Climate change poses an unprecedented threat to businesses globally on several fronts. Many are already factoring in the effects of a warmer climate into their decision-making in an attempt to protect their assets and supply chains, while others, such as oil companies, are having to completely rethink their business models as we shift towards a zero-carbon future. During this transition period companies are faced with a wide range of risks and opportunities and need to think carefully about how best to navigate their way through these.
Governments are implementing tighter policies and regulations to curb emissions, and stakeholders, from financial institutions to customers, are increasing pressure wherever possible to achieve the same. And rightly so. So how can you future-proof your company and make it through this transition in one piece? By integrating a smart and well-thought-out climate strategy into the core of your business and doing so as soon as possible.
The first step towards implementing a climate strategy is to understand your impact and assess your risks. What is your company’s carbon footprint? Where are your emissions hotspots? What is your carbon intensity? Who are you doing business with and how are they managing their emissions? These are some of the important questions that you should find the answers to on a regular basis. This step alone can seem daunting and it often helps to take a pragmatic and phased approach. Are you a manufacturing company?
It probably makes sense to first focus on your direct and energy (i.e. scope 1 and scope 2) emissions. Are you an office-based consulting company? Focus on emissions from business travel and electricity consumption as a starting point. Measure emissions per business unit and give your teams the responsibility to report them as they already do with financial and operational KPIs. Over time expand the scope and accuracy of your carbon footprint to gain insight into additional sources of emissions.
A good climate leader manages their own internal emissions, a great climate leader, however, tackles their supply chain as well. This might seem like planetary altruistic behaviour, but it simply makes good business sense to ensure your suppliers also survive the transition. Use your purchasing power as a force for good by engaging with your suppliers and supporting them with managing and reducing their own emissions. Walmart, for example, launched Project Gigaton in 2017 with the aim of reducing emissions from their supply chain equivalent to taking 211 million cars off the road.1 This level of action is of course not possible for most, but simply requiring your suppliers to disclose their scope 1 and scope 2 emissions on an annual basis can go a long way towards increasing emissions awareness and management. Having this information on hand is also very valuable for determining your supply chain footprint and knowing where to focus.
Insight into your company’s carbon footprint will identify the major sources of emissions throughout your business, providing a good starting point for developing a reduction strategy. For many companies electricity consumption is often an emissions hotspot and offers low-hanging fruit. Are you operating in a region with a competitive utility market? Speak to your utility provider and switch to renewable electricity, or switch to a different utility provider if needs be. There are always opportunities to reduce electricity consumption and often these even provide good financial returns – get the experts in to do audits of your facilities and develop these projects, the costs to do so are often quickly recouped.
Within other categories there are many ways to reduce emissions, from simple reductions in business travel to innovative uses of technology. Some solutions are more nuanced and might require expert assistance, an outside perspective can be very valuable when forming an impactful reduction strategy that is tailored to your business. Set yourself targets before embarking on your reduction journey and communicate progress to the outside world on a regular basis so that you remain accountable, stakeholders value transparency more than almost anything.
As climate change gets worse, companies can expect governments to enact tougher regulations that will extract an increasing price for emissions through taxes and other mechanisms. Of the 185 signatories to the Paris climate agreement, 96 nations have stated that they are planning or considering the use of carbon pricing to meet their commitments.2 The unprepared could find their emissions becoming a huge financial burden and force the stranding of assets, the selling of business units and the closing of divisions as a result. So how can companies prepare for such a future? Through a simple mechanism called Internal Carbon Pricing, a vital component of any corporate climate strategy. Simply put, internal carbon pricing involves setting a price for internal emissions that aligns with external current or future carbon pricing (e.g. carbon taxes or carbon markets).
This concept is nothing new. Currently over 1,300 companies, including 100 Fortune Global 500 companies with collective annual revenues of about US$7 trillion, have disclosed the use of internal carbon pricing, or plans to implement it within the next 2 years.2 By putting a price on carbon you automatically factor in climate risk when making investment decisions, evaluating risks and forging new company strategies. Carbon pricing can go beyond the realm of decision-making and can be used to incentivise and finance emissions reductions.
Microsoft introduced an internal carbon price in 2012 by charging all its business units $8 per tonne of CO2emitted from business travel and the use of electricity.3 These funds go into a carbon fee investment fund which is used to finance energy-efficiency or offsetting projects, among other initiatives, and has saved over 7.5 million tonnes of CO2e emissions to date. By translating emissions into monetary value, a language most understand, you can empower and incentivise your employees to take responsibility for their emissions.
The tragedy of the commons refers to the overexploitation of shared resources due to each of us acting in our own self-interest. If we want to avoid climate change becoming the most catastrophic example of this theory, we need to take collective responsibility on an individual, corporate and government level. As individuals, we have the power to make informed purchasing decisions, change our lifestyles, and add our voices where they will be heard.
Governments have the power to change the rules of the game and use our hard-earned taxes to help decarbonise our economies. Companies, sitting right in the middle of all of this, are under increasing pressure from both sides and face the risk of failure due to inaction. By implementing an effective climate strategy, you as a business are not only ensuring the continuous support of all your stakeholders and future-proofing your business against future regulations, you are also simply doing the right thing. And history has taught us over and over again that doing the right thing is ALWAYS good for business.
World Bank Group. 2019. State and Trends of Carbon Pricing 2019. https://openknowledge.worldbank.org/handle/10986/31755