Climate-related business plans and reporting must go beyond checking boxes and focus on what matters

Despite a global pandemic and economic slowdown, we are still on track for a world that will be too warm to sustain life and business as we know it. It’s time for corporate leadership on climate. Companies should seize this challenge and focus on building resilience, which means creating both low-carbon and transition strategies that consider physical impacts. Investors and regulators are insisting that these plans be created and better communicated through climate-related financial disclosures.

In the rush to disclose net-zero and low-carbon strategies, companies should not forget that when we neglect physical climate impact our plans can be torpedoed — your low-carbon factory can’t work if it’s underwater! Shifting to a business resiliency mindset now also means embracing looming regulatory changes as an opportunity to reinvigorate traditional risk assessment tool kits, upskilling boards and creating business planning processes fit for our new climate-shaped economic reality.

Twenty-first-century business planning requires considering climate change at every turn. Even investors are now keen to know climate risks and your strategies to navigate them. In fact, some investors are already starting to blacklist companies that don’t have climate risk plans and disclosures in place. Legal & General Investment Management’s recent decision to divest from U.S. insurer AIG is just the start. Corporates who adjust their risk calculus and infuse their planning and risk processes with climate considerations will remain viable. Those who stall will be swept into action by mandatory regulations or left in the cold by investors. Climate is now so mainstream that even oil and gas investors are demanding credible disclosure of climate-related risks and how they are derived.

Both the G7 and G20 economies, alongside representatives from the World Bank and other key global financial institutions, have embraced the Task Force for Climate-related Financial Disclosures (TCFD) framework as the basis of forthcoming mandatory disclosures. This is more than lip-service. TCFD is climate focused, transparent, data-driven, and squarely focused on governance and strategic action. The United Kingdom is already set to adopt TCFD in the fall of 2021, American regulators are expected to propose TCFD-aligned requirements soon, and France is actively crafting next steps.

Decades of inaction, climate aversion and information gaps may cause some corporates, investors and financial market observers to worry about their ability to respond swiftly and effectively, but they shouldn’t be too concerned. Companies are often doing more than they think because climate-related risks and opportunities are really just core business risks and opportunities. Climate-related actions, like responding to market pressure to reduce carbon, or creating a strategy to prevent flood damage, may not be identified as climate related by corporate leaders. This means many are acting in the dark and higher level strategic actions are not being informed by climate considerations.

A recent pilot study by Manifest Climate with 14 companies from retail, telecommunications, mining and financial services, with a market capitalization of nearly $50 billion, found that all companies disclosed less than what they were doing to identify, understand and manage climate-related financial risk and opportunities. These findings are consistent with similar investigations by others. Companies across the board are not yet climate confident or competent, but they have the building blocks to get there. On average, companies reported more than a third less than what they were actually doing. The largest gap is on the disclosure of climate-related governance or oversight from boards and other levels of management.

Mandatory TCFD-aligned disclosure of climate-related financial risks is a rare case where regulation will do more than merely discipline or constrain businesses and markets. If leaders use this opportunity to infuse their existing systems with climate information and update their approach to governance, risk outlook and traditional business planning, they will usher in an era of greater foresight, transparency and predictability. In short order, we will see sharper corporate governance and better risk management.

We have long delayed action on climate because it is complex, stirs uncertainty and entrenched interests have generally prevailed. However, we are living and doing business in an environment of climate disruption and uncertainty. This stark new shift should expand our thinking and fast-track full and proper acknowledgment of climate as a core business consideration. Climate at the heart of business means moving beyond “checking boxes” and setting lofty but ungrounded targets that are akin to greenwashing. Businesses must adequately consider climate risk and opportunity at every turn. Stakeholders must push for decisions aligned with climate-related truths, decisive decarbonization strategies and plans for physical disruption. Businesses and investors now need strategies that consider data about the suite of transition and physical risks, and climate opportunities with the rigour applied to insights about inflation, interest rates, and currency fluctuations.