The 9th EcoAct benchmark assessing decarbonization of FTSE 100 companies is scathing: 85% of these large companies do not have a strategy to meet their climate challenges. The board members of these companies – and of others – have an urgent role to play in accelerating the taking into account of climate issues by companies.
Climate Change is Already a Key Risk Factor for Companies
1. Companies Keep Making Decisions That are Disconnected from Current Climate Realities
The way in which climate issues and corporate practices are disconnected is striking.
- On the one hand, climate risk already materializes through its technical, financial, social and reputation impacts. Very tangibly, the successive summer heat waves have already shown how much the constructions were not technically adapted, how much the investments to be provided for their adaptation were significant, whether for public authorities or companies, and how much the insufficient management of these heat waves posed public health problems for the entire population, and not only for the most vulnerable segments of it
- On the other hand, however, day-to-day decision-making in companies continues to underestimate these risks
This is the case for the automotive sector, with the European Commission suspecting that some car manufacturers have inflated the figures for the baseline CO2 emissions, hoping to be subject to less ambitious targets to be met in the context of new European standards.
Thus, many discussions and strategies project the climate issue onto paths to 2030 or 2050. A way to create distance, and to speak about the responsibilities of today’s decision-makers for future generations. This is an error of judgment. Youth has identified it well, since it does not project itself into a world to bequeath to “its grandchildren”. The youth who revolt are asking for accountability for themselves.
2. Companies Called Upon to Act not for Future Generations, but Already to Adapt Themselves to Rapidly Changing Realities
The reality is different. Not only is science progressing and alarmed to see its forecasts at 2050 approaching and risking to be realized more around 2040. But climate change is not solely part of the operational reality of companies in 5 or 10 years. It is already a reality.
More surreptitiously, climate change is changing many aspects of how a company operates on a daily basis. For example:
- The high greenhouse gas emissions (direct and indirect) of certain transport or consumer activities are changing customer expectations and purchases. The aviation industry has become emblematic of these issues
- The emotion generated by the Amazon fires, for example, is creating a new diplomatic mobilization, and is pushing hundreds of investors to become more demanding on the companies in which they are shareholders by deploying a code of good conduct for a zero deforestation strategy
- Employees say they are concerned that their company will become more actively and quickly involved. Interesting signs, billionaires are helping to pay for climate protests, for example
- Since 2018, the Bank of England or the Banque de France have had the idea of an imposed climate stress test. This necessarily changes the way the financial sector (lenders, insurers) plans to finance the real economy, and at what cost
Boards of Directors and Climate Adaptation of Companies. 8-Point Action Procedure
The Boards of Directors have a duty to take an urgent and in-depth approach to ensure that companies take the climate issue seriously. Here is an 8-point procedure.
1. Direct Periodic Involvement of the Board of Directors
Climate issues must be reviewed periodically by the Board of Directors, based first of all on the 3 following elements: This is an 8-point procedure.
- First of all, in order to create a common vision within the Board, a prospective analysis of the company’s resilience in climate scenarios comparing a trajectory at 1.5°C with other trajectories (we are currently moving towards 3 or 4 degrees) must have been developed and discussed within the Board of Directors. This not only helps to understand the issues, but also to see the urgency and operational gaps that can be taken on a trajectory of 2 or 1.5 degrees, for example. Hearing stakeholders and experts can make the exercise more concrete and operational in order to integrate climate realities into the operational reality of the company
- Based on this long-term vision, a risk mapping must be proposed and validated by the Board of Directors. As science progresses and the understanding of business impacts improves, this mapping must be updated regularly and at least every 3 years. It also makes it possible to calibrate the mapping taking into account regulatory or contextual changes (evolutions in customer and consumer expectations, for example)
- The Board of Directors may delegate one of its members, or a committee to regularly monitor these issues in order to anchor climate issues in the daily reflection of the Board
2. Concrete Climate Commitments as Part of the Company’s Strategy
It is the responsibility of the Board of Directors to ensure that climate issues are integrated into the company’s strategic and operational processes. 5 key points can be deployed in a coherent way:
- Ensure that the company’s general management sets greenhouse gas emission reduction targets within a 1.5 degree trajectory, focusing on the most significant exposure risks depending on the nature of its activities. For an energy-intensive industrial production company, ” scope 1 ” will be essential. On the other hand, for a retail company or one that is highly exposed to carbon risk in its supply chain, particular attention will be paid to “scope 3”
- Integrate climate issues into strategic (strategic plan, investment plan…) and operational (product choice, customer risk assessment…) decision-making processes. Particular attention to dialogue with employees and business partners is essential to ensure the roll-out of a relevant and engaging operational approach
- Establish the climate issue as a cross-cutting issue and not delegated to an internal expert. Depending on the degree of risks or opportunities brought by the climate issue, leadership may for example fall to the strategy or compliance department
- Share and report information by aligning reporting activities with TCFD recommendations (ideally sector-specific, when available)
- Innovate in the processes of enhancing individual and collective performance. The Board may introduce climate objectives into the individual variable compensation of executives. For example, in the real estate sector, the Board may also change the economic relationships between the lead structures and the vehicles carrying the real estate assets (interest on quasi-equity, intra-group fees, etc.) to reflect the climate effort and take it into account in the valuation of the entities and offer the prospect of collective performance
Conclusion: The Board of Directors is No Doubt influential on Climate Issues
The climate issue is urgent, and is already part of the daily life of companies. It is not a question of future generations, but of present adaptation.
In response, it is the Board of Directors that has many levers at its disposal to understand and drive a strategic and operational approach.
Author of several books and resources on business, sustainability and responsibility. Working with top decision makers pursuing transformational changes for their organizations, leaders and industries. Working with executives improving resilience and competitiveness of their company and products given their climate and human right business agendas. Connect with Farid Baddache on Twitter at @Fbaddache.