Accelerating investment decision-making through reporting (part 1)

Extreme weather events around the world including flooding, storms and fires have propelled climate-related economic losses to an estimated $4.3 trillion since the 1990s. Meanwhile, $2.1 trillion was invested in clean energy technologies last year. But greater investment is needed in renewables and new tech - including carbon capture, sustainable aviation fuel and modular nuclear reactors.

The question is, are company boards thinking about climate strategically to inform their decision making in a way that both mitigates risks and capitalises on opportunities?

Richard Manley, Chief Sustainability Officer at CPP investments, which has around CA$700bn under investment, says there’s a growing and increasingly vocal expectation of directors from the investment community when it comes to climate-related issues.

“We expect you to be able to demonstrate you are providing oversight and counsel to ensure the executive team considers all material business risks and opportunities in the setting of strategy, its operational implementation and its communication. If you can't demonstrate that, expect us to challenge whether you are really the right people to have in our board.”

In practical terms, that translates to clear articulation of the governance over an organisation’s sustainability strategy, assessments of the material business risks and opportunities tied to sustainability factors, and gap analysis. “Once you have an emissions baseline, thinking about how to address them is a pretty simple formula,” Manley says.

Transparency is enhanced by reporting on sustainability risks and opportunities using the International Sustainability Standards Board’s (ISSB) IFRS Sustainability Disclosure Standards, which have been designed to communicate material information to investors. The UK government issued consultations during London Climate Action Week to adopt UK Sustainability Reporting Standards, based on the ISSB Standards, and on transition plans.

Yet too many conversations still focus on the climate downsides. Ben Combes, a climate strategy director in Deloitte's economic advisory team, agrees that boards could be more proactive in terms of having carbon opportunity conversations. “A board is there to think about the long term. The opportunities relating to climate should be clearly identified, and inform how they shape the future of the company. Climate should sit alongside technology as an inexorable driver of change.”

Just as the digital world is not just the analogue world digitised, the zero carbon world won't just be the high carbon world without carbon, Combes says. “There are physical and transition risks but innovation will drive us to different outcomes. There is a huge opportunity here.”

Given its strategic importance, thinking about how and where decisions about carbon risks and opportunities are made matters. Whether that’s the Chief Sustainability Officer, the strategy function, the CFO – it’s essential that everyone is talking the same language to be able to address these issues effectively, Combes says.

“There is still some space to bridge in terms of the competencies that people are bringing to the table and how to align them. We've seen accountability and governance shared across two or three members of the board, but it’s about making sure that the board understands how decisions are going to be made on this and where that sits,” Combes adds.

Meanwhile, ensuring your board is asking pertinent questions about climate strategy requires the right people to be involved in discussions. “That's why it's important to get the strategy team involved, or work with the finance team to bring it all together. Everyone I've worked with in this area is trying hard to make progress, but are you looking at this through the right lens?”

“If you start with the question of, can we improve profitability while radically reducing emissions, you're thinking about those trade- offs in parallel right from the start and bringing everyone with you. There are headwinds but there's a realisation that the train has left the station, the world and companies will look very different in 2040 than they do now, and they need to be a part of that transformation,” Combes adds.

Jo Harlow, a NED at Sainsbury's, Centrica and Halma plc, and Chapter Zero board member, says with climate reporting largely in place, addressing climate strategy is a far more interesting proposition for boards to get their teeth into. However, she accepts that climate trade-offs can present themselves as opposing forces. “Take energy transition versus energy security or the environmentally positive production of food versus food security - the capital requirements of both of these can be seen as being in opposition. Boards need to redefine how they think about returns on capital investments."

Boards must not be afraid to have that discussion, and NEDs need to be educated about the importance of these debates, Harlow says. “These decisions can be difficult, and sometimes agitating for investment in sustainability can feel like you're not making progress until you find out what happened after the board meeting and what the executive team decided to do, but I do believe progress is being made.”

While the current geopolitical environment has prompted some rowing back on public climate commitments, the need for NEDs to step up to the climate plate has never been more important. It's easy to conflate what's happening in the world and the climate realities that boards face, Harlow says.