With multiple climate change pressures (and opportunities) starting to grow, it’s clear that organisations need to formulate a comprehensive new approach to the way they do business and also how they interact with their stakeholders. Companies need to consider how to undertake such a fundamental reshaping of business priorities and activities while remaining relevant and thriving in a post-fossil fuel economy. Also the ways they could specifically incorporate climate risk into their business strategy and the capabilities and skills that are required to execute it.
The following is a set of key areas organisations must focus on to build their net-zero transition plans:
In the past decade, a growing number of companies have started to incorporate sustainability risks and opportunities into their business strategy. Some have taken a comprehensive assessment of their entire value chain, while others have focused on more specific parts of the business where they see the most risk and opportunity. However, too many organisations still fail to integrate climate action into their overall business strategy despite widespread acknowledgement of the risks they face and also fail to involve their financial teams in climate strategy.
Over half of global GDP generated by the business is moderately or highly dependent on nature. That’s why a transformation of business strategy is central to achieving the required care for climate, nature and society’s prosperity. Central to this new strategy is the four ‘R’s, which is to remove and reduce impact and restore what has been damaged. And most importantly, reimagine success.
If organisations are to succeed in placing climate risk and wider ESG issues at the heart of business strategy then executive boards will need to make climate change and sustainability a central part of their agenda. Companies should implement a structure to make this happen in a way that links to other business functions, e.g. finance and risk HR.
Boards and their executive teams should therefore focus on the level of investments their organisations are willing to commit in addressing climate change and building their pathway towards net zero. This could either be in terms of reducing carbon emissions throughout the organisation’s value chain or in generating clean energy. Risk oversight has long been an important part of a board’s responsibilities. Moving forward, a central tenet of good governance will need to involve understanding how to assess and act on climate-related risks and how they communicate that action with external stakeholders.
When the organisation cannot within its own business model or strategic timeframe reduce its own carbon footprint to zero then carbon offsetting provides a mechanism to compensate for emissions, therefore aligned to the concept of carbon neutrality. It operates by funding an equivalent carbon saving elsewhere. Carbon offsetting, in the form of mass tree-planting and forest protection projects, is another tool that is being embraced by both governments and organisations as a stop gap while they look to fully decarbonise their own operations.
But, as with the often oversold promise of new clean technology, tree-planting and forest protection schemes also need to be approached with caution. Some mass tree-planting projects have caused more environmental problems than they solve, notably large monoculture plantations that, in some cases, have destroyed soil and biodiversity. The first step all organisations need to take on the path to net-zero is to understand the number of emissions they must assume responsibility for, and then look at how to reduce them. The current best approach for evaluating an organisation’s GHD emissions involves three categories of business operations known as Scopes.
Science Based Targets (SBTs) to guide decision making
Part of the challenge for organisations is that the complexity of delivering on climate and net-zero strategies requires science-based targets being applied through every part of the business’ activities. This includes the sourcing of raw materials, the functioning of supply chains, the manufacturing of products, whether physical or digital and their carbon footprint when used by consumers. To address these concerns the SBTs recently announced a new, streamlined target-setting route for SMEs, helping them focus on their Scope 1 and 2 emissions rather than undertaking the arduous task of accounting for the emissions produced by consumers of their products and services (Scope 3).
Turning high-level climate business strategy into action can be intimidating for all organisations. That’s why being guided by science is so important in achieving climate goals. By working internally with their own sustainability professionals, consulting broad frameworks such as the UN SDGs, and seeking advice from industry-wide bodies like the Natural Capital Coalition, organisations can shape a science based target approach that helps, not hinders their business. Organisations will need support in this area, especially SMEs that are recovering from the pandemic.
Accounting standards and frameworks
Despite the multitude of reporting requirements, today’s corporate reports still have some way to go to providing meaningful, entity-specific analysis, or outlook on the how external factors influence the value and wellbeing of a business, whether that be the impacts of climate change on sourcing and supply chains, access to freshwater supplies or threats to biodiversity and nature.
It is critical that organisations manage and report on the value they create, preserve and erode through a different lens, one that reflects and integrates both financial and non-financial considerations. At the moment, different governments, industry bodies and NGOs are working hard and fast to achieve the consolidation/harmonisation of different existing non-financial reporting standards and frameworks. The temptation for companies is to wait for a fully integrated approach to be agreed and then look to comply with it. That would be a mistake, especially as climate related reporting will soon become mandatory in more jurisdictions around the world. Instead, organisations should keep informed of the main guidance as it evolves.
A new approach to integrity and assurance on sustainability information
Assurance services, both internally and for clients, will likely play an important part in this risk management process. Currently, there are many organisations providing assurance over non-financial aspects of business processes and strategy. Accountancy and finance can bring much-needed business skills, financial acumen with long-established and respected auditing and ethical rigour to climate and nature-related impacts.
Global assurance standard-setters need to seize the initiative in the same way that the reporting standard setters have done as this will be essential to deliver the step change required to provide fully assured non-financial information that all stakeholders can rely on. Enterprise Risk Management must increase its breadth of considerations to include indirect non-financial risks and integrated thinking to appreciate the interdependencies between the material resources an organisation uses and impacts. When it comes to climate risk action, this includes considering how it impacts other resources.
Education and skills
In too many organisations, expertise in climate risk and ESG still resides in a small group of sustainability experts who are distanced from financial decision making and often still view issues they are passionate about through a non-financial lens. This must change rapidly if organisations have any hope of tackling the existential threats that climate risk will pose to their business. Gen Z employees are particularly aware and vocal about how their future will be shaped by climate action or inaction. Increasingly, they are likely to consider climate action and sustainability as core issues for the organisations they work for, and with the right training and skillset can become leaders in these areas.
There is a great deal more to be done when it comes to improving climate and nature-related education, but as climate action becomes a core component of mainstream business, everyone within the organisation will need to understand how their own work can contribute and will be affected. Finance and accountancy professionals should take a leadership role not just in strategy but also in educating the rest of the organisation about climate and nature-related action. They will also need to continue their own sustainable business education as policies and regulations change while best practice evolves at a rapid pace.
Views of the author are personal and do not necessarily represent the website’s views.
Narayanan comments on issues pertinent to emerging technologies, technology policy and human-centred technology. His areas of interest include AI and machine learning, fintech, blockchain, digital ethics, and the role of emotional intelligence in a digital world. He’s presented extensively around the world, written on a range of topics in his areas, contributed to governmental policy groups and collaborated with standard setters on non-authoritative guidance. He oversees a team of policy specialists in areas including sustainability, economics, and the public sector – and also explores how these might connect to his core interests, such as via Sustainable AI.
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