We are on the cusp of a momentous change, which offers an opportunity to drive value for companies to innovate business models and be a better steward for the environment. -His Royal Highness The Prince of WalesIn 2021, with ESG and climate among the focal points of Larry Fink's annual letter to CEOs, the Davos agenda, and a new president taking office in the United States, certain questions arose for boards:
- What will the new U.S. Executive Orders look like?
- Do companies have to bind their ESG initiatives to global treaties, or can they, in the words of one board member, 'do [their] own thing'?
Meanwhile, sizable gaps still exist between awareness of climate issues and actual implementation of solutions, as well as an urgency among companies to move the needle.
In February, Betsy Atkins ' a board member with Wynn Resorts, Volvo Cars, and SL Green Realty ' moderated a Diligent online discussion to probe the issues on board directors' minds. Speakers included leaders from around the world: His Royal Highness The Prince of Wales; Jenny Johnson, President and CEO, Franklin Templeton; Mike Wirth, Chairman and CEO, Chevron; and Carmine Di Sibio, Global Chairman and CEO, EY.
Much of the discussion focused on climate-based challenges: What are the main hurdles and complications speakers been hearing and seeing? How can companies ' and the boards who provide vital oversight ' begin to tackle these challenges?
Speakers discussed the complexities and frustrations of climate frameworks, disclosures and reporting, investor communications, and board oversight. But they also examined another side of the issue: opportunities related to climate.
'This is not just about cost and risk, it is about an exciting transformative journey,' said His Royal Highness The Prince of Wales. 'Understanding how individual companies can adapt and catalyze change can be a value driver for future growth. This is also not about risk management on the sidelines. It is about capturing new markets, leading innovation, and restoring balance between nature, people, and our planet.'
Moreover, with the future of our planet at stake, participation in these opportunities isn't optional; it's imperative.
'As we move sustainability from niche to norm, the global board director community has an absolutely crucial responsibility to catalyze this transformational change,' His Royal Highness continued.
The takeaway for boards? Rather than viewing the Task Force for Climate-Related Financial Disclosures (TCFD), the net zero goals of the Paris Agreement, and other climate measures, regulations, and obligations as burdens, consider them opportunities to make your company stronger, more sustainable, and more attractive to talent, capital, and customers.
Is the escalating focus on climate because clients want it, because of regulations pushing for it, or because it is good business? It is all of these things. -Jenny Johnson, President and CEO, Franklin Templeton
Climate as a Capital Advantage
Despite climate change's position as a global priority, too many financial departments fail to recognize climate initiatives' potential for ROI. Climate may increasingly be a regulatory obligation and great for goodwill and PR, but where's the value-add in areas like on-the-ground operations or financing a long-term or revolving loan?
Even now, many board members share a common question: How can they convince skeptics that attention to climate is good for the bottom line?
As a leader in socially responsible investing, as well as being one of the world's largest ESG investors, Franklin Templeton is aptly positioned to offer answers. In Climate and Boards Part 1: Navigating the Challenges, President and CEO Jenny Johnson explained how the company's portfolio managers evaluate opportunities across jurisdictions and sectors. How are they managing climate-related risk? What are their climate-related goals, and how have they progressed toward these outcomes?
Climate-focused policies are simply good for business. Johnson shared Franklin Templeton's own story as proof. Through efforts like using biofuels and 'green water' at data centers, the company reduced its carbon footprint by 27% over the last five years.
Furthermore, a lower carbon footprint, commitment to the Science-Based Targets initiative, or a higher ESG rating by MSCI or Sustainalytics makes a company a much more attractive prospect for investment.
Before COVID-19, Johnson reflected, she found focus on climate among Franklin Templeton's institutional clients worldwide to be mixed, with the EU leading the way. A year later, 'I was astonished,' she said. 'Pretty much every institutional client in the U.S. wanted to know what we were doing about climate. Now you see a lot more conversations in Asia, with places like Hong Kong, Malaysia, and Singapore that are really trying to replicate the kind of work that's been done in the EU.'
'I think you're seeing more and more impact funds coming out which will be specifically targeted to climate change efforts,' she said, citing as one example the EU's plans for green bonds. Such efforts cater to both established institutional powerhouses and rising individual investors.
'Let's face it, anybody here who has kids knows how passionate they are about climate,' Johnson told the virtual audiences. 'I think it's something like 54% of millennials say that they think that climate is a very important part of their investment strategy.'
In conclusion, Johnson said, 'Companies that want access to capital will have to stay on top of this, and capital will become more costly for companies that don't stay on top of these things.'
Climate as an Innovation Advantage
Climate solutions can also position a company as an innovator ' especially in a sector that operates at the heart of the climate landscape. Chevron Chairman and CEO Mike Wirth shared his perspectives.
For over 140 years, the quest for more reliable, economical, and sustainable ways to keep the lights on, transportation moving, and quality of life improving has driven the energy industry: from whale oil, kerosene, and coal to gas, solar, wind, and beyond. Innovation is 'the history of our industry,' Wirth said.
Today, he said, 'Demand has grown, expectations have evolved, technology has evolved, and the energy system now is much larger and much more diverse.' In response to these conditions, companies in the energy sector have been following three paths: stick with oil and gas, go full-scale into new technologies, or' in the case of Chevron ' concurrently work to reduce emissions in the existing energy system while moving forward toward a new way of doing things.
It's a fine balancing act involving the realities of a world still heavily dependent on oil and gas, an industry with very long product life cycles, and the imperative of the Paris Agreement's net zero goals. 'You're going to need to get to carbon negative where you're actually taking carbon out of the system,' Wirth said.
'We absolutely recognize that the world has committed to a lower carbon energy system, and bringing new solutions to the energy equation is probably the most promising way to use technology to reduce emissions,' he added.
Despite the world's many challenges, now is a good time for developing these new innovations. 'The digital revolution has made possible things that we couldn't have imagined just a few years ago, and frankly COVID-19 has accelerated the use of digital technology,' Wirth said.
He cited examples from Chevron and his industry, like augmented reality that can bring a subject matter expert from halfway around the world onto an offshore platform for virtual troubleshooting and maintenance.
Chevron's efforts to nurture and accelerate this innovation extend beyond its own R&D efforts.
'We really try to be in touch with some of the small creative pockets of innovation around the world and try to support them with investment or by becoming a customer in areas where we can help them scale.'
As one example, he said, 'We've got a big venture capital fund that invests in novel and new ideas and the energy technology space: everything from electric vehicles and storage technology to direct air carbon capture that takes carbon dioxide out of the air in a more efficient way. There's a tremendous explosion of innovation that's underway. Some won't pan out but some will, which is why we invest across the wide range of these technologies and ideas.'
Such investments will be critical to solving the climate crisis, according to EY Global Chairman and CEO Carmine Di Sibio. 'I personally don't believe that we can get there unless we have a lot of innovation in the energy sector and a lot of innovation across the board—new technologies and new ways of doing things funded by venture capital and private equity money.'
You can go negative or you can go neutral, but the idea is that you want to make sure that you're actually reducing your emissions versus just buying offsets. -Carmine Di Sibio, Global Chairman and CEO, EY
Climate as a Strategic Advantage
'Climate has to be a part of the overall strategy no matter what sector you're in,' Di Sibio declared.
EY achieved carbon neutral status in 2020. Di Sibio, like Johnson, cited pressures by the younger generations: 'They ask us all the time: As part of EY's overall strategy, where is climate? Where are the sustainability goals?'
As with the investor community, employees and customers are increasingly demanding action on climate, and companies will need to respond. Di Sibio cited the emergence of a 'nutrition label' for the carbon footprints of consumer products.
Companies will need to determine what to disclose and how to balance potential conflicts between the '''E' and the '''S' in ESG ' for instance, if a reduction in the usage of a certain energy source, like coal, has devastating consequences on jobs and local economies in the communities where a company operates.
Anticipate 'a lot of conversations,' said Di Sibio, and make these conversations a staple of board discussions.
'No matter what sector you're in, it's pretty clear now if your strategy doesn't incorporate sustainability, I don't think you have a valid strategy going forward,' Di Sibio said. 'It's something that has to be part of your business and how you think about your business ' the demand side, the supply side in terms of things like supply chains and how you produce a product. It has to be embedded in everything you do.'
'I do think moving forward, teams and individuals are going to be evaluated around what they're doing from that perspective.'
This is already happening at Chevron. According to Wirth, compensation for all 40,000 employees ' including his own ' is linked to emissions goals, and climate is very much a priority of board discussions.
'Our board continuously assesses climate issues as part of reviewing our business strategy, and we've got a very diverse board in terms of expertise,' he said. 'They challenge one another and they challenge management continuously. Climate is an issue that is so fundamental to our business it is part of virtually every one of our board meetings.'
In Conclusion: The Boards' Role in Seizing the Climate Opportunity
The escalating focus on climate has spurred some board members to wonder: Will sustainability become more important than economical gain in board rooms?
According to Di Sibio, it's all connected. 'Progress on climate can't be achieved unless we are all behind it: unless business is behind it, unless the overall economy is behind it.' And here, boards play a pivotal role: staying on top of opportunities to make a business-and planet-transforming impact and communicating with management to make them a reality. Take the Science-Based Targets initiative, for example.
'Only 2.5% of global companies have really signed up for this,' Di Sibio said. 'It's growing, but we need more companies to sign up. As a board member, where is your company in terms of that?'
Catch up in Climate and Boards Part 1: Navigating the Challenges.
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