The outcomes of COP27 were a mixed bag, with implications for boards, according to Deloitte. Here’s what directors need to know.
Going into COP27, there were high hopes concrete plans would emerge for the implementation of the Paris Agreement, the further delivery of a $US100 billion annual climate finance fund for mitigation in developing countries, and a plan to compensate for the loss and damage caused by climate-related disasters to those same countries.
Ultimately, it was a mixed bag. The big leap forward was the acknowledgement that the impacts of climate change on vulnerable developing nations can no longer be ignored, and it brought the in-principle establishment of a loss and damage fund.
While overall progress on implementation was less than ideal, the significant business to business interaction at the summit shows that the private sector is more than ready to play its part. This will be important in driving the promised $US100bn of annual climate finance.
The key message for board members is twofold:
1. First, recognition by governments of the need to finance loss and damage means that this commitment will eventually flow through to the private sector. Boards of directors need to analyse their value chains and consider the impact of their net zero strategies on those most vulnerable and most impacted by climate change. Directors should be vigilant to the speed that voluntary actions move to mandatory requirements.
2. Secondly, as the COP slowly moves from being a conference where governments decide ambitious targets, to a forum for the implementation of those targets, companies, led by board members, will have a bigger role to play in being ambitious and helping nations achieve their climate goals.
The Australian Perspective
With a freshly legislated and more ambitious emissions reduction policy in place, Australia’s presence at COP27 was warmly welcomed. But commentators quickly pointed out that despite a new commitment to slash emissions, we remain one of the world’s top exporters of coal and gas and have not committed to ending new projects or providing a clear plan to halt fossil fuel subsidies. COP31 will certainly be a test for Australia.
Loss and Damage and Boards
When it comes to the newly established loss and damage fund, it is clear the private sector will be expected to pay its fair share – but how? Will impacted stakeholders expect that shareholders of corporations that have historically benefited most from the profits from fossil fuels contribute the most? Will vulnerable countries seek compensation through climate litigation from businesses operating in their region?
In anticipation of these scenarios, boards should consider increasing their focus on mitigation efforts. The longer it takes to reduce emissions, the higher the bill will be for both adaptation and compensation for loss and damage. Questions to ask management include:
- What parts of their business or value chain operate in areas that are disproportionately impacted by climate change?
- What loss and damage are those communities experiencing as a result? Could they be perceived as attributable to their companies’ operations?
- What investments could be made to help these communities adapt? Examples include offering microfinance services, access to education and health services, improving the quality and location of infrastructure, or enhancing disaster preparedness in the region.
Implementation and Boards
To limit warming to 1.5 °C, boards must be willing to ask the right questions to understand how they can bridge the gap between their climate goals and reality. To reduce emissions, most products will need redesigning and supply chains will change, requiring a culture of innovation that must be established at the top.
Business must also consider the impact the transition towards net zero will have on vulnerable stakeholders, like the communities they operate in, or employees in carbon-intensive sectors.
‘The Chairperson’s Guide to a Just Transition’, recently launched by the World Economic Forum in collaboration with the Climate Governance Initiative and Deloitte contains four steps necessary for a just transition framework:
- Understand the issues: work with management to engage with stakeholders to understand their scope 3 impact and the key issues that flow.
- Strategic alignment: create clearly defined just transition outcomes that can be embedded into company strategy.
- Prioritisation: engage with non-investor stakeholders so they can effectively monitor and oversee how the strategy is impacting them over the long and short term.
- Monitor: use data and analytics alongside multi-party engagement with stakeholders to measure performance and avoid risk.
Pursuing implementation will necessarily involve a harmonisation of climate-related reporting and the International Sustainability Standards Board (ISSB) is expected to finalise its standards in Q1 2023. Further information about the ISSB standards is available here.
Boards should be thinking about voluntarily adopting these guidelines and integrating them into their reporting and risk frameworks, with the expectation they will become mandatory.
For board members concerned about greenwashing, the UN has recently published a list of robust recommendations for setting and attaining net zero targets with a focus on integrity. This list is aligned with the Net Zero Guidelines published by the International Organisation for Standardisation (ISO) at COP27 that seeks to provide a common reference point harmonising approaches to net zero.
COP27 also saw the theme of nature and biodiversity emerge as part of the dialogue on implementation. As stakeholders become aware of the growing risk to nature, they will expect boards to disclose nature-related interdependencies and provide risk mitigation and adaptation plans.
For more on nature- related risks and opportunities for boards, CGI Australia recently hosted a webinar, An introduction to reporting on nature-related risks that is available to view here.
Concluding the Implementation COP
Although a clear plan for implementation of the Paris Agreement failed to be laid out, it became clear that implementation is dependent on redirecting large amounts of money. The private sector is in pole position to direct the funds that the global community needs to meet that target.
COP27 gave us an insight into the change that governments are expecting, which indicates that it will only be with the courage and commitment of our board members that the scale and speed of change required to achieve a just transition can be realised.
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