We all know ESG is important, and that climate is a key part of ESG. To make informed business decisions with our board and management, directors need to come up the sustainability learning curve, which starts with a real understanding of terms, issues and metrics.
For example, we all need to know the difference between carbon negative and carbon neutral, the overarching goal of the Paris Climate Accord and the definition of Scope 1, 2 and 3 emissions. Boards and companies should also understand how climate applies to their industry.
Climate concerns need to be considered within a geopolitical framework and in the context of overall trends. For example, President Biden made climate one of his key initiatives in his first 100 days with the appointment of John Kerry as climate czar, reentry into the Paris Climate Accord and executive orders addressing climate change policies, including a moratorium on new oil and gas lease permits on federal lands and waters and revoking the permit for the Keystone XL pipeline. Companies should expect more action and regulation to follow.
As directors, we should anticipate climate as a priority for this coming year from our investors. This year is the year of “climate governance” as part of board governance. Our employees, customers, investors and community are all deeply interested in our corporate positions on climate and will factor climate positions into their decisions.
It’s critically important that the company develop a clear external and internal narrative on climate. Management and the board must review, discuss and agree on what quantifiable commitments the company may make, after understanding the costs of those commitments and the tradeoffs, and develop a timeline for their climate journey.
IKEA, for example, committed to, and achieved, phasing out all single-use plastic products from the global home furnishing range in January 2020. The home furnishings chain is now working toward a target of using only renewable and recycled materials by 2030.
Patagonia has announced a plan to eliminate or mitigate all of its carbon emissions by 2025, and uses only renewable electricity for its U.S. retail stores, distribution centers, regional and global offices and headquarters.
UPS created the On-Road Integrated Optimization and Navigation, or ORION, a complex algorithm that optimizes routes to enable drivers to avoid left turns, which increase idling time. ORION saves the company 100 million miles and 10 million gallons of fuel and reduces carbon dioxide emissions by 100,000 metric tons a year. A reduction of one mile per driver per day over one year can save UPS $50 million.
While different for every company, opportunities to make a difference abound. Oil and gas companies can look to lower their carbon emissions by innovating in areas like carbon capture, while manufacturing companies can retrofit equipment like long-lived boilers with renewable solutions. Across industries, companies can buy “green energy” from their utilities, and look at green bonds.
Boards need to ask themselves questions such as:
• How is climate change likely to affect operations and value creation in the foreseeable future?
• What stakeholder concerns should the company be addressing with its approach to dealing with and communicating about climate change issues?
• Should we add a chief sustainability officer?
• Should we review our energy transition throughout our company using both a political and regulatory lens?
• What climate-change-related goals, risks and opportunities should be disclosed in financial statements, and what metrics should be used?
Directors need to be informed and ready to be proactive on this issue, which impacts our companies on levels ranging from access to capital and talent to brand perception among customers. Now more than ever, investors, employees and consumers are all looking to support brands that are transparent about their vision, mission and values.
It is no longer an option to adopt a “wait and see” approach when it comes to climate; it is critical for companies to start their climate journeys, as it will be a critical part of board governance in 2021.
