2020 has made it clear that externalities can have a drastic impact on businesses and the economy. As consultants with over 20+ years of experience helping clients take action on climate, we’ve seen that companies with robust business resiliency and extensive scenario analyses have consistently been more prepared for unexpected crises including the 2008 recession and the pandemic. Companies that have committed to using CDP beyond disclosure and as management tool are able to future proof against external and internal risks. We have found the process of integrating climate change into business strategy and financial analysis very helpful to mitigate risk and prepare for resiliency.
How can you future-proof against the unexpected, whether it is emerging regulation, changes in technology, extreme weather events or customer expectations? CDP is your most valuable tool for risk assessment and management, and using your disclosure as an opportunity for scenario-planning is the best way to set yourself up for success.
1. Science-Based Targets (SBTs)
The best way to address risk is to take a rigorous, science-based approach to metrics tracking progress to make this risk tangible. Aligning with the Science Based Targets initiative (SBTi) provides a clearly defined path to reduce emissions in line with the Paris Agreement goals. The Biden Administration’s recent plan to reduce emissions by over 50% and a recent Executive Action requesting federal suppliers set SBTs have sent many companies scrambling, but the over 1,000 businesses that already committed to SBTs were already set up for success.
The SBTi allows you to create strategies and metrics that align with multiple scenarios. According to CDP data, 14% of companies are only performing scenario analysis using one scenario, exposing companies to fundamentally different but probable scenarios. Move past vague or arbitrary goals to achieve a low-carbon future as well as future-proof against increasing regulation and climate risk.
2. Stakeholder engagement
Another way to bring long-term risks into a short-term action plan is assessing stakeholder expectations. Comprehensive stakeholder engagement helps manage risk from the relationship management side. As priorities shift for investors, consumers, employees and governments, engaging with a wide spectrum of stakeholders creates a culture of awareness and action on climate. Managing stakeholder sentiment risk proactively is essential as stakeholders become more informed, educated and elevate their expectations for companies.
Additionally, more stakeholder groups are utilizing CDP’s Supplier Questionnaire to gain transparency into how your company is integrating climate strategy within the core of your business. Increased engagement with the disclosures benefits companies through improved relationships with customers and suppliers via collaboration and communication of climate efforts through reporting.
3. Monetizing risk
CFOs and legal departments acknowledge climate risk as a motivating factor, but initiatives tend to move at a much slower pace because of the long-term nature of the risk. It is hard to make a case for action when the risk doesn’t feel tangible. In fact, over a quarter of companies disclosing to CDP do not identify climate-related risks with the potential to financially or strategically impact business, a significant oversight that leaves them vulnerable. Understanding the risks and their direct impact on the bottom line is essential. Calculating the financial implications of each relevant climate risk will help your company strategize how to mitigate the risk by determining potential investment costs, budgeting for the future and understanding the financial impacts of inaction. Elevate your disclosure from the awareness to the management level by undergoing a financial planning exercise that is specific to your company.
4. Executive compensation
Finally, ensure action on these risks. How do you motivate executives and departments that are rewarded on short-term timelines for long-term goals? The first step is breaking down your long-term goals into short-term intervals that you can track against. Then, tying executive compensation and performance reviews to these goals ensures that sustainability is prioritized at a C-suite level. Create a sense of urgency from an executive level to minimize risk of inaction and ensure that you’re tracking toward long-term goals.
Assessing your risks and making them tangible isn’t a hypothetical exercise; it could be the most important thing you do to protect your business against future risk. Invest in your sustainability and ESG program by setting SBTs, complete a full stakeholder engagement, monetize your risks and tie climate goals to executive compensation. This will ensure that you future-proof your company against any potential risks and make tangible progress towards a low-carbon future.
Sustainable Business Consulting, a women-owned, silver climate change consultancy solutions provider in the US, helps companies to develop programs, build capacity and connect companies to the global sustainability movement. We support companies with external reporting programs like CDP and can help companies to collect and calculate data, ensure their responses are recorded accurately and meet supplier requirements. We are proud to be a certified B Corporation, women-owned, and majority people of color.