Preparing companies for climate change
There might still be troglodytes in boardrooms who are unaware of climate change, but the vast majority should by now be at least aware of what it is. However, it is safe to say that most of that majority remains unaware of how their companies should be responding to it. There is a vast amount of guidance on the subject issued by a plethora of organisations. The launch of the International Sustainability Standards Board (ISSB) at CoP26 by the IFRS Foundation seeks to draw this diversity of advice together with a common set of standards that will look at the full environmental, social and governance (ESG) space. Unlike IFRS, that has to date been accepted by about 120 countries but not by the USA, the new Board has the support of even that country. Therefore, the probability that its standards will become mandatory in a few years’ time in India, is high. This column provides high level guidance to boards of companies to prepare for that day.
Businesses will be impacted on various fronts. They will need the help of specialised agencies to assess the risks involved
ISSB has already issued for comment its first prototype (draft) standard for Climate Related disclosures. In addition, it has produced detailed draft guidance for such disclosures for about 60 industries and commercial activities. It proposes to use existing standards from various organisations to craft its standards that will cover the full ESG spectrum. It already has a draft standard under development on Labour. Some of the organisations that will provide it with inputs include the Sustainability Accounting Standards Board, the Global Reporting Initiative and the Task Force on Climate Related Financial Disclosures.
There are two ways to consider the impact of climate change (CC) on a company: the impact that the climate will have on it and the impact that the company will have on the climate (and the environment). The former is a risk. The latter is both, a responsibility and an opportunity.
The impact of CC on a company can be assessed under the following heads:
- Likely legal and policy changes introduced by governments to penalise negative impacts (carbon taxes) and to encourage positive behaviour (carbon credits).
- Technological changes that may make obsolete services, products or production processes.
- Changes to the markets that the company serves.
- Will the company’s reputation be impaired or enhanced if it continues to do what it is doing?
- Physical risks. Will business locations remain operational due to the impact of CC? There could be acute events (storms, drought) that damage facilities or there could be chronic problems (sea level rise, ambient temperature or humidity changes) that determine the response.
The above changes could, in some cases, even prove beneficial. But there is no doubt that in the majority of cases they will result in down-side risks requiring significant financial investment to mitigate.
Companies would need to assess the above-listed risks also for their stakeholders, especially their critical vendors and customers.
Should companies off-load negative-impact activities onto vendors? Should companies deal with vendors and customers who it knows do not respect the environment or are the root cause of greenhouse gas generation?
The risks would need to be reported to the company’s stakeholders stating what mitigation measures are proposed to deal with them.
The impact of the company on the environment is the flip side of the above. Obviously, managements are expected to mitigate all adverse impact with changes in processes, improved use of resources, etc. They are also expected to increase any positive impacts of their activities. There are several dimensions to consider:
The first is the ethical dimension. Should companies off-load negative-impact activities onto vendors? Should companies deal with vendors and customers who it knows do not respect the environment or are the root cause of greenhouse gas generation?
The second dimension is opportunities. Can the company provide products or services to its current and potential customers that will help them to:
- Improve the efficiency with which they use resources, especially energy.
- Widen the choice of sources and types of energy that they use.
- Develop new products and services to, in turn, address the needs of their customers in the context of CC.
- Develop new markets for them to address.
- Improve their resilience to CC.
The third dimension is reporting the company’s impact on the climate. The broad categories into which such reporting can be divided are:
- Governance. How is the company’s impact on the climate monitored and acted-upon in the governance framework, i.e., by the board and its committees?
- How has CC been incorporated into the company’s strategy? This will include how the company proposes to address the risks it is exposed to because of CC and seize the opportunities that CC presents to it.
- How are the risks being managed at a more granular level?
- What metrics does the board and management use for measuring the company’s impact on the climate and the risks it faces? It shall disclose those.
There are no businesses that will remain unaffected by CC. Large corporations will have the advantage of size in identifying their risks and opportunities. But even they will need the support of specialised agencies such as The Energy Resources Institute (TERI) to look into the middle and far distance that the exercise involves. For example, some projections forecast a three-meter rise in sea levels in the Gulf of Khambhat by mid-century. If that were to happen, industries in Surat, Broach and Khambhat would need to shift. Is such a prediction dependable? What is the latest science telling us? Few companies have the knowledge to do this on their own. So also, with what governments are likely to do in response to climate change; it is thinktanks that not only engage with governments but are the source of the latter’s actions
Any business considering a significant investment in Mumbai or those with critical operations in that city need to start planning their responses now
Smaller businesses will have to rely on government advice, their own observations, advice from industry associations, observing the behaviour of their large neighbours and other such inputs. Some local bodies might recall that the Municipal commissioner of Mumbai, six months ago, warned that large portions of his city will be submerged by the sea within the next 30 years. Any business considering a significant investment in Mumbai or those with critical operations in that city need to start planning their responses now. CC is now upon us; it is no longer a distant concern best left to time to handle.
(Nawshir Mirza is on the governing council of TERI, is an independent director on the board of Thermax and has served on the board of Tata companies for several years (Views are personal)