Sales Trend 3 of Barrett 12 Sales Trends Report for 2022 looks at the risks that businesses need to consider regarding climate, and actions towards minimising their impact, energy transition, and what governments and consumers are expecting from them.
By guest author Andrew Petersen – CEO, BCSDA
This is a condensed version of Sales Trend 3, to read the original version you can download the report for free.
A new era of corporate climate risk
Over the past few years, the term “climate risk” has risen to the fore, taking up residency inside the world’s biggest companies, banks and investors. Today it is part of many companies’ toolkit as they seek to understand the impacts of climate change on their business and society.
What do we mean when we talk about climate risk?
The United Nations Framework Convention on Climate Change defines “climate-related risks” as those: “…created by a range of hazards. Some are slow in their onset (such as changes in temperature and precipitation leading to droughts, or agricultural losses), while others happen more suddenly (such as tropical storms and floods).”
Why has this happened?
First, driven largely through growing acceptance and embedding of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) framework[1], is the current broadening out of sustainability (both the “e” and “s” of environmental, social and governance). This is a key feature driving the institutional and technical response in corporate disclosure within the “real” economy.
Second, there has been a deepening appreciation of the connectivity of risks and the likelihood that climate change will remain the driving force in disclosure. Other factors, primarily biodiversity and ecosystem loss, will increasingly feature in recognition, measurement and disclosure developments. Australia has recently seen fresh debate around climate policy with the long-awaited introduction of the Climate Change (National Framework for Adaptation and Mitigation) Bill 2020 (Climate Change Bill) into Australian Parliament by Independent MP Zali Steggall.
The appetite for climate change litigation also remains strong despite global attention diverting to the emergency response to the pandemic. A quick data point: According to the U.S. Climate Change Litigation database[2], which tracks climate-related litigation and administrative proceedings, there already are nearly 1,400 cases pending in the United States alone, plus more than 400 non-U.S. cases. Most of those cases aren’t against companies, but some are. The most important decision is the Shell case.
Investors and C-suite Executives are taking note.
Pivotal to these developments is the deepening appreciation of the scale, urgency and interconnected character of risks, for which prior developments in the methods and expectations about financial reporting – and corporate disclosure more broadly – could quite fairly not have been anticipated. As they see the writing on the ‘courtroom’ wall, and the resulting potential financial liability facing companies, they are accelerating their own shareholder activism. If there was any doubt that climate change should be treated as a major financial risk, that question should now be laid to rest.
Two cases in point: In February 2021, the ABC reported that the ANZ bank had pulled out of funding the Port of Newcastle in what is being interpreted as a significant rebuke of the coal industry and its exposure to climate risk; and as if to reinforce the point in January 2021, Moody’s Investors Service reported that 18 sectors have a combined $7.2 trillion of debt with “high inherent exposure to physical climate risks,” such as devastating wildfires, storms and other calamities. To put that number in perspective, only two countries have a gross domestic product that’s larger: the U.S. and China. Japan, the world’s third-largest economy, has a GDP of about $5 trillion. For Moody’s, environmental considerations are becoming increasingly relevant when assessing credit quality.
And the corporate response? In “Climate Change and Corporate Value: What Companies Really Think (2020)”[3] a series of insights from interviews with Directors and C-suite executives at more than 500 global companies on the topic of climate change identified some key findings:
- Climate risk and decarbonizationhave become a significant boardroom issue requiring action.
- Most companies treatclimate risk as a very serious business issue, recognizing that climate risk equates to financial risk.
- Companies face external and internal pressuresto implement decarbonization strategies.
- This new focus on decarbonization and climate risk is alreadymanifesting itself on the People Agenda for companies.
- Critical barriers to decarbonizing business remain, including costs of decarbonization are perceived to be high; inability to source technology solutions; skills and expertise; and a lack of awareness of potential solutions to finance climate resilience and decarbonization strategies.
Ben van Beurden, CEO of Royal Dutch Shell Plc, following the Dutch court case expressed fears that a “disorderly transition” would follow, leaving companies with stranded assets and robbing investors of expected returns.
We are seeing consumer-goods companies are out competing one another to put out the most ambitious climate plans. Mining companies are trying to shed their coal assets. Electric car companies are raising astonishing sums of money. Energy utilities want to become “supermajors” powered by renewables.
And even as we are still in the middle of the pandemic, instead of slowing down, the energy transition appears to be picking up pace. In short, companies and investors are starting to make changes in order to avoid a disorderly transition, but there’s still a long way to go. This risk is unfolding rapidly and needs to be incorporated as a business risk, not just mentioned in a corporate sustainability report.
So how to address climate risk?
Standards-setting efforts such as the Task Force on Climate-related Financial Disclosures[4], are essential. This tool relies on voluntary reporting but it’s the closest to a unifying standard in the industry for reporting climate risks. TCFD now has more than 2,200 supporters. In early 2020, Singapore announced it will add climate risks to its financial-sector stress test[5]. TCFD-aligned reporting will become mandatory in the U.K. by 2025[6],the U.S. Securities and Exchange Commission is moving toward mandatory climate risk disclosure rules, while the Federal Reserve is deepening its exploration of financial system risks. New Zealand has announced that it will make climate reporting compulsory[7], and in January 2021, the Morrison government signed up to two international agreements that aim to integrate climate risk into investment decision-making, including through pricing risk; the Coalition for Climate Resilient Investment, and the Call for Action: Raising Ambition for Climate Adaptation and Resilience.
So what are the steps that a company can take to integrate climate risk into its strategic decision making:
- Favour credible, readily obtainable data
- Set short term milestones while tracking long term goals
- Use scenario planning to frame long-term uncertainties
- Rank vulnerabilities, targeting the biggest
- Focus on specific metrics
A global agreement is now within reach that would require all listed companies to disclose the risks they face from climate change in a standardised way, the governor of France’s central bank has said in June 2021[8]. Mandates have a way of begetting more mandates—further entrenching standards, but also creating networked value from shared expertise and (hopefully) lower accounting costs.
In Summary
As the Shell court case made clear, society’s expectations of companies are rising even faster than global temperatures. And the notion that companies may be responsible not just for their own operations but also for customers’ use of their products represents a new legal standard, one that no doubt will embolden both activists and investors and could amp up pressure on companies to increase their decarbonization ambitions.
Disclosure is coming, and in some markets, coming before the end of 2021. Companies have many types of risks that need measuring and understanding, from policy risk to reputation. They also have many things to gain from managing those risks, from better product-market fit for a lower-carbon economy to greater resilience to supply chain disruption.
Companies should view sustainability disclosures not as a cost but as a way to focus on some factors that make a more sustainable and resilient company — one that reduces risk, that makes you more attractive to customers, more attractive to employees, gives you a better supply chain.
[2] https://climatecasechart.com
[4] https://www.fsb-tcfd.org
[5] https://www.bloomberg.com/news/articles/2020-02-04/singapore-to-include-more-climate-change-risks-in-stress-test?cmpid=BBD020420_GREENDAILY&utm_medium=email&utm_source=newsletter&utm_term=200204&utm_campaign=greendaily
[6] https://www.gov.uk/government/news/chancellor-sets-out-ambition-for-future-of-uk-financial-services
[7] New Zealand has announced that it will make climate reporting compulsory
[8] Global deal near on forcing companies to disclose climate risks: Frankfurt/New York | The Australian Financial Review
Related topics
12 Sales Trends for 2022 – Decarbonising Sales Operations
The Moral Case for Decarbonising Sales Operations
The Economic & Business Case for Decarbonising Sales Operations
A year ago
The Phenomenon that is #March4JusticeAU
New Article Email Notification