Climate 2.0: What Is Expected of Business Now?

Authors

• Ryan Schuchard

  Former Associate Director, Climate Change, BSR

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Business at large has only recently awakened to climate change—really just within the last 10 years. It started slowly, following the 1997 adoption of the Kyoto Protocol, and then it picked up speed after the development of industry-accepted greenhouse gas (GHG) monitoring and reporting standards such as 2001's GHG Protocol and 2003's Carbon Disclosure Project (CDP).

During the first decade of the new century, companies began to measure, reduce, and report emissions from operations. They pioneered carbon finance, showing that carbon markets play a vital role in resolving climate change. They came to grips, for the first time, with the financial value at stake from climate change. They came to define leadership as a focus on policy engagement. During this time, discussing adaptation (seen as admitting defeat) was considered taboo.

Times have changed.

Now, companies realize that climate change is no longer a potential future problem; it has arrived. The record U.S. drought in 2011 led to US$7.62 billion losses in Texas alone, and already in 2012, more than 1,000 counties in 29 U.S. states have been designated primary natural disaster areas from another record drought that is suppressing farm profits and driving up the price of soybeans and corn. While it remains difficult to attribute specific events to climate change, these are exactly the kind of effects that scientists expect more of in a warming world. As the real problems of more hostile weather sink in, the concept of becoming climate-resilient is now seen as critical to the future of industries, and investors want to know what companies are doing about it.

At the same time, there is far less confidence that a treaty-style international framework will emerge or that top-down national policies in the United States and China will happen quickly and comprehensively enough to dampen growing emissions. As a result, low-carbon development can no longer wait for a price on carbon. Instead, it is about opportunities on the ground for business innovations and partnerships.

This is evident in calls for business to be more engaged than ever before, from stepped-up campaigns by traditional activists like Greenpeace, to new initiatives targeting key sectors, to activism by companies such as Walmart, which is encouraging its suppliers to do more. What was once considered the leading edge—advancing initiatives around procurement, policy engagement, and creative partnerships—is now commonplace.

These developments place business at the heart of today's most creative, collaborative climate solutions.

Yet companies are also facing new challenges. The economic recession has tightened budgets. The adage that addressing energy waste is akin to "picking money up off the floor" is insufficient because the development of effective corporate energy-efficiency programs requires money, people, and resources. Today, the public discourse about energy has also advanced. It's no longer about climate change versus cheap energy. The debate now encompasses oil independence, technology, and the widening pursuit of unconventional fossil fuels (those resources that are more difficult to extract and that come with greater environmental consequences)—developments that make energy decisions more complex.

Ahead of all of these changes, the un-ignorable fact is that time is running out: By one estimate, the economy is already counting on burning more than five times the level of carbon-containing energy resources than we can afford if we intend to say within the acceptable 2°C of warming.

In our current era of climate action—call it Climate 2.0—the stakes are higher, and the answers are less clear. To shed light on what companies need to be doing, I caught up with leading thinkers (see full list at the end of this article) on business climate action to ask two questions:

1. Recognizing that many companies are seriously committed to making changes and looking for breakthroughs, what should leaders aspire to?
2. Considering that many companies—especially newer companies and those in emerging markets—have yet to address climate change in earnest, what are the minimum standards for basic credibility in climate action?

Their responses covered a range of themes, including governance, strategy, communications, results, and integration.

Governance

In relation to climate change, governance is about ensuring that the company has the right systems in place to account for, make decisions about, and control performance for carbon-reduction initiatives across the organization. For mainstream institutional investors, this is the top issue, which is why they have become active in filing board resolutions. As World Wildlife Fund's Senior Program Manager and Climate Savers lead Matt Banks said, "Analysts are paying more and more attention to commitments as they evaluate long-term stability of companies in a carbon-constrained world."

Minimum standards: Companies need to demonstrate that they are using resources productively and sustainably, even when energy is relatively cheap or a minor input. This is important to demonstrate credibility, according to Rebecca Henson, Calvert Investments' senior sustainability analyst. In addition, companies are expected to include diverse stakeholder input in their climate change decision-making. Finally, they need to expand their definition and address the physical risks of climate change through adaptation—a reversal of the sentiment of just a few years ago.

Leadership: According to Andrea Brown, from the World Business Council for Sustainable Development's Climate and Energy team, leadership requires establishing senior oversight and support for climate stewardship, with effective accountability measures and incentives that encourage departments to address shared issues together. Leaders are also expected to avoid "unaccountable" coalitions: In other words, companies should avoid joining associations whose lobbying efforts contradict the companies' stated position. Nike and Apple demonstrated this style of leadership when they left the U.S. Chamber of Commerce due to their concerns that the organization was advocating for regressive climate measures.

Strategy

Strategy is about developing informed, long-term plans for the entire organization to address climate change. This means understanding the company's unique opportunities, risks, impacts, and choices for climate change, and creating reduction targets based on the company's sector and unique relationships, and an approach to achieving those targets.

Minimum standards: At a minimum, a company's strategy should evaluate key climate impacts. "Companies should address issues material to the business and bite off the biggest part of the carbon footprint first," said Michelle Lapinski, the Nature Conservancy's director of corporate practices. "Otherwise they risk their actions being perceived as window-dressing." This requires a plan with long-term strategies that comprehensively mitigate key climate impacts and risks. Andrew Hutson, senior manager at the Environmental Defense Fund, emphasized that companies have to go beyond processing information. "'Now we know' isn't a good enough answer," he explained. "Once you have information, you are obliged to do something about it."

Leadership: Companies with leadership strategies go beyond incremental operational improvements and use their unique points of leverage to create the greatest carbon reductions, however possible. This means driving reductions in their value chain, typically through supply chain programs but also through investments and product design. As GHG Protocol Director Pankaj Bhatia put it, this is because value chain (Scope 3) GHG emissions can account for the majority of a company's impact.

Leaders are also more proactive in using their business strategies and relationships for climate progress, such as considering climate in siting decisions, negotiating with utilities about energy mixes, and discussing energy concerns with customers. Finally, leadership means engaging in policy, particularly in industry-based and local forums where it can have more influence and create higher standards for the sector.

Communications

Communications is about sharing the company's story credibly and effectively, and also bringing stakeholders along as part of the planning process. This means reporting comprehensively about climate impacts, issues, risks, and opportunities in investor disclosures such as those for the CDP, and also in general sustainability reporting. The bar for communications on climate is rising—and the activists on this subject are changing. "Today's activists include investors and retail buyers, from the U.S. federal government to Walmart," said Daniel Kreeger, executive director, Association of Climate Change Officers. An important distinction about communications: It's not only about PR. At BSR, we have found that communications often prompts companies to become more serious about strategy and make more informed decisions.

Minimum standards: At minimum, companies are expected to provide full and transparent reporting of GHG emissions from their operations (scopes 1 and 2) while providing accurate, comparable data. Additionally, the information should be compatible with accepted standards or should tell a complete story about the company's climate impacts. Companies need to disclose material risks, opportunities, and plans related to physical, regulatory, market, and other aspects of climate change. And, warned Greenpeace IT Analyst Casey Harrell, there's no room for exaggerations: "They need to avoid talking a bigger game than they deserve credit for." Finally, they need to publish a climate change policy, or at least clarify the policy in their published environmental sustainability policies, suggested Tim Juliani, director of corporate engagement at the Center for Climate and Energy Solutions.

Leadership: Leaders do several additional things with communications. They provide assurance of data disclosed through independent verification of reported performance. They educate employees and customers about climate and efficiency, taking their role as an influencer seriously. They promote and share lessons to foster quicker adoption of best carbon-reducing practices in the industry. They tend to involve diverse, cross-sector stakeholders in the development of information they communicate—with an aim to use their marketing muscle to inspire the public to act on climate change. And they should (though only a few companies are doing so openly) advance understanding about what they are doing to promote resilience and justice as they adapt to a future uncertain climate.

Results

An area of rising importance is the achievement of actual results, which is about holding companies accountable for goals that result in substantial and measurable reductions. This expectation has emerged only recently, as stakeholders have grown frustrated with slow results on companies' climate change commitments.

Minimum standards: At minimum, companies should make good on promises, and, in particular, they should not fail to meet goals just because they aren't taking their commitments seriously. It is also about avoiding being a laggard in the industry, as defined by indexes like CDP. Companies that fall short in results are particularly vulnerable to activist campaigns, noted Greenpeace's Harrell.

Leadership: Leadership in results means aspiring to aggressive carbon and energy targets for absolute reductions relative to peers, which necessarily involves value chain strategies. And leaders are expected to monitor and report on progress annually. "The U.S. private sector should aspire to targets calibrated to the recommendations of international bodies that monitor climate change—for example, 3 to 4 percent of emissions reductions per year, and around 33 percent by 2020, based on a 2005 baseline in aggregate," said the World Wildlife Fund's Banks.

For most companies, this requires some process of transformation, going beyond linear reductions to creating wholesale changes. Coca-Cola's and PepsiCo's elimination of hydrofluorocarbons in vending machines is an example of this. Leadership also typically includes helping partners and suppliers in emerging markets by offering training and making available resources and tools for carbon reduction, in particular, energy management.

Integration

Integration means building mutually reinforcing objectives and incentives between climate initiatives and the core business, which happens through the creation of strong performance measures and coordination among business units and teams. In practice, integration is one of companies' greatest climate challenges. Building bridges between units and creating regional strategies that support corporate direction is truly "the long tail" of climate action, even for the most advanced companies.

Minimum standards: The thrust of integration is getting carbon-reducing activities outside of the sustainability team and inside the departments that have the greatest influence on the company's footprint. One of the most important action areas for companies related to this is ensuring that lobbying efforts align with policies, said the World Business Council for Sustainable Development's Brown. Basic integration is also about scaling up successful pilot programs throughout global operations.

Leadership: The GHG Protocol's Bhatia explained that "leaders should aim to align carbon management with the company's core business strategy and should be willing to alter the fundamental business model to achieve this if needed." This means leaders create strategies and teams focused on pushing progress in both sustainability and business around key resources such as energy and fuel. For instance, those involved in agriculture will develop a sophisticated perspective on their risks and opportunities in forestry carbon markets.

Finally, there is an external element to integration. "True leaders also work to share their perspective and what they've learned with other companies and will often participate in partnerships or coalitions that work toward improving corporate climate action," said Calvert Investments' Henson.

The Road Ahead

Those familiar with CDP reporting will recognize that four of the themes here—governance, strategy, communications, and results—reflect those in the Carbon Performance Leadership Index, which assigns one score for companies and is featured in their listings on Google Finance and Bloomberg LP. BSR's compilation also includes integration, reflecting the growing expectation that companies improve the globalization of processes and full implementation of cross-departmental programs that concern climate change.

Since the failure of the U.S. Congress to pass climate legislation in 2010, and the turtle's pace of the post-Kyoto UN process, the urgency of business leadership in climate change has increased. Now, companies need to spend less energy following the top-down, global policy process and more on carbon-reduction initiatives throughout their global operations and value chains—from efforts with suppliers to financial investments. They also need to invest in sector- and geography-focused coalitions that are creatively addressing carbon reduction through business practices.

The bottom line: Companies should be more selective about how they drive impact, and make sure that actions translate into real carbon results. The questions are simple: In what areas is business falling short, and in what ways can business accelerate progress by using their greatest strengths?