Imagine a ship going full steam ahead into dangerous waters. The captain stands on the deck with a telescope in hand, but is not looking through it to watch for dangers that could lie just over the horizon.
The captain agrees that there is probably a big iceberg out there somewhere and that hitting it could sink the ship. But the captain doesn’t slow down and maintains the course that has been set.
This is the current response from most businesses leaders to climate change and resource scarcity.
Since the industrial revolution private enterprise has built and shaped the world in which we live. Businesses have effectively and efficiently met the needs and wishes of a growing and increasingly affluent global population. But an unforeseen and terrible consequence of this is that society now faces environmental challenges so great that the ecosystem may be damaged beyond repair.
Today, our strongest response to these environmental challenges is to leverage the capability and capacity of business to shape and build a sustainable, low-carbon future. Only businesses can bring together the productive and technical capacity, alongside access to financial capital, to transform the world at pace. And rapid transformation is exactly what is needed.
But change brings disruption. There will be winners and losers. Some corporate titans will capture the commercial opportunities in this transition, allowing them to survive and thrive in a changing climate. Other businesses, that may seem unsinkable today, will go the same way as the Titanic.
The Carbon Trust recently published the findings of an extensive study looking in depth at the response of businesses to climate change and resource scarcity, asking why it is so far from where it needs to be and the course we need to follow.
Our global survey of board-level executives of large businesses from across four continents found strong agreement that the challenges from climate change are real, creating a bottom-line impact today, big risks and significant opportunities.
They are also confident that more change is coming, with 70% believing that action taken by consumers, governments, and investors will force the transition to an environmentally sustainable future. And most see that shift happening within the next 15 years, before 2030. That’s not far away, but it is beyond the business planning horizon of all but the most capital-intensive businesses.
A picture emerged of unjustified confidence. Out of 229 interviews only one respondent said their company’s sustainability performance was below average when compared with competitors. And half saw themselves as leaders in their sector.
Step change towards sustainability
Half of the businesses surveyed also thought that a step change towards sustainability, driven by consumers, governments and investors, would require them to fundamentally change their products, services or business models. And they were remarkably positive about their ability to make those changes when the time was right.
Despite this, the response of many businesses today amounts to little more than rearranging the deck chairs. It became clear that businesses are living in two realities: although they recognise that risks and opportunities exist over the horizon, efforts and resources are focused on delivering today’s business plan.
But businesses are rational. They respond to market conditions and signals to maximise opportunities and mitigate risks. And the reality today is that in most cases, market conditions and signals aren’t strong enough to create the imperative, or offer the incentive, for businesses to take transformative action.
But there are likely to be significant physical impacts from climate change, alongside a stronger global response from governments and consumers in the next decade. If this is indeed the case then is there not a failure of governance to adequately assess the strategic implications of this and take action accordingly?
Our research found that a major issue for company boards is the difficulty they face in relating sustainability to core business operations, or being able to quantify the risks and opportunities from climate change and resource scarcity. The Carbon Trust has developed a pragmatic response to this which we are putting into practice with businesses, governments and investors around the world.
On the actual Titanic there was a businessman. Thomas Andrews was the ship’s chief designer, having served as managing director of the Belfast shipbuilders, Harland and Wolff.
After the ship sank the following cable was sent from the White Star Line’s offices in New York: “After accident, Andrews ascertained damage, advised passengers to put on heavy clothing and prepare to leave vessel. Many were sceptical about the seriousness of the damage, but impressed by Andrews’ knowledge and personality, followed his advice, and so saved their lives. He assisted many women and children to lifeboats. When last seen, officers say, he was throwing overboard deck chairs and other objects to people in the water, his chief concern the safety of everyone but himself.”
He was heroic in the face of disaster. But if boards today look for the challenges ahead and adjust their course, they can avoid disaster and carry us all to a sustainable, low-carbon future.
All the captains of industry need to do is pick up a telescope and take a good look beyond the horizon.
Suggested questions for non-executives to assess company value-at-stake
(1) Direct demand: Will awareness of the risks of climate change or other sustainability issues be likely to cause consumers to shift their intrinsic demand up or down depending on the environmental credentials of products and, if so, how much value will be lost/gained due to falling/rising demand compared to overall demand?
(2) Indirect demand: Are there any likely catalysers of a shift in consumer behaviour like moral leadership or campaign groups or government policy seeking to stimulate consumers and, if so, how much value will be lost/gained due to falling/rising demand compared to overall demand?
(3) Tech subsidies: Are there any new technology deployment subsidies available for sustainable technologies that apply to your sector and how large are they compared with the likely cost of development minus the potential profits?
(4) Direct taxes: Are there any taxes (or likely taxes) which would impact your business operations and how large are they (or are they likely to be) compared with the cost of avoiding them plus any knock-on benefits?
(5) Minimum quotas: Are there any (or are there likely to be) any minimum quotas on the use of low-carbon energy or other more sustainable products (e.g. biofuels) and, if so, how much will it cost you to comply with these quotas relative to your overall operating costs?
(6) Minimum standards: Are there any (or are likely to be any) minimum product standards imposed (e.g. minimum efficiency performance) and, if so, how much value will be lost from obsolescent products and how much will it cost to reform your production to meet these standards relative to your overall operating costs?
(7) Prohibitions: Are there any (or are there likely to be) absolute prohibition on sale or use of certain types of product (e.g. no incandescent light bulbs) and, if so, how much value will be lost from obsolescent products and how much will it cost to replace them relative to your overall operating costs?
(8) Reporting: Are there any mandatory information requirements (e.g. product labelling) and, if so, how much will it cost to comply and what will the effect be on demand relative to overall demand?
(9) Related sectors: Is an adjacent industry regulated (or likely to be regulated) by one of the above measures which could in turn affect your business and, if so, what will be the likely value cost?
(10) Direct investment patterns: Could your sustainability record impact investment decisions in your company and, if so, how much share value could potentially be lost/gained this way relative to your overall share price?
(11) Indirect investment patterns: Is an adjacent industry exposed to investment scrutiny over its sustainability record (e.g. energy provider) and, if so, how would a reduction of investment in this industry affect your own share price?
(12) Existing technology: Will prospects of a low-carbon or sustainable economy stimulate increased deployment of existing but more sustainable technology and, if so, are any of these technologies applicable to your business, either by directly reducing costs (etc.) or indirectly by lowering policy costs or consumer-stimulating demands (etc.)?
(13) Novel technology: Will prospects of a low-carbon or sustainable economy stimulate further innovation of new sustainable technologies and, if so, are any of these technologies potentially applicable to your business, either by directly reducing costs (etc.) or indirectly by lowering policy costs or consumer-stimulating demands (etc.)?
(14) Asset risk: Could the direct effects of environmental issues (e.g. extreme weather events or water-stress) impact your assets and, if so, what potential proportion of your assets are at risk and what is their value compared with the overall value of the company?
(15) Supply chain risk: Could the direct effects of environmental issues impact any of your supply chain and, if so, what potential proportion of your supply chain is at risk and what is the total value at risk compared with the overall value of the company?
Tom Delay is chief executive of the Carbon Trust – the first to be appointed to the organisation in 2001. Since then, he has grown the organisation to become a world leader in advising businesses, governments and the public sector on carbon emissions reduction and the development of low-carbon technologies, markets and businesses. Tom chairs Partnerships for Renewables, a Carbon Trust Enterprise that develops wind farms on public land, and is a member of the UK Energy Research Partnership.