RISK ASSESSMENT Climate change, mandatory reporting and investor scrutiny create new challenges for companies, as Mike Scott reports
In many ways, the Rio+20 summit earlier this year failed to advance the cause of sustainability as it descended into rancour and deadlock.
As a KPMG report on the meeting says: “Whereas the first Rio conference in 1992 produced international treaties on climate change and biodiversity that were hailed as landmarks in human history, this year’s summit produced a 53-page document which has been widely derided for being weak and meaningless.
“But, and it is an important ‘but’,” the report adds, “it would be a mistake to believe that nothing of importance happened at Rio+20.”
While global policymakers appear to have backed themselves into a situation of policy paralysis, company leaders have recognised that they need to take action. And they have started to do so in recognition of the fact that the challenges that businesses face and the opportunities that they can exploit are changing.
From the financial crisis to the freak weather that is causing food prices to soar, to natural disasters that can have global ramifications, such as the Japanese tsunami in 2011, recent events have proved that the business world is increasingly affected by events all over the world, in areas that would appear to have no connection to them.
In the past three decades, direct global economic losses for all types of natural catastrophes have averaged $90 billion a year, according to figures from the Willis Research Network, with 78 per cent of those natural catastrophes being weather-related. The impact of extreme weather events and resilience to their impacts requires a system-wide reassessment of risk.
The difficulty lies in articulating the risk for a given company as risks differ between industries, geographies and even individual companies. The traditional way to quantify risk is to identify the hazard, the exposure to that hazard and then vulnerability to that hazard.
With such a lack of clarity about the impact of climate change and the timeframe within which it may become an issue, it can be hard to identify material risks and the best way of reporting them.
Paul Simpson, chief executive of the Carbon Disclosure Project (CDP), says the risks fall into three main categories: increasing tax and regulations around greenhouse gases; extreme weather events and changing weather patterns; and technology innovation.
Climate change remains the risk multiplier. The International Energy Agency says time is running out to avert catastrophic climate change after global emissions rose by 3.2 per cent in 2011, despite a huge leap in the amount of renewable energy capacity and slower growth caused by the financial crisis.
Because investors are going to become increasingly worried about the impact of climate change on their investments, companies are likely to find themselves under increasing scrutiny concerning their climate resilience. Consultancy Mercer suggests that investors should “kick the tires” of existing investments across all asset classes to assess the sensitivity of each asset class to climate change risk factors and their climate resiliency.
It also says investors should engage with companies on climate risk management issues, so companies need to be ready to explain their strategy.
One of the big disappointments of Rio+20 was the watering down of a commitment to make companies report on their sustainability performance. But that so dismayed a number of governments – South Africa, France, Denmark and Brazil – that they pledged to make it obligatory for their companies to report on sustainability.
Separately, but also at Rio, deputy prime minister Nick Clegg announced that companies listed on the London Stock Exchange, one of the world’s largest, would have to report on their carbon emissions from next year.
Writing in The Guardian before the announcement, which will affect about 1,600 corporations, Mr Clegg said: “Using resources responsibly is in business’s own interests too. Pepsi depends on water; Unilever depends on fish stocks and agricultural land; and every firm relies on a stable fuel supply. But while nine out of ten [chief executives] say sustainability is fundamental to their success, only two out of ten record the resources they consume.”
Carbon reporting is the first vital step for companies to make reductions in emissions, according to the Carbon Trust. By measuring and reporting emissions, companies can begin to set targets and put in place carbon management initiatives to reduce emissions in the future. Defra, the Department of Environment, Food and Rural Affairs, estimates that reporting will contribute to saving four million tonnes of CO2 emissions by 2021.
Regulations on emissions reporting will indirectly increase everyone’s attention on the issue, which should lead to improved performance, Jonathan Grant, a partner in the Sustainability and Climate Change practice at PwC, says. “Investors will also get more from the information about the risks and liabilities of the business, and its efficiencies,” he adds.
“We’re moving into a different era on environmental reporting, particularly for the big brands. There is overwhelming interest from stakeholders for information about carbon and climate change risks, opportunities and strategies, all of which might impact the financial wellbeing of a business. Investors in particular want information that gives them insight, not hindsight, into a company’s long-term prospects.”
Measuring and disclosing carbon emissions and resource use is becoming a mainstream concern, says Ben Caldecott, head of policy at Climate Change Capital. “Legislative drivers, the fact that investors see these metrics as proxies for well-run companies and the fact that resource prices are becoming ever more important to the bottom line, are all secular, long-term trends that aren’t going anywhere. This has implications for all boards and senior executives,” he says.
Leading businesses have recognised the world is changing and that, if they are to be fit for the future, they need to change with it, says Yvo de Boer, KPMG’s special global adviser on climate change and sustainability, and former head of the UN climate talks process.
“For them, that debate is over,” he says. “What is different now is a new focus on how they can address the triple bottom line of people and planet along with profit. There has been a shift from problem-thinking to solution-thinking.”
Mr de Boer says that, while policymakers failed to make any substantial progress at Rio: “Businesses did not sit back and wait. Many have recognised that sustainability megaforces, such as climate change, water scarcity, food security and urbanisation, are not waiting for the politicians to make up their minds. Instead, businesses have taken action on their own.”
TOP FIVE TIPS
Sustaining carbon cuts
ACT NOW: Don’t bury your head in the sand. Do the research and get started, ensuring you make friends with people in those areas of the business that will support you with data collation, from finance and your environment-sustainability teams, through to facilities and human resources, says Frances Darton, sustainability sector manager at Achilles.
SUSTAINABILITY IS HERE TO STAY: Long-term thinking will set you in good stead when it comes to carbon reporting. Choose a structured approach that will support all your current and any future reporting requirements. It’s proven that genuine leaders in carbon reporting reap benefits across their organisations, including operational efficiency, energy efficiency and cost savings alongside enhanced reputation, brand leadership and marketing opportunities.
THE BUSINESS CASE: Organisations should look beyond the reporting requirement to realise the business benefit, identifying opportunities in carbon management and reduction. While measurement is a great starting point, considering a forward-looking programme or standard which focuses on achieving future reductions is recommended. This will not only drive quick wins, but support a longer-term approach to greenhouse gas reduction, future-proofing your carbon strategy.
BE PROUD TO BE SUSTAINABLE: Shout about what you are doing and highlight your achievements. It’s vital that your stakeholders, both internal and external, know about your commitment to sustainability. Keeping staff updated on progress will encourage engagement and will be key in driving the behavioural change required to make in-roads into your reduction strategy.
BUSINESS AS USUAL: To deliver long-term cultural change, sustainability must be embedded as business as usual, top down and bottom up. Sustainability works when, together with carbon reduction, it isn’t seen as something which is managed by another team. The entire organisation must be engaged and have a sense of ownership.