Shift your mindset and accelerate your decarbonization pathway

This isn’t just about TCFD compliance. From the EU’s Corporate Sustainability Reporting Directive to coming disclosure rules from the US Securities and Exchange Commission, stakeholders and regulators around the world are challenging companies to say more about the climate risks they are exposed to and the actions they plan to take in response, such as reducing their carbon emissions. To comply, companies need to understand and report on the environmental risks they will be exposed to over the long term, and what the financial impact might be. But this is not some kind of theoretical scenario modelling exercise you begrudgingly do to keep regulators happy. It’s work that can and must be done if your business is to have a future.

Many of the stakeholders calling for or requiring better climate risk assessment and disclosure are providing helpful frameworks, model internal processes, action lists, governance structures and so on that you can use. Examples include the Global Reporting Initiative and the Science Based Targets initiative (SBTi).

There is no need to reinvent the wheel when such models are available. Instead, you can focus your effort and attention on critical climate risk assessment issues that do require new thinking, such as how to gather and manage the vast amounts of granular data that risk modelling and analysis requires.

The move to a decarbonized world will create significant opportunities to generate value. In the conversation around climate change, these opportunities are not always considered. That’s not surprising, given the urgency of the crisis we’re all facing. And in the business context, there’s the added decelerator that people usually think of climate and carbon as problems that create risks, not opportunities to create value.

This has to change. Our study shows that 29% of pacesetting companies have not created new products and services that have low or no emissions. And even among this leading pack, only 60% have established entirely new lines of business to capture market opportunities. Few Observers have yet to act in these areas. What’s getting in the way?

The prejudice in favor of financial value and against long-term value can be unwittingly baked into the tools and models people use to make decisions, causing perverse results.

It’s often difficult for companies to estimate the return on investment (ROI) on transition opportunities with the level of certainty that their traditional decision gates require. You can get stuck and lose time trying to provide evidence that doesn’t exist. This is understandable as the variables involved are often completely new, such as the measurable reduction in carbon emissions. Even though they are understood by environmental, social and governance (ESG) specialists, they might not be understood by finance people, or the ROI models they use.

Nevertheless, our study shows that, on average, 37% of initiatives will have a positive return over their lifetime, while only 19% will have a negative return. This should motivate companies to increase their investments in climate initiatives.

Another way to overcome this barrier is to turn the problem on its head: Justify the value of action by demonstrating the cost of inaction. Once you determine a real carbon price for your business – not a generic measure or a benchmark against your peers – low-carbon activities and assets become relatively more attractive by default.

By including the real cost of carbon in your decision-making you can also release internal funds for investment. Putting an end-date on business activities that depend on unsustainable levels of carbon, as suggested above, also forces the business to find new ways of deploying its capital.

Stakeholders inside and outside the company need to know that everyone understands the roadmap and is united behind it. In our study, many companies said a lack of collaboration within leadership teams was impacting the ability to take effective action. Across all companies, 62% said board members and management disagreed on which criteria are most important when evaluating initiatives and 61% said so many groups were involved in initiatives, it was difficult to make progress.

Summary

Companies need to accelerate their response to climate change and end their unsustainable dependence on carbon much faster than the current pace. By looking at the most common progress-blockers through a new lens, most apparent challenges can actually become catalysts for change. By keeping a tight focus on what really matters, they can cut emissions faster and create more financial value.