Climate risk series: Deriving strategic value #1

At the twenty first Conference of Parties (‘COP21’) in Paris in 2015 an agreement was reached on the imperative to limit global temperature rise to well below 2 degrees Celsius above pre-industrial levels by the end of the century. The Paris Climate Agreement has since led to increasing calls for governments and organisations to take ambitious action on climate change mitigation and adaptation. In this context, mechanisms such as the Science Based Target Initiative and the recommendations of the Task Force on Climate-related Financial Disclosures (‘TCFD’) have been developed to support organisations in understanding and embedding climate change considerations in the way they operate.

Since the release of the TCFD recommendations in June 2017, 785 organisations have committed to support the framework and 340 investors with nearly $34 trillion in assets under management are asking organisations to report under the TCFD[1]. This has translated in a strong push for action by companies to understand the exposure of their business to physical and transitional climatic impacts.

To monitor the implementation of the TCFD recommendations, the Task Force recently released its 2019 Status Report. In developing this report, the Task Force reviewed financial filings, annual reports, integrated reports and sustainability reports for over 1,100 organisations across 142 countries.

On the back of this report, and informed by other international media and our own observations through the work we do with our clients, we will publish a series of articles to discuss the progress to date, the key challenges faced by organisations and ways to overcome them. This first article discusses the importance of governance and ensuring the relevant people within your organisation understand their role in integrating climate change considerations in defining your business’ strategic direction.

Article 1: Governance

Key finding of the TCFD 2019 Status Report: “Mainstreaming climate-related issues requires the involvement of multiple functions”.

Breaking organisational silos is fundamental to truly embed climate change considerations into the business’ decision-making processes in an effective and efficient manner. Climate change can affect multiple functions within an organisation and therefore they all need to come to the table when discussing how climate-related drivers can impact (negatively or positively) the resilience of the business.

In our experience, an impactful way to bring everyone along on the journey is through tailored, carefully designed workshops. We have designed and facilitated several of these workshops and, gratifyingly, have been able to see Executive Leadership Teams, Board members and cross-functional senior management reach a common level of understanding of how different climate futures can impact their business. We found that the presence of one or more strong advocates from the most senior level of the organisation at these workshops can greatly help set the tone and drive participants to get on board and take ownership.

In some instances, we have observed a disconnection between the Board and the Executive Teams when it comes to driving the implementation of the TCFD recommendations. The Board wants to see the business respond to the challenge, but the Executive Teams may not always be able to prioritise the issue and find the best way to tackle it. This can lead the organisation to undertake climate risk work (frequently led by the Sustainability Manager) without having the full understanding and support of the Executive Team, producing outcomes that become hard to implement and embed within the organisation or that struggle to get the financial or operational support they require. While this will still allow the organisation to report on work done under the TCFD, it does not enable the business to access the strategic value that comes from truly cross-organisational scenario analysis work. It may also lead to incremental rather than transformational action, which is a missed opportunity for the organisation to think strategically about climate change and enhance its competitive edge.

Effective internal stakeholder engagement, not only at the beginning but all along the journey, is the best way to avoid this false sense of progress. This, coupled with a review of the organisation’s governance structure, processes and reporting lines, will ensure climate change is fully embedded in the governance of the organisation and decision-useful processes and disclosures can be developed.

When assisting our clients with climate risk-related governance and stakeholder engagement work, we involve our most senior staff, bringing the required strategic thinking, industry knowledge and relevant expertise to facilitate the discussion with your Board and Executive Team to achieve the desired outcomes. We are experienced workshop designers and facilitators, and bring a deep understanding of governance structures and processes gained through both in house and consulting experience. Some examples of our work to date include the design and facilitation of a climate risk workshop for Treasury Wine Estates’ Executive Leadership Team, the delivery of a climate-related physical risk assessment for a large multi-site industrial client, a TCFD disclosure gap analysis and climate risk assessment for Incitec Pivot Limited, and the development of Westernport Water’s Climate Change Adaptation Plan, amongst others.

If you would like to know more about our team and how we can help, please refer to our Climate risk & TCFD services or contact Marisa Sánchez Urrea.

This article was written by Marisa Sánchez Urrea, Senior Manager Climate Change & Energy.

[1] TCFD 2019 Status Report: https://www.fsb.org/wp-content/uploads/P050619.pdf