Climate change presents strategic opportunities for boards

    The crisis is now in same basket of risks as technology disruptions, cyber security, pandemics and terrorism.

    By JEFFERY TAN 

    The Business Times, 8 February 2021

    THE connection between business and climate change has been clearly established by the Covid-19 pandemic.

    A locked-down world cut its carbon dioxide emissions last year by 7 per cent, the biggest drop ever, according to the Global Carbon Project, a group of scientists who track emissions.

    During the peak of the global confinements in the first quarter of 2020, Nature Climate Change reported that daily emissions were about 17 per cent below the previous year.

    When the World Economic Forum met at Davos in 2019, it published a guide for boards on establishing climate governance for companies. This guide covered topics from climate accountability on boards to having the right structures to ensure climate risks and opportunities are properly understood, managed and reported.

    Governments are also compelled to tread into the climate change space. Many are now focused on transitioning their countries to low carbon economies to mitigate the impact of climate change.

    The Singapore International Energy Week in October 2020 saw a slew of initiatives announced by the Singapore government to "green our consumption by living green, to green our production by making sure that our grid is more efficient". These efforts range from Singapore announcing the purchase of clean solar energy from Australia, to being part of the Lao PDR-Thailand-Malaysia-Singapore Power Integration Project, and the deployment of Singapore's first stacked energy storage system.

    Such endeavours signal the introduction of new policies, legislation and regulations, that will, invariably, impact companies.

    Duty of the board

    Climate change is accelerating, and its impact on regulations will have potential strategic risks to companies. Consequently, boards need to clearly identify these risks and actively manage them in the same way as other strategic risks.

    The real possibility of climate change morphing a company's assets from a good investment (giving handsome returns) to one that is a "stranded asset" (with greatly diminished value), means that this issue demands the closer attention of boards.

    Not taking steps to identify, assess and address such climate risks can be the basis for potential stakeholder claims against boards for not exercising good strategic oversight or, at the least, lacking the awareness expected of competent boards.

    A case can be made that boards should evaluate the physical risks and impact of climate change like floods, droughts and rising sea levels - that could damage or disrupt a company's operations, distribution networks, supply chain, etc; thereby impacting its ability to operate profitable, sustainable businesses.

    Put simply, climate change is now in the same basket of risks like technology disruptions, cyber security, pandemics and terrorism.

    Setting the rules for success

    Instead of reacting to climate change risks as yet another risk to be met with a compliance-type response, astute boards should frame this as an opportunity and leverage it as part of the "building back better" effort in these pandemic times.

    For example, in July 2020, Apple unveiled its 2030 carbon-neutral pledge that covers itself and its suppliers. The company is committing that its devices will have "zero climate impact" at the point of sale. Apple's pledge extends this climate commitment to its entire supply chain - making it a condition to be fulfilled by its supply chain vendors before doing business with Apple.

    In Asia, early movers on climate change include the likes of Samsung Electronics and Taiwan Semiconductor Manufacturing Co. Their global focus requires them to compete on climate change issues to maintain their commercial lead.

    Covid-19 is forcing companies to re-think the path for their businesses going forward. This presents an opportunity for boards to encourage their companies to pivot from merely focusing on physical risks and the effects of climate change on their companies' businesses, to embracing and transforming these challenges into strategic advantages.

    Visionary boards will lead the way to turning an otherwise "compliance-type" response into a unique market advantage that can go beyond just the company and its industry.

    Enlightened boards will recognise the climate change impact to their companies and appropriately incentivise management to focus on and measure this. They can play a significant role in guiding their companies to seize this as an opportunity to distinguish themselves in a crowded marketplace; and thereby ascend the business leader board.

    Will this be easy? Probably not.

    This is where the collective wisdom, insight and creativity of directors can be tapped to move a company's response on climate change from a passive compliance posture to a proactive endeavour that creates climate change leadership and strategic advantages for the company.

    To succeed, boards need to focus on climate change as a key business issue, the same way they scan the competitive landscape to determine what is needed to create value and thereby distinguish themselves in the crowded marketplace. Unless boards prioritise climate change and see this as a value creation opportunity, their businesses risk being left behind when compared with rivals who have a well thought-out strategy in this area.

    The author is a member of the Advocacy and Research Committee of the Singapore Institute of Directors.