The financial and reputational risks associated with climate change are on the rise. Companies that fail to account for climate-related risk are not only a threat to the environment, they are a threat to themselves.
First, seize this moment to decarbonize, in particular by prioritizing the retirement of economically marginal, carbon-intensive assets. Second, take a comprehensive approach to building resilience. Companies have fresh opportunities to make their operations more resilient and more sustainable as they experiment with shorter supply chains, more energy efficient manufacturing, videoconferencing instead of business travel, and increased digitization of sales and marketing.
Managing Climate Risk
Surviving impacts from our climate crisis requires that businesses actively manage their climate-related risks… including business disruptions due to extreme weather events, tightening environmental regulations, and evolving consumer demands. Companies should be working on and deploying climate-related risk strategies and crisis plans – and that requires increased climate competence throughout the organization (including in the C-suite).
Climate-related financial and risk information should be communicated to all stakeholders. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) has developed voluntary risk disclosures for use by companies in four key areas: governance; strategy; risk management; and metrics and targets. Following these recommendations ensures that companies are meeting industry standards and will help them to avoid legal, reputational and financial damage.
Scenario Planning
Scenario Planning develops multiple plausible futures. It can help organizations build more resilient plans, prepare for change and innovate. These futures are not forecasts, but they give insight as to what could occur. With insight, organizations can determine strategies to optimize their opportunities and mitigate their risks.
Scenario planning is a technique for visualizing potential futures which combines imagination with robust analysis. It’s key benefit is to outline the different ways in which the future might play out – especially valuable during times of extreme uncertainty like now. With those insights, we can strategize multiple ‘Plan Bs’ for many potential eventualities. Better decisions can be made today if we spend time imagining the potential outcomes of current trajectories.
Most of the skills required for successful scenario planning derive from systems thinking and design thinking – two different yet related skill sets that should be deployed side by side.
Systems thinking helps us to see the important relationships between diverse facets of complex systems. These diverse facets may not be readily visible, but become increasingly apparent as we work to understand more about unintended consequences (for example, urban design resulting in flooding in extreme weather due to the paving over of nature with impermeable materials, causing runoff that overwhelms storm sewers during downpours).
Each action described in a scenario must be thought through from every possible angle. Ask “What happens if we do ‘A’? What are the potential intended and unintended consequences?”
Creativity and imagination are capabilities we are all born with and use easily as children. Unfortunately our educational system and culture do not nurture them. If you activate your imagination constantly, you also activate your innate capacity to think, and imagine, in systems. Designers are taught to think this way and can make valuable additions to your scenario planning team.
It is impossible to create a resilient business without understanding the range of possible futures a company might have to deal with. Companies must understand the intersection of various possible futures and sustainability challenges, from climate to a truly circular economy. If you anticipate all the potential scenarios your organization might encounter as you develop your plans, you'll be far better prepared to act quickly and decisively when you're faced with a disruption.
Resilience
Our world is more fluid, unpredictable, less stable and more at risk than at any time since World War II. Resilient business strategies should be ingrained throughout your organization. Processes traditionally part of the sustainability agenda should be an integral part of your business model. Stand-alone sustainability practices should be replaced with resilient business strategies that embed sustainability within the operating system of your organization.
In the wake of the pandemic, businesses must build their future using resiliency strategies. Our metrics of economic value do business and society a disservice. It is time to abandon optimization as the default approach. We have removed slack in everything, from supply chains to airline schedules; and we are now living with the harsh consequences. Efficiency should be a core value of business. Relentless optimization should not.
Groupthink is not the way to achieve resilience. Resilience starts in the boardroom, and is much more likely to be successful if it integrates diversity (including experience and perspective). External advisory boards are an effective tool to help ensure that companies identify and prepare for unexpected events. The view from outside the company enables people to see the forest for the trees, and to make critical comments insiders might hesitate to articulate. Decision-making is also strengthened by the inclusion of representatives from all stakeholder segments.
Businesses cannot thrive within societies that are failing. Today, the social contract has proven inadequate in many countries because public services have not been resourced properly: the social and work agreements in place when our current social contracts were developed have largely been dismantled. New challenges (e.g. income inequality, a transition to a net-zero carbon economy, and an evolution of workplace protocols) must be addressed. The pandemic was an extreme test for the social safety net. It exposed the need to redefine the future of work, address the needs of workers throughout the organization, and improve access to 21st century skills development.
Investors will want to know whether a company can prove it is resilient. No business strategy can possibly succeed if it doesn’t account for the impacts of our climate crisis, supply chains subject to rapid disruption, and shifting political environments.
The world is learning a painful lesson about the damage that can come from a lack of resilience. Transformative events on the scale of the pandemic often reveal the need to make structural changes. If we prioritize resilience, we can effectively reboot without going back to our previous paradigm, and at the same time prepare for uncertain events on the horizon.
Supply Chains
In recent decades businesses have focused on maximizing efficiency. To save costs and streamline operations, manufacturers have limited themselves to a handful of suppliers in a few countries. These global supply chains created savings and boosted profits when all was running smoothly. But the pandemic has disrupted all that… and our climate crisis guarantees ongoing disruptions.
Markets will benefit from an adjustment to supply chains by selecting suppliers that are closer to home. Resilience will outperform efficiency through the cultivation of multiple suppliers (both near and far).
By digitizing other processes, companies can harness the opportunities that come from economies of knowledge, compensating for those lost in scale.
Transparency
Increased scrutiny demands transparency and honest accounting of environmental impacts. This should include proactive disclosure of current environmental effects; measures taken to reduce these effects; and policies to increase sustainability. A company that is upfront about its environmental impacts, as well as disclosing the countermeasures it has put in place, can demonstrate its commitment to sustainability and improve its relationships with all stakeholders… and minimize the risk of adverse press attention.
“New Abnormal” Low/No Carbon Business Models
A crisis is an opportunity to rethink processes and procedures rather than just patch up business as usual. In the aftermath of the pandemic, businesses should be relaunched leveraging green technology, renewable energy, cradle to cradle design and natural biomimetic infrastructure to develop more efficient and resilient low-carbon business models.
While the movement towards a multi-stakeholder approach to business has increased in recent years, our climate crisis creates an opportunity for a conscious mindset change. That is, an opportunity to upskill for climate literacy, and upgrade company cultures to include climate resilience. Responsible business leaders will recognize this moment as an opportunity to use a societal lens that contributes to stability and makes everyone better off in the long term.
Bob, great article. Yes, time is past due for holistic corporate long-term strategy instead of myopic quarter-to-quarter planning that maximizes dividends and share buy-back at the expense of R&D and resiliency.