No One Gets a Pass on Climate Change: How to Start Sharing Your Story Now

Written By Matthew Novak, Senior Consultant

July 14, 2021

News about climate change is everywhere. Stretching from record-breaking heatwaves to corporate commitments toward lowering carbon footprints and international summits on how countries can address this border-defying megatrend. The climate change crisis has dominated headlines for decades. Therefore, you can bet that your customers are paying close attention.  

But customers are not the only interested party. Long-term large investors are keen to look deeper at climate issues, too. They want to understand what companies are doing that could adversely affect their portfolios in the years and decades ahead. As institutions work to manage the risk climate change poses to their portfolios, companies of all sizes will be under increased pressure to disclose emission reduction targets and to mitigate their own climate risk.

Investors and regulators are looking right at you.

Once upon a time, measuring carbon footprint and mitigating climate change was considered a fad for companies in tree-hugging U.S. states. That is no longer the case. It is a global issue, and every company is on the hook – both from an equity valuation and a regulatory compliance perspective.

Investor Pressure and Engagement

The vast majority of the largest companies in the world already have ambitious emissions reduction targets based on years of compiled emissions data. In addition, many are creating robust strategies to integrate climate change into their operations and that of their value chain. And some are actively developing technologies and processes that will shift companies to a carbon-neutral footprint. As companies make strides in their targets and strategies, investor pressure will quickly turn to smaller companies.

BlackRock is one of the most vocal on pressuring portfolio companies of all sizes to understand their climate risks, but they are hardly alone. Virtually every large asset manager and institutional investor, from State Street and Vanguard to JPMorgan and Morgan Stanley, have started engaging with companies that lag behind on disclosing how they manage these risks.

Regulatory Landscape

The US Securities and Exchange Commission (SEC) is stepping up climate change-related ESG disclosure requirements, too. A public comment period recently ended with expected decisions in the latter half of 2021. Also, the European Union (EU) is developing strict ESG disclosure requirements, again with climate change risk being a top priority. And other global regulatory bodies in places like the UK and India are paying more attention to corporate climate risk disclosures with each passing day.

No matter your size or industry, you do not get a pass when it comes to climate change. The risks of climate change must be integrated into your business model and sooner rather than later. Or you will face backlash from consumers, the Street, and regulators alike.

5 Steps for Jump-Starting Your Climate Change Strategy

If you are new to climate change reporting, many existing guidelines can help you get up to speed quickly. Leveraging these resources is the key to defining the salient climate change risks specific to your business and then developing an action plan for better managing and mitigating those risks.

Here’s how to get started:

  1. Assess your climate risks.
    • To better manage and mitigate climate change risks, businesses must first define the salient climate change risks specific to their organizations. Salient climate change threats are those risks that could have the most substantive impact on your company. Remember, threats stemming from climate change go beyond evaluating your company’s geographical footprint in coastal cities like Miami and New Orleans that are at greater risk of intensified hurricanes and coastal waters rising. It also includes assessing your contributions to climate change through greenhouse gas (GHG) emissions in a fast-changing regulatory environment.
    • Overall, salient climate risk can be divided into two main categories, physical and transition risks, and then broken down further from there.
      • Physical risks encompass risks associated with rising sea-levels and natural disasters, including the intensity of hurricanes, flooding, and wildfires rising.
      • Transition risks relate to the regulatory, policy, legal, market, and reputational risks associated with climate change. Examples include a government entity putting a price on carbon or the company receiving bad press related to its impact on climate change, leading to a negative impact on the company’s reputation in the eyes of an increasingly eco-conscious consumer base.
    • Assessing the types of climate risks most salient to your organization helps you understand where you should be focusing your efforts in managing these risks. The more you can focus on the big picture, the better positioned you will be to mitigate all involved risks.
  2. Align with a framework.
    • A framework can help guide your development and adoption of a decarbonization and climate risk strategy. The Task Force for Climate-related Financial Disclosures (TCFD) and CDP are two main frameworks for this purpose. These frameworks include energy and emission metrics, targets, climate risks, and governance structures. While strategy development relies on internal buy-in and operational understanding, the frameworks are a starting point to better understand investors and stakeholder expectations for external reporting.
  3. Calculate your emissions.
    • The Greenhouse Gas Protocol (GHG Protocol) Corporate Standard is the de facto global standard for companies’ inventory and report emissions. The GHG Protocol requires companies to track and report direct Scope 1 and indirect Scope 2 emissions. In addition, while not required, companies are encouraged to report Scope 3 emissions. Other inventorying standards include The Climate Registry and the EPA Center for Climate Leadership.
    • Understanding Scopes
      • Greenhouse gas emissions fall into three scopes:
        • Scope 1: Direct emissions from owned or operated sources including:
          • Generated electricity, heat, and steam
          • Physical or chemical processing
          • Mobile combustion resulting from company-owned transportation
          • Fugitive emissions that result from releases, such as equipment leaks
        • Scope 2:  Indirect emissions from purchased electricity, heat, and steam
        • Scope 3: All other indirect emissions, which could include any of the following for your specific company:
          • Purchased goods and services
          • Capital goods
          • Fuel- and energy-related activities not included in Scope 1 or Scope 2
          • Upstream transportation and distribution
          • Waste generated in operations
          • Business travel
          • Employee commuting
          • Upstream leased assets
          • Downstream transportation and distribution
          • Processing of sold products
          • Use of sold products
          • End-of-life treatment of sold products
          • Downstream leased assets
          • Franchises
          • Investments
    • The scopes relate to who “owns” the GHG emissions released into the atmosphere. And to understand which emissions fall into which scope, it’s crucial to decide on certain boundaries so that relevant emissions are calculated. Still, emissions not pertinent to your company don’t count against you.
    • The GHG Protocol provides guidance for this decision by breaking it into three categories: equity shares, financial control, and operational control. Very few companies opt for equity shares, which relates to the company’s percentage ownership of an operation. Instead, most companies use one of the control approaches: financial or operational.
      • Financial control of an operation means that the organization can direct the financial and operating policies of the operation to gain economic benefits from its activities.
      • Operational control means that the organization or one of its subsidiaries has the full authority to introduce and implement its operating policies at the operation.
    • Choosing which approach will dictate what specific facilities to consider in your GHG inventory. You may want to see what method your peers are using to help decide which is right for you.
    • Doing the Math
      • Once you have divided emissions into the appropriate scopes, it’s time to add things up. Emissions are reported in metric tons of carbon dioxide equivalent (tCO2e). But the data you compile won’t be in those units, so it will have to be converted using emission factors and Global Warming Potentials. Those factors can be found within the IPCC website and government websites such as the U.S. EPA. Once the conversions are completed, you add the figures to provide a picture into your organization’s total scope 1, 2, and 3 emissions.
  4. Set appropriate targets.
    • When you have a handle on the quantity of emissions your company is generating, it is time to figure out how to reduce them. Indeed, the whole point in tracking and reporting GHG emissions is to set aggressive, yet reachable, targets to lower your carbon footprint.
    • Again, you have choices in how you go about this. One of the premier programs that help companies set appropriate targets is the Science-Based Targets Initiative (SBTi). The SBTi is a partnership between several organizations that develops best practice emissions reductions based on the latest research. Because of the rigor of the initiative, the process includes signing a commitment, getting targets approved, and communicating the targets externally, all of which can take a couple of years.
  5. Look to the future with a climate scenario analysis.
    • To fully understand the potential impact of climate change on your organization, you need to analyze possible future scenarios. To do this, start with an end goal, such as the commonly cited 2-degree scenario, then work your way backward. Essentially, the 2-degree scenario posits the climate risks to a company should the world meet the Paris Agreement commitments to limit global warming to two degrees above pre-industrial levels. Current estimates have the world hitting more than four degrees above pre-industrial levels by the end of this century.
    • Once the scenarios are decided, the objective is to understand how your company could be impacted by the salient climate risks involved in achieving that scenario. For example, in the 2-degree scenario, there will still be sea-level rise and increased intensity of natural disasters, which will impact business. In addition, to achieve the Paris Agreement commitments, there will need to be policy and regulatory changes, such as putting a price on carbon, that will impact every organization with a carbon footprint.
    • Like any scenario analysis, the exercise does not provide a perfect depiction of the future. But it can pinpoint areas within the organization that could be most vulnerable to climate risk and provide a roadmap to address those areas better going forward.

Climate change matters. How you tell your story matters, too.

With its wide-reaching implications for every company and person on earth, climate change is one of the biggest megatrends of the 21st century, and rightly so. Your business must begin addressing it and understanding both how your organization impacts the climate, and how climate change impacts your business in return. While the task can seem daunting, putting it on hold is no longer an option. When you leverage existing frameworks and resources, you can make strides quickly. And we are here to help as well. Reach out to learn more about climate risk disclosure and how to make it weave into your financial narrative and investor relations strategy.

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