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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3 Reasons to Use Science-Based Measures in Your Sustainability Report

planetary_boundaries_2015

In the Guardian, the case is made that current reporting practices on sustainability are a great waste of time. According to researchers, nobody actually reads sustainability reports. One of the main reasons being, that reports are impenetrable: they’re just too thick to get through.  The authors identified a number of issues with current sustainability reporting practices which could be the cause for this.

The main culprit: most companies do not have a good process in place to determine materiality. The outcomes of a materiality assessment determine which aspects are to be included in your sustainability report.

One thing researchers missed, which could address both their worry that ‘sustainability reporting has stalled’ and help further discussions on the materiality issue, is the use of science-based metrics in sustainability reporting. I see a number of frameworks arising that all seem to stem from Johan Rockströms’ famous article in Nature, called ‘A safe operating space for humanity’. The premise is beautifully simple:

To meet the challenge of maintaining the Holocene state, we propose a framework based on ‘planetary boundaries’. These boundaries define the safe operating space for humanity with respect to the Earth system and are associated with the planet’s biophysical subsystems or processes. (…) Many subsystems of Earth react in a nonlinear, often abrupt, way, and are particularly sensitive around threshold levels of certain key variables. If these thresholds are crossed, then important subsystems (…) could shift into a new state, often with deleterious or potentially even disastrous consequences for humans.

In short:  we need boundaries – sufficiently underpinned by science – for Earth’s relevant subsystems and processes to continue using the Earth for our resource needs. Boundaries do have to be properly translated for use in existing models (such as the Global Reporting Initiative’s G4 Guidelines). Also, the boundaries must correspond with a firm’s size – as yardsticks against which to measure a companies’ sustainability effort.  This gives us the ability to benchmark a company’s progress against the reality in which it operates. A number of science-based frameworks are already adopted by some of the world’s leading companies on sustainability, e.g. Science Based Targets (Coca-Cola, Dell and Carrefour among many others), One Planet Thinking (Eneco) and Context Based Sustainability (Ben & Jerry’s).

I give you three reasons why your business should include science-based measures and boundaries in its non-financial or sustainability report.

1.     Make your report more relevant by showing your relative impact

The Guardian argues that most sustainability reports do not really invite us to continue reading. I tend to agree. Just pick-up a random sustainability report and you’ll be sure to get lost in tables, charts, figures, and the ubiquitous pictures of smiling, happy people. You immediately wonder how you should put together all these stats and figures to reach a conclusion on the companies’ sustainability efforts. Or, what I often ask myself: why do the things this company does towards sustainability matter at all? What is their impact if you would compare this to the size and scale of their value chain? By including science-based measures and boundaries, you show what your firm is achieving against objective yardsticks. In turn, it’ll make your sustainability report more relevant and credible to your stakeholders and investors.

2.     Show that your business is not ‘greenwashing’

Sustainability reporting is still often seen as a greenwashing operation. Although a claim of greenwashing is actually almost always too severe an accusation considering the definition of that word – ‘misleading information disseminated by an organization so as to present an environmentally responsible public image’ – I hear the term a lot when talking about the sustainability efforts of organizations.

I believe that the term greenwashing is used by the general public, because it is difficult for companies to understand which elements to focus on in their sustainability reporting. This leaves space for stakeholders to wonder about all of the sustainability elements companies chose not to include.

In the article ‘Raising the Bar on Corporate Sustainability Reporting to Meet Ecological Challenges Globally’, the United Nations Environmental Program raises similar doubts about the effectiveness of sustainability reports:

(…) the quality of these reports is insufficient to represent the full impacts of a company’s use of resources and materials on the environment and on communities.

And:

“Corporate sustainability reporting needs to be rapidly elevated from focusing on incremental, isolated improvements to corporate environmental impacts,” said Arab Hoballah, Chief of UNEP’s Sustainable Cities and Lifestyles Branch. “It should instead serve to catalyze business operations along value chains to achieve the kind of transformative change necessary to accomplish the Sustainable Development Goals and objectives by 2030. This is precisely what is needed to encourage countries and companies to act effectively at their respective levels.”

Moving towards more contextual-based reporting – i.e. taking into consideration both boundaries and the impact that is expected from your organization in respect to its size and span of your value chain – will surely make your organization less susceptible to charges of greenwashing and will make your positive impacts (or the steps you take to mitigate negative impacts) clearer to your stakeholders.

3.     Safeguard your business against the Slippery Slope argument

Activist NGOs surely serve a purpose in raising important topics. However, their solutions might go a bit far at times. The way activist NGOs attack businesses often reminds me of something Theodore Dalrymple wrote (on an entirely different topic but the words resonate):

I was still of the callow – and fundamentally lazy – youthful opinion that nothing in the world could change until everything changed.

Hardin, in his magnificent Filters Against Folly, called this the Slippery Slope argument:

The punch line goes by many names, among which are the [The Camel’s Nose,] Thin Edge of the Wedge, and the Slippery Slope. The idea is always the same: we cannot budge a millimeter from our present position without sliding all the way to Hell. (…), the fear of the Nose/Wedge/Slope is rooted in thinking that is wholly literate and adamantly antinumerate.

Hardin goes on to call this the demand for absolute (or extreme) purity:

The greed of some enterprisers in seeking profits through pollution is matched by a different sort of greed of some environmentalists in demanding absolute purity regardless of cost.

And:

When costs are paid out of a common pot, extreme purity in one dimension can be achieved only by impoverishment or contamination of others. Trying for too much we achieve less. Rational limits must be set to every ideal of purity.

Thus, Hardin states that everything that we do will lead to some unwanted consequences. Our actions need to be analyzed with the right terminology (‘literacy’), but, on top of that, we will also need the right measures (called ‘numeracy’; for more on these very useful terms, also see my blog The Business Case for Non-Financial Reporting).

Numeracy doesn’t just mean quantifying things; it means making the numbers relative to certain boundaries that give the numbers meaning. Using science-based measures to show the performance of your business towards certain boundaries or limits makes for a compelling argument to counter any Slippery Slope argument. In a way, what you are doing is making both ‘purity’ and ‘pollution’ more relative. Now, it can be measured and actions can be discussed and taken more objectively.

By way of conclusion: moving closer to a world we want

I have given you three reasons why you should consider moving towards science-based measures and boundaries in your non-financial reporting. As I already argued in a previous blog post, see Beyond Shareholder vs. Stakeholder Value, a firm’s main purpose is to provide maximal value to the economic system, but it should do so by adjusting to changing stakeholder demands. I believe moving to science-based measures and boundaries is the next step in these stakeholder demands and could take non-financial reporting to the next level, benefiting both companies (through the three reasons I gave you) and society as a whole (by introducing planetary boundaries).

Including science-based metrics will not solve everything, but let us see it as the next step and acknowledge that we cannot solve all issues at once. To paraphrase Theodore Dalrymple, moving forward, let us be:

realistic without being cynical, and let us be idealists without sounding like utopians.

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