Climate change – time for no regrets

While it is reasonable to wonder if the economic turbulence triggered by COVID-19 will drive social and environmental issues down the global agenda, early evidence suggests this isn’t happening.

Instead, COVID-19 is reinforcing the sustainability imperative by highlighting the links between our natural resource management, public health and economic wellbeing.

There is a global drive to use the COVID-19 recovery process as a platform to reinforce the sustainability message in public and private decision making and investment. The World Bank, International Monetary Fund, and Organisation for Economic Cooperation and Development amongst others, are urging governments to “green” their COVID-19 policy responses. Global investor and corporate leader groups are emphasising the importance of sustainable and equitable COVID-19 recovery plans, and caution against the COVID-19 recovery undermining our capacity to deal with other critical threats such as climate change.

Governments respond

It appears that these calls to action are being heard. The EU is working to put climate change and sustainability at the heart of its COVID-19 response, and cities around the world are rolling out environmental initiatives that simultaneously enhance public health and bolster climate action. Canada has gone even further and has made reporting climate risks a condition of receiving its Covid-19 bailout funding.

In New Zealand, the government identified the “just transition” to a low-emissions economy as one of its top five priorities for the 2020 budget with the opportunity still ahead to emphasise social and environmental objectives, including climate change, as part of its COVID-19 response.

Minister for Climate Change, James Shaw, at the recent A Near Horizon event (also featuring Mark Carney, former Governor of the Bank of England, and Adrian Orr Reserve Bank Governor) emphasised the imperative of a green recovery to avoid borrowing twice from future generations.

Climate change and resilience

For New Zealand companies, the global call for a sustainable recovery is amplifying current stakeholder values, concerns and expectations.

Boards need to align their strategic focus with this reality. Investors, regulators, supply chain partners and consumers are placing sustainability, with a focus on climate change, at the centre of business value and our companies and boards are increasingly being held accountable for their response.

Chapman Tripp recently produced a legal opinion that confirmed the relevance of climate change as a foreseeable financial risk to the fiduciary duty of board directors.

The Zero Carbon Act requires lifeline utilities to report on the actual and potential effects of climate change on their business as well as how they will identify, manage and govern climate-related risk. The Ministry of Business, Innovation and Employment anticipates making climate risk disclosure mandatory for all NZX listed issuers, banks, insurers, asset owners, and asset managers by 2022. After a one-year transition period, disclosures will be expected to align with the Taskforce on Climate-related Financial Disclosure’s (TCFD) recommended framework. Mandatory assurance is likely to follow, once standards and guidance are in place. The External Reporting Board is seeking a mandate to make this happen.

During the A Near Horizon event, Mark Carney emphasised the Taskforce on Climate-related Disclosures framework as a foundation for disclosure of how companies will adapt their strategies to a new reality of net-zero emissions by 2050, as well as how businesses build resilience to shocks like COVID-19.

As boardroom discussions shift from managing the impact of COVID-19 to building back better, it makes commercial sense to seize this opportunity to invest in sustainability and capacities that strengthen overall business resilience. In this time of heightened uncertainty, what we know for sure is that we must be prepared for a range of man-made and natural shocks and stresses, of which climate change is the greatest challenge ahead.

Actions speak louder than words

There has been much talk about what should be done. To make this real and pragmatic in the current economic environment, boards should continue to focus on the following:

New leadership and governance

Lead new thinking and challenge management teams to think differently. Ensure the oft-stated new normal is implemented in practical terms. Bring the right people and new skills to strategic discussions. Upskill and enhance governance to ensure the thinking and response is different.

Take stock of current efforts against requirements

The regulatory landscape is rapidly evolving to increase companies’ responsibility and accountability for a meaningful and effective climate response. It is important that companies understand what is expected of them – now and in the future – and how they measure up to inform strategic and operational decision making. A readiness or maturity assessment is a key first step in any climate response.

Identify your risks and opportunities

An effective response requires a clear business case describing the full range of risks and opportunities presented by climate change. This includes quantifying financial risks and opportunities under appropriate climate scenarios to be able to stress test the business, enhance resilience and invest with confidence.

Don’t wait; start now

Some issues will take time to address. Fully integrating sustainability thinking into core business strategy cannot happen overnight. Rather than wait, use the insights from strategic planning and scenario development to identify the “no regrets” actions. Identify those things that are sound from an economic and environmental standpoint – eg realising capital now from divesting sunset businesses or activities to invest in future green activities and processes.

Resilience

Building resilience will require investment in the physical, human, social, and natural capitals that help companies absorb the impacts of shocks, adapt to a new and more unpredictable reality, and transform business in a way that reduces vulnerability, facilitates growth and drives positive impact. While our current economic setting may cause pause for thought, this should not lead to delays in taking action. We have the tools and knowledge to invest in the future with confidence. In borrowing the words of our prime minister, we may have missed the opportunity to “go early”, it is critical that we now “go hard”.

For more information, please contact the authors from KPMG’s Sustainable Value team.