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How should boards approach the great strategic challenge of climate change?

Posted by Tom Delay | 7 December 2017 | Viewpoint

It is a quote attributed to Henry Ford, “Whether you think you can, or you think you can't - you're right.” The saying is common within management advice, expressing the important role positivity of purpose plays in delivering on goals.

However, when applied within the context of a complex systemic issue such as climate change, the question asked needs to be far broader. It instead becomes about whether a wide range of significant and interconnected events will or won’t happen, regardless of what you think you can or can’t do as an individual or an organisation.

Predicting the global response to climate change, as well as the impacts that will result from this, is one of the great strategic challenges currently faced by boards and investors. Getting it right could help unlock future-proofed revenue streams and considerable profits. Getting it wrong could prove to be an expensive mistake, or even pose a threat to a company’s ongoing existence.

When it was signed in 2015 the Paris Agreement was almost unprecedented in its unanimity: a clear direction of travel. Practically every government in the world signed up to the common ambition of holding the increase in global temperatures well below 2°C above pre-industrial levels.

Although there is still doubt over whether those governments genuinely believe their efforts can be successful. Even if all current national commitments are met in their entirety, UN estimates suggest the world will warm somewhere between 2.9°C and 3.4°C. And this projection was made before the Trump administration signalled US withdrawal from the Paris Agreement.

On the other hand, the shift towards a low carbon economy is occurring far quicker than anticipated. The level of global greenhouse gas emissions has remained broadly steady for the past three years, breaking the link between economic and emissions growth.

The costs of clean energy technologies continue to plummet on a curve steeper than even their most passionate advocates would have predicted just a few year ago. We are seeing breakthroughs in batteries that are unlocking new eras of electrified transport and energy storage. And many of the world’s biggest cities and corporates have now committed to align their own targets with what the science says will be necessary to keep warming well below 2°C.

The question is no longer if we will move towards a low carbon economy, it is when and how? And importantly, how much warming will be locked-in during this transition? These are issues that need to be considered very carefully.

Most obviously there are the direct impacts of climate change, for example the costs associated with more frequent or severe incidents of extreme weather disrupting operations and supply chains.  Then there are the societal changes that occur in response to these issues, particularly policy and regulatory changes, but also exposure to rapid technological advancements driven by investment in innovation, or shifts in customer attitudes and behaviour.

For some highly exposed sectors there are even legal risks. As the science around extreme event attribution improves, fossil fuel companies are finding themselves in the crosshairs of activists and NGOs. Only recently the cities of San Francisco and Oakland started proceedings against five oil companies to get them to pay for the cost of protecting the Bay Area from rising sea levels and other effects of global warming.

Fortunately there are a growing suite of practical tools that companies are using to help them in their assessments of climate-related opportunities and risk. Most prominent amongst these is the new framework of recommendations developed by the G20 Financial Stability Board’s Task Force for Climate Related Financial Disclosures, which was led by Michael Bloomberg.

Adoption of the recommendations are being strongly supported by some of the world’s largest fund managers. Earlier this year Blackrock and Vanguard were instrumental in a shareholder revolt at ExxonMobil, requiring management to disclose climate risk. And Aviva Investors has warned more than 1,000 companies that it will vote against their Annual Reports if they do not publicly disclose the risks their business models face from climate change.

Importantly, the format of the recommendations do not require companies to arrive at a particular end point. Instead they take companies through the process of properly considering relevant external factors and coming to their own conclusions.  And an ever increasing number of large listed companies across multiple industries are committing to do exactly that, such as Philips Lighting, Iberdrola and WPP.

 

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The guidance advises companies to take a scenario planning approach, understanding what the impacts could be for your business under different global responses to climate change. Of particular importance is having a clear view on what would happen in the circumstances where the world is successful in delivering on the terms of the Paris Agreement, keeping global warming well below 2°C.

Of course, for each company and sector the approach to forecasting will to some extent need to be bespoke. But it is likely that as time goes by there will be greater levels of standardisation and commonly used assumptions, as methodologies become increasingly sophisticated and the science becomes more certain.

A related trend, one that has become increasingly visible over the past couple of years, is for companies to set themselves science-based targets on climate change. This involves aligning their operations with what is objectively required to deliver on 2°C goals within their own operations, as well as setting ambitious targets on reducing indirect emissions outside their control, by influencing suppliers or customers.

Currently over 300 corporates have committed to do this through the Science Based Targets Initiative, a collaboration between the World Resources Institute, UN Global Compact, WWF and CDP. Within this group there is even a small subset of major companies – at present Tesco, Carlsberg Group and BT – that are going even further and aiming for the aspirational 1.5°C higher bar in the Paris Agreement.

By basing future plans on the best available climate science, a business can put itself on a trajectory ahead of regulatory risk and objectively claim to be taking sufficient levels of action on emissions. Equally as importantly, this can unlock a number of commercial benefits as well, which go beyond mere reputational enhancement.

It is now well established that a strong focus on sustainability helps companies to improve the efficiency with which they use resources and energy, cutting costs and boosting productivity. But what is now becoming apparent alongside this is that there are huge market opportunities in selling the solutions for a low carbon future in the here and now.

BT reports that 22 per cent of the company’s global revenues are linked to ICT products and services that help customers reduce their own carbon footprint. Volvo will only manufacture hybrid and fully electric cars from 2019. And Shell is opening up its first forecourt in the UK that won’t sell petrol.

To go back to the Henry Ford quote, even though an individual businesses may not be able to unilaterally solve global warming, they can put themselves onto a pathway to deal with it.

What is needed is a positivity of purpose, alongside a rational and informed assessment of the future impacts of climate change and shift to the low carbon economy. Those that believe they can do nothing and continue with business as usual are far more likely to succumb to risks, miss opportunities, and fall by the wayside. The responsibility for company boards is to guide their organisations through this transition and help them to thrive in a sustainable future.

A version of this article first appeared in Board Agenda.

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