Climate Leadership: The Biggest Issue for Directors
New Zealand’s international commitments on reducing greenhouse gas emissions remain and there is renewed focus on action to make progress towards delivering these goals.
Why does it matter?
In 2024, carbon pricing through the New Zealand Emissions Trading Scheme seems likely to take on new importance.
This could see carbon pricing playing a pivotal role in incentivising organisations to reduce their emissions, along with measures to provide greater market certainty.
The focus is quickly moving beyond merely understanding your emissions profile and “knowing your number”, including information about suppliers and customers. Boards need to think both short and long-term and to strategise wisely by factoring in the organisation’s response to anticipated rises in carbon prices in years to come. Investment in emissions abatement needs to be considered because inaction risks higher future operational costs and a potential drop in competitiveness and productivity.
The importance of climate leadership by boards has never been more pressing. The world faces massive challenges in meeting the Paris Agreement goals, necessitating heightened urgency and action.
With escalating weather events, and regions still recovering from disasters such as the Auckland Anniversary Weekend floods and Cyclone Gabrielle, which have led to a combined national estimated cost of $3.5 billion in insurance claims, boards must continue to be resolute in preparedness.
In addition, climate change will impact beyond physical infrastructure or through supply chain disruptions. With the potential for more severe and more sustained droughts, impacts on the availability of water and its quality will become more evident. There will also be impacts on rural and urban land use, including through managed retreats.
All of this will affect bird and other animal life, trees, bush and forests. These wider impacts on nature will be increasingly important for boards to consider over the coming year and into the future.
Your board discussion for 2024
Directors should ensure the agenda includes:
- Carbon pricing and the Emissions Trading Scheme: How is your organisation assessing and managing the risks and opportunities arising from the New Zealand Emissions Trading Scheme and the potential rise in carbon prices? How is your board planning to proactively invest in emission reduction strategies?
- Weather event preparedness and risk mitigation: What measures should your board consider given the potential implications of weather events on organisational resilience? How can your organisation strengthen its resilience in the face of escalating climate-related challenges?
- Climate action narratives and reporting: How can directors actively shape the narrative, moving beyond compliance to demonstrate a genuine commitment to safeguarding the future of our planet? What steps can be taken to communicate this commitment effectively within the organisation?
- Downstream climate change impacts: What steps are being taken to understand the impact of climate change on water availability and land use? What are the implications for your business/organisation of these wider natural environment impacts?
Board decisions for 2024
- Assess your company’s or organisation’s greenhouse gas emissions intensity and the potential savings through emission reductions if the carbon price were to fluctuate.
- Agree on the three highest risks from climate change disruption, including extreme weather events and changes in consumer preferences, and the mitigations that will be put in place to address them.
Time for ‘constructive panic’
A lot is going on in the world that we as directors need to get our heads around. Cyber security, AI, peak globalisation, Ukraine and Palestine. Even amid all that noise, climate and its potential effects on a changing world remain top of the list of concerns around the board table in 2024. So why is climate important in governance?
Climate represents a once-in-several-generation opportunity to invest in New Zealand’s future, one that is driven by two strong forces. Firstly, consumer preferences are swinging strongly toward sustainability (notwithstanding concerns about the cost of living). Secondly, we have made commitments (Net Zero 2050) that are creating significant changes in regulation for business.
For far too long, New Zealand has underinvested in our future. That includes a need for more investment in infrastructure, in developing our people, in technology, automation and productivity. But what boards need to understand is that we now have a chance to seize an opportunity in climate investment, which will allow us to address our earlier skimping, and tackle big changes in a way that will make a difference.
Investing in our future is just better business. As we move to net zero, lower carbon emissions will create more efficient businesses, which means better returns for investors and a more resilient economy. A healthier natural world means thriving, healthy communities, resulting in a better quality of life for all
In 2023, Cyclone Gabrielle reminded us we have lived in a predictable world for long enough to know we can’t be ‘unprepared’ for unpredictability. Extreme weather events have shown us what happens if businesses aren’t prepared, or lack resilience. And as insurance costs continue to rise, it will soon force changes in where we build, or where we relocate. We also need to be prepared for non-linear change — ‘black swan events’ — in our environment.
In today’s economy, carbon is a resource. That means we all need to know the price of it, and how to represent it in our operating models and financial statements. Know your number. Report it. Let’s hold ourselves to account as we invest to reduce our numbers.
As we contemplate the effect that a new government will have on our organisations, we should remember this: the short-term incentives may change, but our collective long-term incentives (Net Zero 2050) are baked in. We need to be careful to keep our eye on the long game.
Business leader Professor David Teece said recently “It’s time for boards to hit the panic button because the world is in a geopolitical crisis where everything’s changing — markets, technology and regulations”.
Maybe he’s right. In any case, consider it an opportunity to ‘put our foot on the accelerator’. Constructive panic is the most productive force in human enterprise. Let’s all take that mindset back to the mahi in 2024.
