Climate Change: How concerned should Boards be?
The topic for the most recent Directors’ Networking Group event was Climate Change; the speaker was Datin Seri Sunita Rajakumar, Chairman, Climate Governance Malaysia. Describing climate change as a crisis informed by science, she said that it was difficult today for any member of the Board to claim to be unaware of it. “Just five decades ago, it was okay to claim that the only responsibility of business was to increase profits,” she said, quoting Milton Friedman. Stakeholders were not recognised then; there were just shareholders to be accountable to.
But it has become increasingly clear that Earth cannot sustain both population growth and economic growth, and cannot replenish itself as quickly as it used to. There are implications to this. The extraction of resources from the environment and the pollution of the environment is leading to consequences such as global warming; global warming leads to extreme weather events; extreme weather events lead to loss of life and damage to property. It has also given rise to another factor – transition risk – as governments pivot to make policies and decisions that make it harder for businesses to continue extracting from the environment.
“The more greenhouse gases are emitted into the environment, the warmer the temperature,” she said. “As the temperature increases, this causes extreme weather events.” Many parts of the world are already experiencing unusually high temperatures and ‘heat stress’ days when it is dangerous to work outdoors because of the risk of heat stroke. This in turn affects the economy and livelihoods, and can negatively impact businesses. Warmer air also holds more water, causing heavier rainfall that may then cause landslides, flash floods, property damage and loss of life. Amid all this disruption, business as usual will be difficult; the supply chain will be affected and life will be generally disrupted.
It will be difficult to get back to ‘business as usual.’ Businesses require long-term solutions that do not cost too much, and significant levels of decarbonisation are needed. Business activities are currently still fuel-intensive; some companies have already begun to pay carbon taxes, but by 2030, Sunita said, it will be necessary to have a carbon price of US$160 per tonne. “At this price, businesses will be out of profit,” she said, adding that when a country is serious about decarbonising, carbon prices will be high. Carbon is currently not priced in even when countries outsource their carbon-intensive activities to other countries.
There is a need to look at the DNA of business strategy, and determine if the way we do business is part of the problem. Recognising that there are now direct and indirect consequences of climate change that pose serious risk, businesses are now trying to embed sustainability into their strategy. They are looking to frameworks for reporting like GRI to support them in their efforts while still having to deal with stakeholder perceptions that they are “saying one thing but doing another.” Perceptions like these could lead to allegations of greenwashing that could be detrimental to the firm’s reputation and put the Board and management in an unfavourable light.
An orderly transition to more environmentally-friendly practices is both urgent and necessary; it is the responsibility of the Board to come up with the solutions for this, and to help others make the transition. But with so many factors to consider, and the criticality of the situation, some elements are missing, such as how to access green energy to power the transition, and what can be used as environmentally-friendly substitutes. “A lot of people are working on it,” Sunita said. “Many businesses are already stepping up.” Locally, the Ministry of Finance has engaged the World bank to look into how to price carbon emissions.
Reporting was also becoming more stringent, with the government considering how to price heavy emitters. But overall awareness of the issue was not high, although some CEOs were beginning to see an early mover advantage to managing the risks related to climate change. Despite the criticality of the situation, many businesses were looking for solutions, and it was actually a blue ocean when it comes to climate mitigation, Sunita said. Companies may want to incorporate circularity into their consumption of resources, she suggested, and use renewable energy such as solar power for their electricity needs.
She added that the government could mandate solar power for all public buildings and rooftops; many entrepreneurs were already working on this premise, and developing solutions. Discussing ways of increasing awareness, she said that pricing it appropriately was a good place to start because “When energy costs more, you will start to think about saving money.” People also need to have incentives to change, a member of the audience opined. Despite the difficulties of coming to grips with the different issues surrounding these problems, many firms were finding opportunities amid the adversity. Indeed, many new businesses were already leveraging climate problems to do business.
She cited the example of a company which owns no power-producing assets but is considered a virtual power producer. “They are asset-light but they manage power; they operate a virtual power plant,” she explained. “If one of the buildings which they manage power for is short of power, the virtual power producer reduces the power consumption of other buildings it manages that don’t require so much, and sells the power to the customers who need it.”
Upcoming regulations may look daunting, but it is not the intention of the government to “put businesses out of business” by imposing unrealistic conditions. Instead, they want businesses to transition to other forms of energy which are renewable because ultimately, they want businesses to be sustainable.