Seeking Impact: Using theories of change to assess and guide corporate climate action — Guidance for boards

We can’t rely on risk because the transition we need in the economy requires a positive, transformative effort, not the conservation of the status quo. ‘Transition risk’ is a risk only be­cause we collectively want and need a transition.

For board members in particular, it’s tempting to view climate change in terms of risk. You need to understand the risks your company faces, and climate change is full of them: the physical risk of climate change itself; ‘transition risk’, a package of potential costs or losses related to making or not making the transition to net zero; regulatory risk, if you fall foul of all the new standards and reporting requirements; reputation risk, if you disclose the impacts your business has and then don’t address them, or fail to disclose them in the first place.

Investors, banks, other boards, even regulators, all encourage the risk perspective — partly because the risks are real and need managing, and also because they all have statutory roles that give them clear mandates to manage risk, and less clear mandates to manage societal and planetary impacts directly. So, it would suit everybody if we could achieve our shared climate goals — the goals of the Paris Agreement — solely through the medium of risk. But we can’t. The experience of the past few years is that the conviction that we can is a convenient untruth.

We can’t rely on risk because the transition we need in the economy requires a positive, transformative effort, not the conservation of the status quo. ‘Transition risk’ is a risk only be­cause we collectively want and need a transition. And we have learned empirically that what we would expect to see if banks and asset managers were really driving portfolio companies to act on climate, or if asset owners were really driving asset managers to act on climate, is not what we see happening in practice (see table). Clearly the financial sector has a crucial role to play, but expectation can only meet reality if organisations can carve a direct line to impact.

So how can companies seek impact directly? How can boards ensure that they do? How can you challenge and validate the causal links that con­nect what your organisation does to the impact you want to see?

The answer to all these questions is to use a theory of change. This is what happens in the non-profit, philanthropic and public policy sec­tors, where seeking impact has been the norm for a long time.

Some organisations use a theory of change just as a statement of belief. But the core idea of a theory of change, as it was conceived in the 1990s, is that assumptions should be made explicit, and then tested. The value is not in the theory itself; it is in the practical valida­tion of the theory. This validation aspect makes theories of change particularly well suited for use by boards. It provides a framework for interrogating whether the activities that an organisation are focused on are truly, causally linked to impact in the way that is claimed.

Although the approach comes from the philanthropic sector, it fits well with how companies already think about strategy and planning. It works from a vision of an external goal, to an insight about how that goal could be achieved, to strategy, to execution. It forces you to ask: What is the specific end state we are work­ing to achieve? What are the barriers to achieving that state? What will break through them? How can we enable those breakthroughs, given who we are? And what must we do to create those enablers?

These questions lead to commercial opportunities as well as societal impact. They shift management focus and metrics from emissions, which are influenced by many factors and only partly under your control, to the strategic drivers of those emissions, which you can manage and build a business around.

Answering these questions may also reveal what the company cannot do, and shouldn’t pretend to. Corporate climate action on the scale we need will require substantial government support and protection. One of the biggest mistakes in the past few years has been for the private sector to give the impression that ‘we’ve got this’, and inadvertently allow governments to relax. By building the government role explicitly into a theory of change, rather than treat­ing the policy environment as an exogenous de­pendency, we can bring about the constructive collaborations we will need.