Climate strategy 3.0: taking climate seriously as a central part of business strategy

Discussion about climate change has hit boiling point in all parts of society, including business. And not before time given what the scientists are telling us about the impacts and dangers already built into the system – and those we can expect with the current emissions trajectories.

The implications are clear – organisations need to lift both the sophistication and urgency of their thinking about how climate will impact on business strategy and their role in addressing climate change.

What are the drivers of this urgency?

First the biggest driver of urgency is the biosphere itself. We see daily reminders of the threat through both visible and serious physical impacts like rising temperatures, extreme events and ecosystem stress. The latest IPCC report has brought this evidence together starkly, with further instalments to come.

Second international pressure for action is growing, and coalescing with heightened community awareness across all ages but even more so with younger voters.

Third, investors are voting with their capital – with equity, debt and insurance support being directed away from climate-exposed businesses, particularly ones where transition plans are not clear and credible. Courts are increasingly ruling in favour of more searching consideration of climate action, both internationally and within Australia.

And finally, governments are implementing policies which affect a wide range of markets, production processes, and low emission technologies. This is clear across both federal and state governments in Australia. Our key export markets in North-East Asia are developing policy approaches to set them on a pathway to net zero emissions, and the introduction of carbon border adjustments will be game-changing over the medium to long run. The Glasgow Climate Conference in November 2021 will see the pace lift further.

It is notable that COVID-19 has not seen these trends stall as they did in the aftermath of the GFC; in fact, it appears that the pace is quickening.

What are the implications?

In short there is a need for the business community to make a step change in the way they incorporate climate in their business thinking and strategy. The risk is that if a business doesn’t make proactive choices to transition now, it will be forced upon one later with much less time to transition.

The first approach has been to elevate climate as one of many ESG risks both internally and in public reporting. This involves an assessment of emissions exposure, physical climate risks, and generally some lower cost actions to mitigate these risks.

The next generation approach brings climate more centrally into the core of company financial reporting and consideration.

This flows from:

  • A growing realisation of how central this risk is to the physical environment where firms operate.
  • How significant future mitigation actions demanded by governments and customers could be for financial performance.
  • The impact of climate positioning on firms’ reputations and social license.

The Task Force on Climate-related Financial Disclosure (TCFD) framework is central to this and a growing number of companies are reporting using its more exacting framework. Indeed, some form of this framework is likely to become mandatory in the not-too-distant future. However, for some this can still be focused on risk identification and longer‑term scenario planning with limited integration with core business strategy.

We are fast moving to a new stage where climate considerations need to be factored into the central business strategy for firms. What I think of as the climate change strategy 3.0.

This involves close consideration of the assets, or portfolio of assets, that diversify exposure and are resilient to changes in climate, climate policy action and investor funding appetite. It involves an understanding of the exposure of customers to opportunities and risk from emissions that arise from the use of firms’ products (including ‘scope 3’ emissions). Firms need to accelerate work with the communities in which they operate, and with broader stakeholders, to manage climate transitions.

Such an approach also means testing business strategy against more demanding and immediate scenarios, and against a wider suite of possible climate policy responses.

Policy responses to date have not progressed in a linear or optimal way. Earlier generations of climate consideration for reasons of advocacy and analytic simplicity, often focused on playing out the impacts of efficient and phased climate policy responses such as the gradual introduction of carbon pricing policies.

For a range of reasons –including concerns about distributional impacts, and the urgent need for action – governments have increasingly reached for other more direct policy levers like direct regulation and project-specific conditions.

Business strategies therefore adopt a robust approach to the range of policy futures, not just the ones people might wish for. Exporters need to be alert to the rapid changes taking place internationally around climate and energy policy, and supply chains.

The challenge for corporates is to respond to this increased intensity by taking climate seriously at the core of their business strategy. This is the intent of the TCFD framework. It will involve the need for new capabilities, tools, and approaches to business culture and organisation that give clear direction to employees on how to factor decarbonisation into their decision-making and actions. It will involve dynamic plans that effectively integrate climate and commercial considerations, and which build agility and optionality into a business.

Above all, there is no doubt that the climate and energy transition is underway. The imperative for businesses that want to thrive in this environment is the need to transform their thinking, – and fast.

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