Focus area 1: Focus on the strategic and interconnected drivers of value and risk

Business depends on common foundations – energy, water, health, well-being of communities, trust, security – which are fundamental to resilience and success. But these foundations are being eroded. Volatility has become the norm. Risks cannot be thought as singular, rather as cascades.

All of this is against the background of the speed of innovation in AI, a strategic capability that can reshape business models, operations and competitive dynamics. Innovation in the use of technology is intertwined with broader considerations about people and the planet such as increased energy and water consumption, land use for data centres, and positive and negative benefits for employees and wider society. These risks and opportunities should not only be on the business radar but at the heart of strategic thinking, informing decision-making and difficult trade-offs.

To remain resilient, boards need to ensure there is a thorough understanding of drivers of value and the breadth of risks that can affect the prospects of their companies. Risks and opportunities may evolve at speed, driving shifts in customer demand and preferences, affecting the resilience of supply chains, the ability to secure limited critical resources (natural resources, water, precious metals), and access to skills and talent.

For business resilience and success, the focus of those charged with governance should be on matters of strategic significance, in other words, on matters that are directly relevant to the business prospects – to cash flows, access to finance and cost of capital – over the short, medium and long term. Boards should provide an appropriate challenge to management to ensure focus on financially material matters directly relevant to the company’s ability to prosper and grow.

Focus area 2: Better focus on transition plans and scenario analysis

Consistent with the role of the board in promoting the long-term sustainable success of the company, transition plans should be seen as a critical and integral part of corporate strategy and reflected in the CapEx and OpEx decisions.

More should be done to highlight the dependencies, including policy dependencies, that the successful execution of transition plans are reliant on.

Scenario analysis is a powerful tool which many companies are now using to assess their climate resilience. Yet scenario analysis is too often viewed as a compliance exercise or an adjunct to strategy, rather than as a way to help boards navigate uncertainty. Inclusion of the true scale of future impacts and key drivers such as tipping points, rapid AI adoption or climate-driven migration could help inform better long-term decision-making.

For investors looking at their portfolios, there is still a gap in understanding how to consider systemic risks and assess their potential impact on portfolios or default strategies. To effectively fulfil their fiduciary responsibilities, investors need to understand how sustainability-related risks and opportunities could affect strategy, performance and long-term value. However, because the current approach to scenario analysis often relies on models based on historical correlations and relationships, it is likely that the exercise understates the true scale of future impacts, particularly in a world that will look very different from the past.

A focused effort by all capital markets and policy actors is required to advance our understanding of the impact of systemic risks on individual companies and portfolios.

Focus area 3: Transparency on action

Disclosure of decision-useful information is an effective lever. While disclosure should not be an end goal in its own right, it can help to change the paradigm on what is value-relevant information and support better capital allocation decisions. Transparency is essential to building and maintaining trust and is an integral part of governance. Investors seek to understand how companies are identifying risks and opportunities that could affect their prospects.

UK companies can get ahead of the curve by reporting against the UK Sustainability Reporting Standards, which are based on the ISSB Standards, without delay. This can enhance understanding of the risks and opportunities that companies have in their own operations and throughout their value chains over short-, medium- and long-term time horizons. Rapid progress is needed in worldwide adoption of the ISSB Standards to achieve globally consistent and comparable information on these business-critical matters. Global passporting arrangements, explicitly permitting companies to report using the ISSB Standards, with limited necessary jurisdictional top-ups should be a key priority for the UK government and regulators to lead on through international diplomacy.

Focus area 4: policy to support transition across the system

Entity-level disclosure through application of the ISSB Standards is not sufficient on its own to address the systemic risks to the global economy. Systemic risks are difficult for markets to price effectively because they do not fit neatly within pricing parameters: their causes are collective, rather than attributable to a particular entity; their consequences often play out over the long term, discounted nearly to nothing in present value calculations and with probabilities that are not only uncertain but unknowable. A stronger policy and incentive framework should support all market actors to move in a direction that the market cannot achieve on its own. Business, finance and government need to be at the table together.

Policy levers such as carbon pricing, tax and other incentives can help internalise externalities and shape investment decisions in the boardroom and by investors. Investors acknowledge they can be agents for change on policy and that they can be more vocal, especially in identifying and communicating dependencies and incentives that would support the transition and enhance long-term financial stability.

Note:

The International Sustainability Standards Board (the ISSB) is focused on supporting companies to provide material information about sustainability-related risks and opportunities to investors. The broader views discussed at the roundtable do not necessarily reflect those of the ISSB.

This publication has been written in partnership with Deloitte. This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Neither Chapter Zero or Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.