Boards Should Look At Climate As A Strategy Question

A version of this commentary appeared first in the National Association of Corporate Directors’ Board Talk.

Talent, diversity, climate, cybersecurity. Which is the odd one out?

It is tempting, and tidy, to think of climate change as one of the environmental, social, and governance (ESG)-related risk categories for a board to monitor. And maybe not even one of the biggest or most urgent. The “growing impact of climate change” rated only 12th out of 18 in the US National Association of Corporate Directors’ 2022 Public Company Board Practices and Oversight Survey among trends “having the greatest effect on your company over the next 12 months.” In the same survey, among boards that say they have started to discuss climate change more frequently, half say they have done so in response to investor expectations, disclosure requirements, or compliance. Only a third say it is for the long-term growth prospects of the business.

The narrowness of this perspective shows up in companies’ climate actions. In preparation for Climate Week NYC this year, Oliver Wyman and the international nonprofit Climate Group interviewed 30 corporate climate professionals around the world, and surveyed more than 100, to learn what is holding them back from greater progress and how they are breaking through the barriers. The stories we heard range in mood from exhilaration to frustration, and the pattern is clear.

In the stories of exhilaration, climate professionals and their companies have a clear strategy for the role they want to play in the climate transition. Their metrics and targets are a means to pursue the strategy — not an end in themselves.

In the stories of frustration, the task of reporting often overwhelms the task of transition. In theory, the metrics should provide the impetus for change. In practice, without an agreed strategy, the changes needed can be too fundamental for this incentive mechanism to work, shifting the organization’s focus to near-term, incremental efforts that won’t achieve what is required.

39%

Of corporate climate practitioners say the most pressure comes from investors

The importance of strategy may seem obvious but can be missed in the way organizations respond to pressure from investors. Our survey of climate practitioners aligns with the NACD survey of public company boards described above: Among practitioners, 39% said the most pressure came from investors, compared with 24% saying business customers, 14% employees, 9% consumers, and 8% policymakers. This pressure, and where it is dealt with organizationally, has sometimes favored a focus on emissions metrics and disclosures ahead over a strategy to tackle the transition.

Boards can help by looking beneath the metrics and disclosures through three lenses:

RISK A critical lens, risk goes beyond compliance with the still-evolving and hard-to-pindown expectations of the ESG raters and analysts. The crucial point with climate change is that the status quo is not an available option, so evaluation of risk requires comparison between alternative futures, not the usual business comparison between a possible future and today. The meaningful choice is between acting later and acting now. Siemens, for example, compares its possible climate actions against the “cost of doing nothing” and projects inaction into a possible future outcome.

OPPORTUNITY Forty percent of the climate practitioners we surveyed see the level of change their organization will have to undergo as transformative. As value chains are disrupted and redesigned, value will migrate, leaving some business models stranded but creating huge commercial opportunities for those that position themselves well.

29%

Of corporate climate practitioners rank climate change as an existential threat

Previously commoditized sectors are becoming less so. Companies are coming to value levels of performance from new strong, resilient, and lightweight materials, such as steels and plastics, and from materials with low embodied carbon emissions. They are looking at new, specialist applications (cabling to floating wind farms) or whole industries (carbon capture and vertical farming) with their own supply chains. All this has just been made more tangible by the level of spending on new forms of energy and other climate technologies in the Biden Administration’s Inflation Reduction Act. Quizzing a company executive team on its climate disclosures may be missing the bigger picture — and may focus the team’s attention on the wrong place.

IMPACT Climate is the odd one out in another critical respect. In our survey of climate practitioners, just 29% rated climate change as either an existential threat or a highly concerning challenge to their business today — but this number rises to 71% when asked about 2030, and 79% for 2040. Succeeding in climate action matters to all of us. Companies can do an enormous amount to drive the climate transition. But they are often limited by managers’ fear of failure, given that much is new and requires experimentation,or by unproven business cases that lack data or results that can be verified in advance. The strongest stories of corporate action involve bravery.

Fortunately, the stance of investors on climate is increasingly open and forgiving, provided that the intent is sound and the narrative is clear. The counterpart of investor pressure on climate is investor openness and a collective and enlightened self-interest in climate impact. Boards have a critical role in channeling this openness and encouragement — and not just the pressure — to the front line.