The business case for climate strategy

Considering our global climate dilemma, it is crucial that companies readjust their activities and business models to mitigate and adapt to climate change. According to the IPCC, the next three years are critical, as limiting warming to around 1.5°C requires global greenhouse gas (GHG) emissions to peak before 2025 at the latest, and be reduced by 43% by 2030.

In response, climate-related pressure is rising, spurring businesses to stay the course on our way to a 1.5°C degree world, and to adapt to the new reality brought about by climate change:

• Consumers – being more considerate of climate in their consumption models and demanding more climate-friendly products and services (e.g. cutting flights, purchasing second-hand clothes, and eating less meat);
• Customers (for B2B companies) – requesting suppliers to reduce their GHG emissions to achieve their net-zero commitments and targets, and pressing suppliers to help them adapt products and services to the new consumer needs;
• Employees – becoming increasingly reluctant to work for companies that have a negative effect on climate climate change;
• Investors – being concerned of the risk of stranded assets, facing pressure from regulation (e.g. SFDR) and from their own stakeholders, and making commitments to have net-zero financed GHG emissions across their investment portfolios;
• NGOs – pressing governments and governments to take effective action on climate change, such as in the Urgenda climate case against the Dutch government and the Shell lawsuit;
• Policy makers – making commitments to become climate neutral by 2050, as did Europe with the European Green Deal, and requiring companies to mitigate and adapt to climate change and report on this publicly.

Three steps to develop a strong corporate climate strategy

Developing a climate strategy entails understanding impacts related to climate change, and having a plan to mitigate the company’s impacts on climate change, as well to adapt to the new circumstances arising from climate change. But where to start? Here are three steps to take to get a good view on your company’s climate-related risks and opportunities, developing or strengthening the actual strategy, and keeping stakeholders engaged along the way.

1. Understand the climate-related risks and opportunities

Before designing the climate strategy, it is essential to understand the following impacts:

• Inside-out/societal impacts (related to climate mitigation) i.e. impacts on climate change by the company e.g. contributing to global warming through direct and indirect emissions of greenhouse gases, and
• Outside-in/business impacts (related to climate adaptation) i.e. impacts of climate change on the company e.g. physical risks such as weather-related events affecting industrial sites and operations, and transition risks such as regulation affecting the price of carbon emissions, and therefore cost of operations.

Using the recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) as a basis for the climate strategy is the “golden standard” from the perspective of regulators, investors and investor-focused ratings such as CDP and S&P Global’s Corporate Sustainability Assessment. The Financial Stability Board created the TCFD to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks, namely those related to climate change. Following these recommendations is also becoming mandatory, as 8 jurisdictions including the European Union, Switzerland, and the United Kingdom have already made TCFD-aligned reporting a requirement.

Several tools are available for companies to assess how the risks and opportunities related to climate change. For climate mitigation, companies should start with measuring their GHG emissions, and undertake life-cycle assessments. Companies can also go one step further and use tools like Impact Measurement & Valuation and Portfolio Sustainability Assessment to quantify the societal impacts of a company’s activities and identify opportunities for improvement.

For climate adaptation, companies should conduct scenario analyses on physical and transition risks brought about by climate change. These analyses provide technical insights on the resilience of an organization’s strategy to climate-related risks. In line with the TCFD recommendations, companies should use at least one 2°C or lower scenario.

In assessing the climate-related risks and opportunities, companies should also consult their stakeholders. Engaging the stakeholders can be done through the company’s materiality assessment or on the base of a project dedicated to the company’s climate strategy. These processes provide valuable insights for building the climate strategy and will allow to facilitate the climate strategy execution.

2. Develop (or strengthen) the climate strategy

Once the risks and opportunities have been identified, the climate strategy can be developed. A strong climate strategy, in line with the stakeholders’ expectations and aligned with the TCFD recommendations include:

• Having a strong corporate governance of climate-related risks and opportunities;
• Understanding the climate-related risks and opportunities, and their impacts on the organization’s business, strategy, and financial planning;
• Having an effective risk management approach to identify, assess, and manage climate-related risks;
• Setting metrics and targets, for climate change mitigation and adaptation. For climate mitigation, companies should set emissions reduction targets approved by Science Based Targets initiative (SBTi) and in line with the SBTi’s Net-Zero Standard.

Source: TCFD, Recommendations of the Task Force on Climate-related Financial Disclosures – Final Report (June 2017)

3. Be transparent and keep stakeholders engaged

Companies are encouraged to report on their climate strategy following the TCFD requirements, to showcase the systems in place to contain climate-related issues. The CDSB’s TCFD Good Practice Handbook provides examples of TCFD disclosures. The CDP Climate Change questionnaire is also a helpful tool for companies to report on their climate strategy and can also be used as gap analysis.

Finally, companies should keep stakeholders engaged in the company’s climate strategy. To do so, companies should embed climate-related issues in the open dialogue that the company has with each of its stakeholder groups. For instance, climate-related issues can be discussed in business reviews with customers and suppliers. This is essential as working on the climate strategy is a value-chain effort and requires close collaboration with companies’ ecosystems.

Want to know more about developing a strong climate strategy?

If you would like to know more or require assistance with working on your climate strategy, net-zero and/or science-based targets, or TCFD, get in touch with Johana Schlotter at johana@finchandbeak.com or call  +31 6 28 02 18 80 to discuss how Finch & Beak can support you.

^{Photo by Markus Spiske on Unsplash}