This could be the year of reckoning for climate change as politicians, investors and stakeholders-at-large are pushing for big change.

As a key ESG issue, directors need to come up the learning curve and understand the terms used to describe climate commitment, including the implications as well as the definitions.

To make informed business decisions with both fellow board members and management, directors must understand the different costs and tradeoffs of various climate commitments and how climate issues apply to their industry.

Larry Fink of BlackRock recommends and endorses the Task Force on Climate-Related Financial Disclosures as well as Sustainability Accounting Standards Board frameworks. Fink further highlighted his commitment to climate in his annual letter to CEOs, in which he discussed the opportunity of a transition to net zero emissions — an economy that emits no more carbon dioxide than it removes from the atmosphere.

Fink noted in his letter that in order to meet the Paris Agreement goal of containing global warming to less than 2 degrees Celsius above preindustrial averages by 2100, scientists say human-produced emissions must achieve net zero by mid-century. He called on all companies to “disclose a plan for how their business model will be compatible with a net-zero economy.”

BlackRock currently has $9 trillion in assets under management, making the investor highly influential among publicly traded companies.

Companies also should be sensitive to their stakeholders and be responsive to employees, customers, investors and communities, which are all deeply interested in corporate positions on climate.

In addition to institutional investors, millennial and Gen Z consumers and employees demanding more transparency, a new presidential administration is also prioritizing climate risk.

President Joe Biden has made addressing climate change one of his key initiatives for his first 90 days and has already appointed John Kerry as his climate czar. Biden has issued two executive orders addressing climate change policies, which include a moratorium on new oil and gas lease permits on federal lands and waters. He has rejoined the Paris Agreement and revoked the permit for the Keystone XL pipeline. Companies should expect more action and regulation to follow over the next four years of this administration.

There is also an increased pull for additional ESG disclosures and transparency around climate policies. Boards should anticipate climate as a priority from shareholders this year and be prepared to clarify their companies’ position on climate.

External ESG reporting gives your customers and employees insights into your brand’s mission, vision and values; it is an opportunity to tell your story and augment your brand “halo.”

Strong ESG reporting is also a positive when/if you are seeking funding either privately or on the public market. Investors will value a strong ESG stance, and you will be granted access to larger pools of stickier capital.

Making a difference

Do the research and consider how climate issues could be a business asset and accelerant rather than just an additional cost.

Here are some companies that are making notable progress in addressing climate risks:

IKEA

• Renewable or recycled materials in all plastic products by 2030.
• Phased out all single-use plastics from the global home furnishing range in 2020.
• More than 60% of IKEA products are composed of renewable materials.

Patagonia

• Company mission statement says, “We’re in business to save our home planet.”
• Launched its Common Threads Initiative, aimed at reducing consumption and environmental harm, in 2011. Patagonia joined with eBay to create a market for customers to trade items they no longer need. This helped Patagonia’s sales to increase 30% to $540 million. The company has since transformed this into a “worn wear” section of its stores, dedicated to used items.

UPS

• Created the On-Road Integrated Optimization and Navigation, or ORION, a complex algorithm that optimizes routes for drivers that will avoid left turns. Left turns have been shown to result in more idling, more accidents at intersections and more fuel use. ORION saves UPS 100 million miles annually and 10 million gallons of fuel annually, and it reduces carbon dioxide emissions by 100,000 metric tons. A reduction of 1 mile per driver per day over one year can save UPS $50 million.
• Committed $1 billion a year in operational and customer solutions with more efficient delivery routes that reduce emissions and reduce costs.

There are significant differences between real-economy companies and services-economy companies. ­Real-economy companies, such as oil and gas companies, have very significant challenges but are surprisingly ahead of many other industries on climate reporting because of the scrutiny they receive.

The typical carbon starting point for an oil and gas company is 60 million metric tons of carbon emitted a year. Compare that with a company like Amazon, which has retail, delivery fleets and miscellaneous services. Amazon’s starting point is 42 million metric tons of carbon a year. On the other hand, Microsoft starts at 16 million metric tons and has pledged to be carbon negative by 2030.

Services-economy companies are typically able to offset their emissions by purchasing carbon offset credits, and they have made some impressive achievements. For example, EY was carbon neutral in 2020, particularly because of a “COVID bump” that eliminated much of the carbon a services company like EY generates through air travel.

Oil and gas companies look to lower their carbon emission by innovating in areas such as carbon capture. Manufacturing companies can retrofit equipment like long-lived boilers with renewable solutions.

Additionally, companies can buy “green energy” utilities and look at green bonds, all of which contribute to their climate positioning.

Next steps

Here are some calls to action for the year of climate governance:

• Ask management to refine their strategy relative to climate issues.
• Develop a clear external and internal narrative on climate issues.
• Management and the board have to review, discuss and agree to any quantifiable climate commitments the company may make after understanding the costs of those commitments and the tradeoffs.
• Communicate a timeline for the climate journey to stakeholders.
• Companies need to actually begin the climate journey as part of a holistic approach to the overall company strategy — it is not enough to simply address climate once a year in an annual sustainability report.
• Consider hiring a chief sustainability officer.
• Review your company’s energy transition through both a political and regulatory lens.

Remember, every company will be asked what its position is on climate issues, and this is no longer just an EU topic. Assess your company’s readiness and have the information to disclose the company’s carbon footprint as a starting point.

Directors need to be informed and ready. Climate impacts our companies’ access to capital and talent.

Your company’s position on climate will also influence your brand perception. Now more than ever, consumers want 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 issues.

There is a common misconception that ESG is just for public companies. However, private companies would be well served to integrate ESG into their overall strategy. This initiative can set them apart from their peers.

Betsy Atkins is a three-time CEO and founder of Baja Corporation and author of Be Board Ready. Betsy is a corporate governance expert and is currently on the board of directors of Volvo Car Corporation, Wynn Resorts and SL Green Realty.

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