Five Ways to Introduce Climate Smart Business Decision-Making

 

Source: COSO and WBCSD, based on risk assessment World Economic Forum

 

As a follow-up on last month’s post on business risk stemming from climate change, this post shows you how to incorporate thinking on climate change in your business processes and decisions. The list of ideas is by no means intended to be exhaustive, but it contains a number of ideas I stumbled on while following the excellent Climate Action course by the Sustainable Development Solutions Network of the United Nations.

1.   Include climate change risk in Enterprise Risk Management (ERM)

Now that climate change risks in particular – and ESG-risk in general – are increasingly becoming mainstream for the business community, the calls to integrate these risks in existing frameworks are getting louder. The survival of your business may be at risk according to the WBCSD (World Business Council of Sustainable Development):

Businesses are facing an evolving landscape of emerging environmental, social and governance (ESG)-related risks that can impact a company’s profitability, success or even survival.

The leading organization for ERM, or Enterprise Risk Management, COSO, has teamed up with the WBCSD to update the COSO-framework with ESG-related risks. This is as much proof as you will ever need to convince your fellow management team members that it’s time to start integrating ESG-risk in your business processes. The joined COSO-WBCSD team published an executive summary on how to best integrate ESG-risk into an existing ERM framework. High-level steps include:

  • Establish governance for effective (ESG) risk management.
  • Understand the business context and strategy.
  • Identify ESG-related risks.
  • Assess and prioritize ESG-related risks.
  • Respond to ESG-related risks.
  • Review and revise ESG-related risks.
  • Communicate and report ESG-related risks.

Please note that all actual mitigation strategies, such as moving production locations, switching to different raw materials and preparing for extreme weather, are the outcomes of your risk management process. In other words, by updating your ERM with climate (and other ESG) risks, you lay the groundwork to be able to mitigate those risks. For more on risk mitigation for the different risk categories stemming from climate change, see last month’s post.

2.   Disclose climate change related risk using an existing framework

The Task Force on Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg, is rapidly emerging as the standard for core elements and recommendations to report on climate-related financial risk. The task force is part of the international Financial Stability Board, and the TCFD principles are backed by some of the leading firms in the world, such as ABN AMRO, Akzo Nobel, BlackRock, Coca-Cola, KPMG, Olam, Philips, Shell, Suez, Tata, Tesco and Unilever.

The recommendations of the TCFD revolve around a number of key features:

  • Adoptable by all organizations.
  • Included in financial filings.
  • Designed to solicit decision-useful, forward-looking information on financial impacts.
  • Strong focus on risks and opportunities related to transition to a lower-carbon economy.

Core elements of climate-related financial disclosures, as drafted by the TCFD, are:

  • Governance. The organization’s governance around climate-related risks and opportunities.
  • Strategy. The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
  • Risk Management. The processes used by the organization to identify, assess, and manage climate-related risks.
  • Metrics and Targets. The metrics and targets used to assess and manage relevant climate-related risks and opportunities.

While the COSO-WBCSD recommendations on risk management mainly focus on internal risk management for the company itself, the TCFD recommendations should be taken to heart because it tells your company what your external stakeholders are seeking in terms of climate related disclosures. It is advisable to use an existing framework for your disclosures (e.g. GRI or IIRC) and, as an add-on for the climate related disclosures, make sure you integrate the TFCD’s recommendations to make it more relevant for your stakeholders.

3.   Use internal or shadow price for carbon in business decision

The mitigation strategy to prepare for a world where there’s either an emissions trading system (ETS) for carbon or a carbon tax, is using an internal (or shadow) price for carbon. An internal price puts a monetary value on all of your carbon emissions (or indeed on all GHG emissions), which you then use in investment decisions. The idea is that this helps your company prepare for times when policies are put into place that restrict or tax your carbon or GHG emissions. In the post on climate change risk, a number of big firm are mentioned that already adopted this practice. Among them are Microsoft, DSM, AkzoNobel, Carrefour and Sainsbury’s. How this works is revealed by The Economist in a recent article titled Low-carb diet:

Investors increasingly demand that companies take that possibility [of carbon taxes] seriously – 81 countries mention a carbon cost in their national pledges to limit global warming under the Paris climate agreement of 2015. Plenty of the Paris promises remain just that for now, but bosses ignore them at their peril, cautions Feike Sijbesma, who co-chairs the Carbon Pricing Leadership Coalition, which groups green-minded governments and business under auspices of the World Bank. In his day job as chief executive of Royal DSM, Mr Sijbesma has made the Dutch food producer examine all proposed ventures to check whether the sums still add up if a ton of carbon dioxide cost €50, well above the going rate of €6 or so in the European Union’s emissions-trading system (..). Where they do not, alternative feedstocks or cleaner energy suppliers must be found. If a project still looks unprofitable, it could be discarded altogether.

A third way to introduce climate change thinking in your business decisions would therefore be to adopt internal GHG prices into your investment and operational decisions.

4.   Join industry initiatives

Setting public goals, and reporting against those goals, might be one of the most powerful communication tools towards your stakeholders. If you want even more credibility, you can opt for tying these goals to science-based measures or work together with other companies in industry initiatives. The last option gives you the obvious advantage of learning from others, and you thus do not have to re-invent the wheel. Credible industry initiatives engage with important NGOs, think tanks and research organizations to set climate or sustainability related targets and implementation plans. Thus, proactive membership gives you an invaluable ‘line of defense’ in the sense that your company can always refer to the industry initiative to explain the decisions taken on action plans, goals or metrics used. This blog post is obviously not the place to give an exhaustive list of all industry initiatives for mitigating climate change. However, as an example, the WBCSD is (again) a good place to start:

  • Through the Rescale project, leading energy and technology companies are working together on solutions to accelerate the deployment of renewables and the transition to a low-carbon electricity system. Companies that signed up to the Rescale project are, among others, Unilever, Nestlé, DSM, Enel and ABB.
  • Sustainable fuels. The below50 project works towards sustainable fuels that emit at least 50% less as compared to traditional fuels. Some of the organizations involved are United Airlines, Audi, UPS, Arcelor Mittal and the Port of Rotterdam.
  • Climate Smart Agriculture. Through the three pillars of Climate Smart Agriculture (productivity, resilience and mitigation), this initiative is contributing to increasing the resilience and productivity of farmers in our food system to make 50% more food available and strengthen the climate resilience of farming communities, whilst reducing agricultural and land-use change emissions from agriculture by at least 50% by 2030 and 65% by 2050. Major names that signed up are Starbucks, Walmart, FrieslandCampina, Olam, Pepsico and Kellogg’s.

More of these initiatives under the auspices of the WBCSD exist (i.e. for the cement, freight, chemicals, buildings and forest products industries), and importantly, your organization might be more effective by joining an industry initiative with an agreed upon implementation plan, than creating climate strategies from scratch.

5.   Follow the debate(s) on climate change

A lot is written on climate change. There is still a lot of controversy over climate change, though we leave climate change naysayers in the same category as people who deny the link between smoking and lung cancer.  One of the main points of controversy that you may not yet heard of, is literally the sucking of carbon out of the air. This is one of the lesser known, but needed, strategies to reduce CO2 particles in the atmosphere according to The Economist:

Fully 101 of the 116 models the Intergovernmental Panel on Climate Change uses to chart what lies ahead assume that carbon will be taken out of the air in order for the world to have a good chance of meeting the 2°C target.

There are many arguments put forward by the opponents of carbon capture (different technologies exist: carbon capture and storage (CCS), carbon capture and utilization (CCU), bio-energy with carbon capture and storage (BECCS)), but the reality is the IPCC argues that we need a fair amount of it if we want to have a chance of living in an under 2°C world. Without taking a position here (just check the articles with the tag ‘slippery slope argument’ for some thoughts on that), it’s advisable to follow debates such as the one on carbon capture. It will raise awareness of the different viewpoints and from which angles your firm can expect criticism once you opt for a certain climate mitigation strategy (e.g. carbon capture). Maybe not so much a direct pathway to integrate climate change into your business processes, but by following the debates on climate change and disseminating information in your management’s risk meetings, you will create awareness of the controversies about mitigation strategies and, in turn, you will create a platform for further discussion.

By way of conclusion

From last month’s blog we’ve learned that climate change poses risks for your business, and how you can mitigate those risks. In this post, five ways for introducing climate change in your business lexicon have been put forward:

  • update risk management with climate risks;
  • disclose climate risks;
  • use internal carbon prices;
  • join industry efforts;
  • follow the climate change debates.

By adopting these strategies, climate change risks will be more easily identified and, in turn, more creative thinking on mitigation strategies in your organization will take hold.

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