By Dr Rory Sullivan
Companies need to respond to climate change – both mitigation (emissions reductions) and adaptation – as a strategic business concern, not simply as an operational issue. From an investment perspective, the ultimate test of a company’s climate change strategy is the extent to which it protects the business over the short-, medium and long-term, through maximising upside opportunities and minimising downside risks.
When we look at those companies that have gone furthest in integrating climate change into their business strategies, it is clear that these companies’ senior management have provided the vision, leadership and direction required to drive the business forward. The senior managers and directors of the companies have a number of characteristics in common:
- They have a clear understanding of how climate change may affect their business (through regulation, litigation, physical impacts, etc.), over the short-, medium- and long-term.
- They know what systems and processes the company has in place to respond to climate change, and have a very clear sense of the company’s strengths and weaknesses in this regard.
- They understand what current best practice among the company’s peers looks like, and how their company compares.
- They have communicated their personal commitment to action on climate change to their employees and to relevant external stakeholders.
- They ensure that appropriate risk management systems and processes are in place to protect the company against the consequences of climate change.
- They ensure that the company’s objectives and strategy are properly aligned with its climate change commitments (and vice-versa!).
- They ensure that climate change-related risks and opportunities are properly considered in the company’s strategic planning processes and capital expenditures For example, many apply a ‘shadow price of carbon’ when making capital investment decisions to assess the sensitivity of their decisions to changes in the carbon price.
- They ensure that key individuals within the organisation are appropriately incentivised to ensure that the organisation’s climate change objectives are met.
- They immediately and personally react in the event that climate change impacts on the business.
One of the key difficulties that investors face is knowing how committed a company is to effective action on climate change. The lead times between corporate commitments being made and performance outcomes (e.g. emissions reductions, changes in product lines) being seen are often significant, and the links between these corporate commitments and outcomes are often difficult to assess robustly. The list above provides the basis for a series of practical questions that investors can use to assess the depth of company management’s commitment to action on climate change.
Given that so much of what a company does is defined by the individuals that lead the organisation – a view reflected in the importance assigned by investors to ‘quality of management’ – the proposals set out here should allow us to dig a little deeper into the rhetoric of ‘climate change is our greatest challenge’ and properly assess management’s commitment and competence to respond to this most important of issues.