Climate in the boardroom: a clear disconnect between what directors say and do

As pressure from all stakeholders moves climate change up the boardroom and executive agenda, there is an urgent need for directors and business leaders in SA and globally to view climate risks and opportunities as more than a reporting or disclosure matter. 

Catastrophic losses caused by extreme weather cost the global economy $280bn in 2021, and the number and scale of these events continue to grow each year, leading to it being recognised as one of the top risks to the global economy by the World Economic Forum’s Global Risk Report over every time horizon.

Despite this, most corporates have been found to be lagging. A report, “Changing the Climate in the Boardroom”, which looks at what boards around the world are currently doing, found that there is a clear disconnect between what board members say about the importance of climate change and what they are actually doing.  Three-quarters understand that climate change is very important to the strategic success of their companies.  However, 43% indicated their companies do not have clear targets for reducing carbon emissions.

In SA the annual Trialogue Business in Society Handbook found that corporate social investment (CSI) initiatives related to the environment were supported by only 17% of SA companies, with an average of 4% of total CSI spend allocated to these initiatives in 2021. While greenhouse gas emissions are now widely acknowledged, most companies do not understand their dependencies on ecosystems or how they affect biodiversity in turn. The average CSI spend on water conservation and wetlands management was just 13% of CSI spend on the environment (an already small number), down from 19% in 2020, which is surprising considering the country’s water scarcity concerns.

As a developing country, SA is particularly vulnerable to the effects of climate change and multiple sectors underpinning the economy are susceptible, including mining, agriculture and transport. The science shows that parts of SA are likely to warm at twice the global rate and that our water-stressed country is likely to become more arid in the west, with an increased risk of extreme biodiversity loss and degradation of critical catchment areas and an increased risk of heat stress. If we do not adapt or mitigate the risks we face, it could have a devastating effect on the economy and an already impoverished and unequal society.

As highlighted by President Cyril Ramaphosa in his recent state of the nation address, at COP26 SA signed a historic R131bn just-transition financing package to assist in the shift from our coal-based energy system to a more renewable energy-based system. This will undoubtedly have an effect on business and it is therefore critical that companies understand their climate-risk factors, as well as opportunities arising from climate change.

One of the risks associated with the move to a low-carbon economy is transition risk, which includes risks associated with regulatory change, consumer preferences and stranded assets. A failure on the part of companies to take this risk into account can result in reduced creditworthiness, which negatively affects the ability to attract investment and secure long-term loans, and appeal to insurers, among others.

Another type of climate-change risk is physical risk. This includes the increased likelihood of extreme weather events such as floods, droughts and wildfires. Physical risks can result in interruptions in day-to-day business activity as well as a detrimental effect on supply chains, market position and the business’s overall value. Worth noting is that the vulnerable members of society are usually the ones most affected by physical risks — their jobs, livelihoods, and homes can be destroyed, which can lead to increased inequality and poverty, which could in turn lead to increased social unrest and crime.

Although climate-change risks are high, they can also create opportunities for companies and investors. Companies can become more resilient to the effects of climate change by focusing on their operations and supply chains. For example, they can focus on their resource efficiency, thereby reducing their operational costs. Innovation, such as in clean energy or low-carbon technologies, can lead to new products and services to either meet new customer or investor demand or to build resilience against climate change. Companies that respond to climate change through innovation and resilience often create competitive advantages relative to their peers.

Instead of simply reacting to the uncertainty of climate-change effects, companies that go beyond the response and are proactive about using their advantage to track new risks affecting their industry, shaping the correct strategic response and strengthening their agility and resilience, stand the chance of building an uncertainty advantage.

Critical to effectively mitigate the risks and realise the opportunities, directors and business leaders need to factor climate change into their deliberations about strategy, risk management and opportunities as part of their duty of care. Both the Companies Act and King IV corporate governance guide create a basis for the expectation that directors should have the necessary skill and experience to perform their duties, and that this should extend to a broad range of matters that could significantly affect an organisation’s ability to create value.

This has two implications for boards. Firstly, all directors should have a foundational understanding of climate change and other key environmental, social and governance (ESG) issues. Secondly, given the complexity associated with climate and biodiversity issues and growing expectations around disclosure, appropriate risk management and engagement with stakeholders, directors with specific experience should be recruited or developed. This is especially true for those directors serving on board committees with delegated responsibility for climate and other ESG issues.

As the final report on the “Independent Review on the Economics of Biodiversity”, led by Prof Sir Partha Dasgupta, reminds us, we are part of nature, not separate from it. If global leaders are serious about preventing the next pandemic, addressing the challenge of climate change and achieving an economic recovery that will help to deliver the sustainable development goals, they must acknowledge that our economies, livelihoods and wellbeing all depend on our most precious asset — nature.

As consumers, investors and professionals, we should continue to engage the corporate and investor sectors in our efforts to influence the redirection of financial flows as a powerful lever to release money for sustainable investments. At the same time, we should withdraw the resources that underpin environmentally, socially or economically harmful effects.

• Duff is a director at business consultancy Trialogue and Smith is executive head of business development at the World Wildlife Forum.