The true meaning of profound change takes a long time to unpack itself. We sense a big change has taken place. We don’t immediately recognise what the consequences are.
So it is with climate change.
So out with the crystal ball. Here’s a stab at what companies might reasonably expect.
- Long term means long term
Only a short while ago, the financial pages of the newspapers regularly featured articles entitled: Are corporates too obsessed with quarterly earnings statements? To some extent this is still a live issue. Increasingly, though, it is eclipsed by investor pressure to focus on delivering climate goals by 2050.
Any company today that has not declared a science-based target for emissions reduction and sketched out a path towards fulfilling the target, is behind and exposed. Listen to BlackRock’s Larry Fink’s threat to climate change laggards: “We will not only use our vote against management for our index portfolio-held shares, we will also flag these holdings for potential exit in our discretionary active portfolios because we believe they would present a risk to our clients’ returns.”
The message to CEOs is not so much wake up and smell the coffee, as wake up and smell the carbon.
- Long term means short term
2050 is a long way ahead. In 2050 I’ll be a sprightly 92-year-old. While the 2050 commitments provide necessary perspective on companies’ actions, of more immediate interest is what can be planned for and delivered in the immediate future.
Here companies face a familiar challenge: how to set a target that is at the same time ambitious and achievable. No-one is going to be in the game of handing out plaudits to companies that set and then achieve puny targets. If asked to advise, I would say to a company, err on the side of ambition with your plans.
If, when we reach 2030, climate catastrophe seems more rather than less likely, there will be little patience with firms that have been slow coaches.
- Climate targets must bring their own rewards
If climate change is the biggest resolvable issue that faces Earth, why wouldn’t you incentivise your executives to be part of the solution?
One of the most prophetic announcements at the recent Shell Strategy Day, was:
We “will continue with short-term targets that will drive down carbon emissions as we make progress towards our 2050 target, linked to the remuneration of more than 16,500 staff. This includes a new set of targets to reduce our net carbon intensity: 6-8% by 2023, 20% by 2030, 45% by 2035 and 100% by 2050, using a baseline of 2016.”
That approach makes sense not just in the energy sector, but across the board.
- Climate change dissolves boundaries
Corporate responsibility began calling to account companies on that which they fully controlled: their own operations. Concerns about supply chains and the impact of products and services have expanded the remit. Climate change will dissolve the boundary altogether as the financial impact from supply chain climate risk exposure and change in consumer behaviours become increasingly apparent.
Companies should expect to be judged on their whole climate change impact, from the start of the supply chain through to disposal of goods and impact of products.
Best prepare for this by reporting accordingly.
- Technology is the wild card
President George W Bush came in for quite a bit of stick, when he suggested technological advance would sort climate. It hasn’t happened yet on a grand scale, but technical innovation will and must be a major part of the solution.
Big incentive there for companies to think boldly about how to decarbonise through harnessing technology that can promote the use of alternative fuels, use of lower carbon materials and more efficient processes. Big rewards for anybody who gets it right.
- Enlist government help
Governments must be made to help. Companies need to be fearless in pointing out to governments when their policies impede the fight against climate change.
In the UK, VAT is not charged on new building, but is charged on renovation. New homes in the UK must be built to stringent insulation standards. Britain’s ageing housing stock needs massive investment to bring it up to scratch. The system must change. The Government is unlikely to act sufficiently quickly without pressure.
Companies need to speak out.
Mind you, we should note that governments are acting on the matter. The UK’s making mandatory reporting against Task Force on Climate-related Financial Disclosures (TCFD) is a case in point. As mandatory reporting kicks in, we will see who is at the front of the pack and who is not.
(Free advice to companies: make sure you’re not a laggard.)
- Prepare to be surprised
I would be surprised if between now and 2050, there was not an event that caused disruption to plans to combat climate change. The likeliest is, I think, a natural disaster that shows the world to be well off course in achieving what’s needed.
Whatever it turns out to be, the companies that will cope best will be those that show an intelligent grasp of the underlying issue, and a flexible and positive response.
