes. Currently carbon pricing is in place in 40 national and over 20 sub-national jurisdictions, across major economies in both developed and developing markets. There is every indication this movement will expand and costs will continue to increase.
Taking strong action to reduce emissions from energy use drives direct operational cost savings. And as the costs of low carbon technology are reduced through innovation and higher levels of deployment, the business case for investing in everything from renewable energy to electric vehicle fleets becomes more and more attractive.
Setting big, bold, ambitious targets can also unlock the potential for innovation within an organisation. There are now a number of case studies of companies that have set stretching sustainability goals, which have been delivered alongside substantial cost savings, product improvements and increased market share. Examples of this can be found in the recent successes of companies such as Kering, BT Group and GlaxoSmithKline.
At the same time it is possible to manage reputational risk. As the physical impacts of climate change start to be felt more acutely, the public are likely to take an increasingly poor view of companies that do not do their bit to reduce emissions. Similarly, as other businesses take progressive leadership positions on these issues, laggards may appear unreasonable and regressive. It is worth noting that CDP has started awarding additional points for companies that have set a science-based target.
Strong commitments on climate change can even improve access to capital. A number of financial institutions – particularly institutional investors such as public sector pension funds – are putting in place specific investment criteria related to environmental performance for their portfolios, including ones that are linked directly to a 2°C target.
Finally, there is the moral case for action. It is well-established that taking action on sustainability and providing employees with a sense of purpose at work can have a positive impact on morale and productivity, as well as reducing absenteeism and improving the recruitment and retention of staff. But for some, the importance of taking an ethical stance may be adequate justification in itself.
Taking meaningful and sufficient action on climate change is the right thing to do. Sometimes when there is an uncertain business case, good leaders need to make brave decisions based on principles. This can have an inspirational effect. As more and more leading companies set science-based targets, the easier it will become for others to follow them. This will help to normalise the approach and create a critical mass that can help drive forward the move to a sustainable, low carbon economy.
In Part 4 of this series we delve a little deeper into the practical challenges that sustainability professionals will face when trying to set science-based targets, particularly the need to build an internal business case.