Reflections

Treating Climate Change as a business issue

10.10.16

StrategicFit has conducted a series of three roundtable discussions with senior leaders and climate change advisors from around 50 companies, including several thought leaders in this space. This article seeks to introduce a useful framework for thinking about climate strategy, building on insights from these sessions. This might be especially helpful in identifying strategic gaps. We’d be happy to discuss in-depth implications, examples and other so-what’s either in further articles or conversations.

Climate change is a difficult problem, it’s not obvious what to do and when. Public policy and regulations may be expensive but flawed. Customers aren’t united in what they want, many don’t care at all but others are extremely passionate.

Companies should treat Climate Change like any other business issue, with associated risks and opportunities. It is not just about reputation. But companies are at different stages in their journeys toward responding to climate change challenges and approaches will evolve over time. Building a doable and acceptable way forward for a company requires strong leadership.

Companies make false starts, respond to other’s flawed thinking and get tangled up between short and long term issues. Our roundtable discussions highlighted some pitfalls and best practices to consider in creating a Quality Climate Strategy. A focus on just emissions reduction misses the point, not unlike a strategy that just focuses on reducing costs.  Our framework forces critical thinking for a quality response.

 

Do you have Quality Climate Strategy?

A company’s climate journey is made up of a lot of decisions to address arising challenges; what can be done, what innovation to explore, how regulations and technology are likely to evolve, and strategic positioning: what matters when balancing timing, costs a

nd reputation.

Our framework describes six elements required for Quality Climate Strategy. It is focused on actions rather than abstract debate.

Each element is further illustrated by examples from roundtable discussions.


Boundaries – A prioritised set of decisions to consider, based on an understanding of how climate change affects your business

To report a carbon footprint and set targets merely complies with regulations; it’s a license to operate. Often just Scope 1 and 2 emissions are used. Regulations don’t always consider the whole product lifecycle and can just shift emissions from one place to another. For example recent automotive regulation has focused on tail-pipe emissions rather than embedded carbon. Are electric vehicles charged by coal power stations actually a low carbon measure?

Leaders must consider critical risks and opportunities not just for their company, but also its clients and supply chain (i.e. Scope 3 emissions). A company can be blind to the problems upstream and downstream of their own industry that they might need to address first. In the food industry, customer facing brands (having low Scope 1 emissions) often make commitments which the upstream suppliers cannot meet in a margin squeezed business.


Alternative approaches – Distinct pathways available as a compelling response to evolving climate change challenges, e.g. ways to lead change, follow competitors or mitigate emissions

When different actions are pursued independently they lack coherency over time and may cause regret. As an example, some 10 years ago, Oil supermajors pursued a growth agenda in their core hydrocarbon business whilst making big investments in renewables and CCS. The strategic disconnect led to policy challenges (such as withdrawal of CCS joint funding from Government) and eventually a U-turn back to the core business. This caused regret and waste.

A company needs to consider how climate change impacts their value chain to understand costs and growth options, not just now but over time. True innovation, breaking established rules, may be essential and would require real conviction – especially when it impacts the core business. Even if a company doesn’t decide to act now, identifying options for later triggering and defining those triggers sets you up to manage future risks and opportunities.


Credible scenarios – A broad and relevant view on possible future technology and regulatory scenarios.

COP21 in Paris signalled a big change in government language, but it is not entirely clear how to deliver the agreed targets. There is a big disconnect between the Paris goals and many of the well-known scenarios (Shell Scenarios, IEA WEO, BP Energy Outlook) based on current trends. It is clear we need step changes in efforts to meet Paris targets. A single organisational view of the future cannot capture the scope or complexity of future changes for your business.

Companies need broad, credible scenarios with distinct signposts that relate to prioritised, business critical issues. A sectoral approach helps break down the problem into manageable enough chunks for real insight.


What matters most – The basis on which you make decisions. Is this purely commercial or do social and ecological factors enter into decision making?

Change can be a hard sell internally if a company just focuses on factors like public relations. Companies can’t sustainably put themselves at a cost disadvantage to their competitors and decision makers must be able to see a path to value or increased competitive advantage in future. It must be treated similar to other business uncertainties.

A company should link the value metrics to the type of decisions. Long term decisions must take into account more than just present value. For example B&Q has chosen to sell Forestry Commission approved wood for years, which is slightly more expensive than alternatives. Research showed customers don’t really care but B&Q felt it was the right thing to use sustainable raw materials. Further, building established supply chains in this area will have long term benefits.


Carbon logic – A precise language to move climate discussions onto the spreadsheet, so risks and opportunities are quantified.

It is difficult to have carbon explicitly treated as part of the business decision making. But you cannot achieve a joined-up approach without a common currency.

A company needs a quantifiable mechanism, such as an internal carbon price, to resolve controversial dilemmas. Capturing uncertainties in financial terms can be very helpful. It legitimises the business risk or opportunity status and gets attention. Clear rules and guidelines on application are a must, otherwise there is a danger of system gaming, or that the price just gets embedded in commodities with true meaning lost.


Act consistently – All stakeholders make decisions in a repeatable and consistent way.

In general, industry wants to take action on climate change. However, while companies may support general principles, they can object to specific policies. This dichotomy mixes communication messages and can result in decisions being made on individual judgement rather than aligned along a common path.

A company needs alignment internally and externally with governments, its sector, its end users and suppliers, to enact Quality Climate Strategy.


How could this be helpful?

Roundtable participants ranged from the top 10 largest global emitters to breakthrough new technology companies that offer clean solutions. It was agreed that the most effective way to deal with climate change is to treat it like any other complex business problem. The Quality Climate Strategy framework integrates this insight with StrategicFit’s approach to strategy & Decision Quality.

A chain is only as strong as its weakest link. Quality in each of the six elements is described in specific benchmarks that clarify explicitly where you are on your journey. Being able to measure where you are on the journey is essential when deciding what’s next.


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