Directors need to take environmental volatility seriously.
Climate change is no longer abstract. Phenomena including raging wildfires in Australia and increasingly frequent “100-year” storms have proved that the impact on supply chains is real, and the potential long-term scenarios range from concerning to apocalyptic.
Environment-related risks ranked as five of the top 10 risks in terms of likelihood in The Global Risks Report 2020, published by the World Economic Forum. The report ranked climate-action failure No. 1 in terms of impact — higher than weapons of mass destruction.
As BlackRock CEO Larry Fink wrote in his 2020 letter to CEOs, compared with prior crises that were relatively short term, including the 2008 global financial crisis, “Climate change is different. Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis.” As stewards of long-term value, boards of all companies should have the topic on their radars, including the following five considerations.
1. Assess the company’s resilience in the face of increasingly disrupted supply chains. Has the company’s network of suppliers of small but important components been assessed for the risk of disruption due to severe storms, floods or fire? What about alternatives for work to get done when roads are impassable and workers are focused on managing risks to their homes and families (an issue that is being addressed as I write)? These issues would likely factor into enterprise risk management and crisis scenario planning in the context of a single severe event impacting the core of the company’s business. However, given the increased frequency of these issues globally, the likelihood of a number of smaller events collectively causing a material impact is increasingly plausible and should be incorporated into risk assessments and planning.
2. Include the company’s energy supply chain in scenario planning. During my recent fireside chat at the Women Corporate Directors 2020 Americas Institute with David Crane — an investor, former energy company CEO and leading voice on climate change — he stressed the importance of assessing the company’s energy supply chain from a risk perspective. In addition to other reasons a company might use solar energy, Crane said the investment should be valued from a business continuity perspective, as access to solar power could help mitigate business disruption from electrical grid failure in the aftermath of a severe storm, wildfire, etc.
3. Recognize that while the worst impacts of climate change may be at least a decade away, risk mitigation planning should begin now. As noted in Climate risk and response: Physical hazards and socioeconomic impacts, a McKinsey Global Institute report, a range of potential risks (categorized as impacts on livability/workability, food systems, physical assets, infrastructure services and natural capital) will, “absent adaptation and mitigation,” have measurable impact in as few as 10 years. It is important for management to begin scenario planning and establish a process for active monitoring. This is especially crucial for scenarios that affect fixed assets and investments that cannot be relocated quickly and for business models premised on low-cost labor concentrated in parts of the world that are most at risk. Boards can add value proactively by guiding their companies as they monitor climate-related risk, consider potential trade-offs, and prepare to implement appropriate long-term adaptations.
4. Factor evolving stakeholder expectations into decision-making. Millennials, and younger generations in particular, are increasingly speaking up. In some cases, they are making purchases and even employment decisions with reference to the company’s carbon footprint and environmental stewardship. Each company will make its own decision, but companies that are not engaged as leaders in carbon footprint reduction should recognize that the topic is growing increasingly important to stakeholders as it becomes mainstream. Responses by some stakeholders to companies’ recent announcements about plans to go carbon neutral make it clear that stakeholders are interested in more than just good intentions — they want to know how companies expect to achieve their stated goals.
5. Keep climate change-related issues on the board’s agenda. The risks and opportunities associated with these issues are multiple and varied. While not every company requires an expert in climate science on its board, every board should be sufficiently educated to understand the implications as they continue to evolve, to ask the right questions, and to guide the company as it navigates its particular issues in a way that adds value not only to the company but also to the planet, the ultimate stakeholder.
Susan M. Angele is a senior advisor to KPMG’s Board Leadership Center.