In the latest issue of the European CFO Survey, close to 1,200 CFOs were asked about their company’s climate change initiatives. The findings show a mixed picture of short-term cost-saving initiatives.
In the latest issue of the European CFO Survey, close to 1,200 CFOs were asked about their company’s climate change initiatives. The findings show a mixed picture with initiatives focused primarily on short-term cost savings.
2019 will probably be remembered as the year that climate change advocacy became mainstream. Towards the end of September 2019, in a series of meetings scheduled to coincide with the United Nations Climate Summit, an unprecedented six million people in more than 180 countries took to the streets seeking even more action to curb greenhouse emissions.
This was probably the largest climate rally in history. The demonstrations in the form of school walkouts had been going on all over the world for a whole year. An additional dimension has been applied to the ‘Extinction Rebellion‘ campaign by attempting to illustrate the potentially disastrous effects of inaction.
The build-up to this high level of visibility and advocacy was sluggish. Government action started more than 30 years ago when the Intergovernmental Panel on Climate Change (IPCC) was set up in 1988. The first global climate deal was signed at the 1992 Earth Summit in Rio. The Protocol to Kyoto was introduced in 1997. The Paris Agreement of 2015 to limit temperature increases and thereby dramatically mitigate the threats, impacts and effect of climate change is a more recent attempt to minimise carbon emissions and has been ratified by 187 countries to date.
Over the last two years, public consciousness, stimulated by the common belief that severe weather events are becoming more frequent and by the rising weight of scientific evidence on evolving weather patterns, has brought more urgency to the debate. As a result, a wide variety of players are now analysing the effects of climate change.
Central banks and other supervisory authorities are increasingly considering climate change as a challenge to financial stability. This has led to the creation of the Climate Change Task Force on Financial Reporting (TCFD) in 2015 and the Network for the Greening of the Financial System (NGFS) in 2017. All are concerned with increasing the standard of climate understanding, risk management and accountability.
Investors are also finding the atmosphere more critical in their activities.
By 2018, more than US$30 trillion of funds had been invested in renewable or green investments in the five main markets monitored by the Global Sustainable Investment Alliance, a rise of 34% over just two years.
Almost 400 investors who represented more than US$35 trillion in assets under management (AUM) had joined the Climate Action 100 + initiative, which is dedicated to pressurising large businesses.
At the recent UN climate summit, a coalition of the world’s largest investors, with more than US $2 trillion in AUM, unveiled the Net-Zero Asset Owner Alliance, dedicated to achieving carbon-neutral portfolios by 2050.
Heads of states and cities are also growing their emphasis on climate change. This is to show support for the achievement of the Paris Agreement. The EU unveiled its Sustainable Growth Financing Action Plan in 2017, aimed, among other things, at channelling more capital into climate-friendly business activities. More than 60 countries and 100 cities across the world have implemented net-zero carbon emission targets – with the UK and France joining Sweden and Norway among the groups of countries that have enshrined the targets in national legislation recently.
What Will Be The Impact of Climate Change On Trade & Commerce?
There are a variety of impacts of climate change on businesses. On the one side, it introduces a range of new market threats. In addition to the most apparent physical risks (for example, the operational impacts of severe weather events or supply issues caused by water shortages), businesses are exposed to transition risks that emerge from the response of society to climate change, such as changes in technology, markets and regulations that increase business costs, undermine the viability of existing goods or services.
The potential responsibility for the emission of greenhouse gases (GHG) is another climate-related danger for businesses. More and more lawsuits have been brought directly against fossil fuel firms and utilities in recent years, holding them responsible for the adverse consequences of climate change.
Climate change, however, still provides economic opportunities. First, businesses should seek to increase their resource utilisation (e.g. by increasing energy efficiency) and thereby reduce their costs. Second, climate change will promote creativity by encouraging new goods and services that are less carbon-intensive or that encourage others to reduce carbon. Third, businesses can improve the sustainability of their supply chains, for example, by reducing their dependency on price-volatile fossil fuels by transitioning to renewable energy. Together, these acts will promote competition and open up new business opportunities.
Are Companies Feeling The Pressure To Act On Climate Issues?
In order to obtain a deeper understanding of how businesses view climate change and it’s effects on the planet, one of the latest editions of the European CFO survey asked just under 1,200 financial execs throughout the EU to what degree their businesses feel the pressure to respond and what exactly they are doing. The survey reveals that most companies feel the pressure from different stakeholders. Clients and consumers are most commonly referred to as sources of tremendous strain, but the staff, civil society, regulators, and investors are not far behind.
The degree to which businesses experience external pressure varies greatly. Approximately 30 percent do not feel any significant pressure from others, while 19 percent of said that the pressure that was put on them was from just a few of the companies stakeholders – usually regulators and civil society. Larger companies (defined as those with annual sales of EUR 1 billion or more) are more likely to feel pressure from many sides, with almost two-thirds (61 per cent) of CFOs reporting pressure from three or more stakeholders and almost 70 percent feel under pressure from clients. The regulator, on the other hand, is the key source of pressure on smaller firms (i.e. with annual sales of up to 100 million in one year).
The pressure felt by various stakeholders often differs across industries. In the travel, automobile, consumer goods and energy and utility industries, the percentage of executives who are reporting pressure to act is among the highest for each of the stakeholder groups.
There are, however, several variations between these sectors in the degree of control coming from the different stakeholders. For example, in tourism, consumer goods and the automotive sector, customer pressure is felt more strongly. The pressure on energy and utilities comes more from consumers and regulators.
On the other end of the continuum, the technology, media and telecommunications (TMT) sector tend to be falling under the radar when it comes to climate change. TMT executives do not feel especially compelled to act on the part of any interested party, even their own workers, partially because the emissions of the sector are relatively low. However, there is potential for TMT to do more to help combat climate change. A joint report by the Global Encouraging Sustainability Initiative (GeSi) and Deloitte shows that digital information and communications technology (ICT) technologies can help deliver solutions to a wide range of sustainability challenges – and in particular to climate change. For example, digital technology can help decouple economic growth from resource use, improve transparency and accountability for environmental impacts, and help monitor and forecast climate change developments.
How Should Corporate Management Respond?
He TCFD identifies four main management disciplines in which businesses are required to handle climate change: governance, policy, risk management, indicators and objectives. Increased transparency in these areas will help investors and other stakeholders evaluate the exposure of businesses to climate-related risks and the efficiency of their response to them.
The guidelines of the TCFD are widely applicable but have a special emphasis on high-impact industries. These include banks, insurance firms and fund managers who will need to fix climate-related risk factors in their portfolios. Looking at the real economy, the sectors on which the TCFD refers include electricity, transport, agriculture and forestry. Companies in these sectors are especially vulnerable and should expect to face rising pressure to reveal how they interpret and cope with the impacts of climate change on their business models and value chains.
The readiness of businesses to report climate change-related management practises and greenhouse gas emissions have risen rapidly in recent years. To date, more than 800 organisations have signed up to the TCFD, thereby embracing the concept of improved monitoring and transparency, although very few have actually delivered so far. Reporting of direct carbon emissions has, however, come a long way. Almost 7,000 businesses registered their emissions to the Carbon Disclosure Project (CDP) in 2019, twice as many as in 2011.
However, improving monitoring and transparency and developing risk assessments and goals would not be sufficient on their own. More important are the concrete efforts performed by businesses to minimise pollution and mitigate risks. This could involve reorientation towards renewable energy and raw materials, reducing their dependency on limited water supplies or shielding production sites from severe weather by building dams or installing heat insulation. Another field of tangible, urgent, but also worthwhile action is to exploit the opportunity to provide marketable solutions to climate change. This may involve the production of less carbon-intensive goods or services that enable people and economies to sustain themselves in a climate-affected world.
Climate Action Begins When You Setting Emission Reduction Targets
It is important to be straightforward with what needs to be done, especially when it comes to determining a company’s response to climate change. This could be achieved by setting goals for potential carbon emissions, taking into account national and international agreements to reduce emissions, such as the Paris Agreement. While the agreement needs each country to define and communicate emission goals at the national level, businesses may now scientifically derive their individual CO2 reduction targets and align them with the objectives set out in the IPCC climate scenarios. Good practise, therefore requires setting goals that identify the ‘fair share’ of the company in achieving the Paris commitments and the speed of progress needed to achieve those objectives.
However, according to the findings of the European CFO Survey, a little less than 10% of companies state that they have set goals in line with the Paris Agreement. Twenty-seven percent of businesses have set targets for the autonomous reduction of carbon emissions. One in two businesses has not set any goals at all. Though the percentage of companies with some kind of emission goals in place increases with pressure from stakeholders, it remains below 50%.
Commitment also varies across the industry. The electricity, utilities and mining sector is the only one in which most CFOs say that they have targets in place.
What Are Companies Doing To Combat Climate Change?
The pressure of the stakeholder leads to change. One-third of businesses that are not under substantial pressure from any specific stakeholder state that they are not taking any steps to handle, mitigate or adjust to climate change. However, in companies that feel pressurised by three or more stakeholders, only 3% are unable to take action.
However, from what finance executives say, the climate response of companies focuses primarily on initiatives that have a short-term cost-saving impact. When it comes to concrete measures taken, most businesses focus on their energy usage and using more climate-friendly equipment. These initiatives also benefit from government benefits and help minimise business costs. As a result, businesses are plucking low-hanging fruit and reaping significant cost benefits. Less popular are longer-term steps that would produce revenue and more sustainable growth through the production of climate-friendly goods and services.
Moreover, businesses typically seem very hesitant to work with other businesses in their supply chain to minimise carbon emissions. Just 28 percent of the respondents reported doing so. There could be problems in working with other organisations and possibly a lack of any financial motivation to do so.
Few follow a more comprehensive approach and adequately identify or incorporate climate-related threats in their governance and management framework. Companies reporting that they sense the strain coming from investors are more likely to have incorporated climate risk management and monitoring in their governance processes. This shows that risk-aware investors can help to foster climate-related change in businesses.
Overall, it seems safe to conclude that most organisations are not taking into consideration the already expected physical consequences of climate change or are implementing substantial adaptation steps. Companies may believe that climate change would have less impact in Europe than elsewhere, but in that case, they are likely to underestimate the risks they face through their global supply chains and markets.
Is It Time To Prepare For A Hotter Environment?
Taken together, the results show that many businesses are increasingly under pressure from their stakeholders and are starting to respond. However, the majority of activities to date appear reactive and based on short-term incentives and fast wins. A longer-term, realistic outlook on the threats and opportunities of climate change is seldom sought.
The following measures can help companies to cope with climate change:
- Understand the threats that climate change poses to industry and the opportunity to become part of the solution.
- Evaluate the size of the necessary emission reductions and the levers that are crucial to achieving them
- Calculate how much it would cost to minimise pollution and sustainable efforts?
- Place climate change challenges and opportunities within the governance system to maintain a realistic and observable strategy.
Climate change is changing how customers, workers and shareholders assess and communicate with businesses. In certain situations, this may lead to a real change where business models need to be reassessed. Companies need not only to monitor and control their exposure to climate-related threats but also to integrate climate change into their strategic strategies. Failure to do so would undermine the viability of their company.