Embed climate into strategy

Wednesday, 01 March 2023

Zoe Whitton
Managing Director & Head of Impact, Pollination

    Developing a strategy for a changing environment from a board perspective is essential for any organisation. 

    Embedding climate into organisational strategy often requires approaching climate change from a new angle. Climate considerations are often approached as stakeholder or reporting requirements rather than strategy. Nonetheless, climate change mitigation efforts and the physical impacts of climate change will fundamentally change economies the world over, having significant impacts on economic and social conditions. In this setting, organisations that are not adapting strategy to take climate change into account are planning for a world that doesn’t exist.

    Strategy is centrally a question of creating value in the face of prevailing conditions. As such, the effective integration of climate into organisational strategy must combine an understanding of the likely change with the regular process of strategy development.

    Organisations display different levels of ambition and maturity in their approach to climate change. These range from responses grounded in traditional corporate social responsibility through to those focused on evolving the organisation’s value offering in the face of climate change.

    Organisations often move through these stages of development sequentially. Some companies, which have been developing their approach to climate change for a long time, have had significant space to do so. However, many organisations that have started more recently are having to move through these stages increasingly rapidly as the demands of stakeholders, regulators, suppliers and customers evolve.

    This process requires considering the needs it presents across an array of organisational considerations. These include not only the organisation’s purpose and priorities, but also its business and operating models. Developing effective climate strategy and bringing this strategy to life often includes changes across all these dimensions.

    The human side of climate strategy

    Bringing climate and strategy together particularly requires governance and people adjustments. Boards and their leadership teams must give climate change sufficient priority. This may seem simple, but is often a fraught process in practice. Nonetheless, the board has a unique role to play in prioritising and legitimising climate change response throughout the organisation.

    Boards and leadership teams need to support the organisation to develop sufficient understanding and capabilities to provide input and implement strategy. We often see leadership teams attempting to develop climate strategy without giving their teams sufficient support to understand likely changes and strategic pressures arising from climate change. In our experience, taking the time to build this understanding often unlocks creativity, buy- in and decision-making capability among senior teams. Similarly, establishing sufficient capability across organisations to respond to the needs of the strategy can often be challenging. Boards and leadership teams should anticipate that the provision of sufficient resourcing and training across the organisation will be a key aspect of delivering against climate-related ambitions.

    Finally, in our experience, implementing climate- related strategy often requires the development of new partnerships with external parties, including customers and suppliers. These partnerships can provide critical visibility on the changing needs and expectations of key stakeholders and the capabilities needed to execute on new ambitions. Boards and leadership teams should be prepared to navigate new relationships with these counterparties as they execute on climate-related strategy.

    Effective scenario analysis

    Scenario analysis is an oft-used tool in climate strategy exercises. Developed in the oil and gas industry to support decision-making under uncertainty, its use in climate disclosures and strategy is increasingly commonplace.

    It can play two important roles for organisations. Firstly, and most simply, scenario analysis is increasingly used as a tool to represent the possible impacts of climate change on the organisation, and the organisation’s preparedness for these impacts, in a consistent and accessible way. Secondly, scenario analysis can support the understanding of the board and the senior leadership team of climate change and its various impacts and implications. In doing so, it can support the formation of effective strategy. The first use is very common and must be undertaken in a way that is consistent with market expectations and norms. The second is extremely powerful, but often does not take place.

    The use of scenario analysis for the first task is increasingly standard. Scenario analysis was adopted by the Taskforce for Climate-related Financial Disclosures (TCFD) as a central tool to support climate related disclosures and strategy development. Listed organisations globally are increasingly asked to complete varieties of climate scenario analysis as part of their regulatory responsibilities. Similarly, regulated banks are asked to complete climate stress testing — a similar process — to assure their regulators of their preparedness for climate change.

    Scenario analysis for consumption by external stakeholders must meet certain requirements. These exercises normally require the use of a scenario with high transition impacts, increasingly a 1.5o scenario under which extensive economic changes are made to avoid climate change. They also require the use of a scenario that includes significant physical climate change impacts, often a 3o-plus scenario, in which climate change plays out with outcomes across numerous hazards. Importantly, scenario analysis should give decision-makers a sense of both the risks and the opportunities to the organisation.

    Building capability in board and executive

    Ultimately, boards and their leadership teams need to develop strategic intuition about climate change. Senior leaders are expected to maintain a good sense of the strategic implications of structural or cyclical changes such as inflation, the rise of e-commerce or a shift to remote working. Leaders must have an intuitive grasp of these topics to effectively lead and manage the organisation.

    Climate change is no different and has similarly significant broad-reaching structural implications. Nonetheless, boards often need to work hard to develop this intuition. A working understanding of climate change has not been a requirement of boards and leadership teams until very recently, and many board members have yet to develop their expertise in the space.

    Australian boards have made progress on this front, but still have quite a way to go. A recent survey by AICD noted that 54 per cent of directors in Australia did not have confidence that their board had the knowledge and experience to adequately address the strategic challenge presented by climate change. Despite this high need for capability development, measures to increase the skill of the board — such as director training, board skills gap analysis or recruitment for climate-related competencies — were among the least popular responses to climate change.

    Asking the right questions

    Boards can ask key questions to prompt the development and testing of an organisational strategy that accounts for the risks and opportunities presented by climate change.

    These include:

    • How will a changing climate impact our assets, operation and supply chain?
    • How can we contribute to building resilience — physical, economic and social?
    • How can we use our capabilities to “win” in an economy undergoing this transformation?
    • What part of our existing value is at risk? How can we support our people and communities to thrive in a changing world?
    • Where is the opportunity?

    They also include questions designed to get a sense of the depth of existing strategy:

    • Has our climate risk and opportunity analysis driven any material change in our strategy?
    • Who is accountable for the organisation’s response to climate change (this may be many people) and is this reflected in their incentives?
    • How are we staying across climate-related developments? Are we updating our scenario analysis, and how frequently?
    • Who should we partner with?
    • How is the management team maintaining its expertise on the topic?

    Zoe Whitton is managing director and head of impact at Pollination. She is also on the boards of the Centre for Policy Development and Investor Group on Climate Change, and on the steering committee of the Climate Governance Initiative, hosted by the AICD.

    Practice resources — supporting good governance

    Examples of the AICD’s contemporary governance practice resources for members:

    Climate Governance

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