Does your company understand the risks of not transitioning to a low-carbon economy?
October 27, 2021
October 27, 2021
Q&A: Organizations are increasingly facing pressures to reduce carbon emissions and embrace ESG planning. There are both risks and rewards at play.
The question is no longer about if but when.
There is a growing urgency in board rooms across the globe to reduce carbon emissions to address climate change. Demands by consumers and other stakeholders are also increasing for organizations to play a bigger role in society by embracing tenets of environmental, social, and governance (ESG) planning.
According to Forbes, 21% of the world’s 2,000 largest public companies have committed to reach net zero targets, with many setting their sights on 2050. Pressure has increased for others to announce their intentions, as investors have joined in the chorus of voices demanding a speedier transition to a low-carbon economy.
Paired with emerging new regulatory frameworks, these corporate actions and conversations are the expertise of Nicole Flanagan, who has been working in the growing fields of ESG, climate change, and greenhouse gas (GHG) reporting since 2001. We sat down with Nicole to discuss her insights into climate-related risks and low-carbon transition regulations as they pertain to business.
Nicole: Yes, there are many. Companies should anticipate them if they are not facing them already. First, by not transitioning, they will face increased costs with the implementation of carbon taxes whether directly in their operations or through increased costs related to transportation and supply chain. As a supplier, you can also be vulnerable if customers demand that their supply chains adopt net zero plans. This can really catch suppliers off guard, especially when looking at scope 3 emissions, which are beyond their control and may contain significant carbon that contributes to their footprint.
Investors are also increasingly demanding that companies have net zero goals and ESG plans as part of their financial reporting. Companies can struggle to attract investors and can miss out on funding opportunities if they are not planning for a low-carbon economy. Moreover, there is a growing investor and financial regulatory framework which requires reporting—such as the Task Force on Climate-related Financial Disclosures (TCFD).
Nicole: The Financial Stability Board (an international body that monitors and makes recommendations about the global financial system) created the TCFD in 2015 to focus on disclosure of climate-related risk, with the objective of improving and increasing the reporting of climate-related financial information. The TCFD framework was released in 2017. While there were voluntary recommendations, these types of disclosures are becoming mandatory under security and exchange commissions around the world—like on the Hong Kong Stock Exchange for example. We anticipate stock exchanges in North America will follow shortly. The goal is to provide climate-related risk and oversight transparency to investors and drive strategic planning and decision-making around ESG and climate risks in organizations—this includes governance at the board level.
Nicole: The requirements of the framework include:
The risk includes both transition and physical risk. As you can see, these are complex and require organizations to do deep planning and risk assessments. When we assist our clients with TCFD and climate-related risk assessments, we always want to look at three potential scenarios, typically a business as usual, an aggressive scenario, and a moderate scenario falling between the two extremes.
Nicole: Yes. The European Union recently proposed the first Carbon Border Adjustment Mechanisms. It will require importers to pay a levy on carbon-intensive products, such as steel, cement, and aluminum, among others. This is going to have a bigger impact on those companies that are in regions where there isn’t an equivalent program imposing a cost on carbon.
Nicole: Certainly. Let’s take a mining company, for instance, that relies heavily on diesel to power its shovels and other heavy equipment. There are regions where grid-supplied, low-emission electricity is reasonably priced. It might be less expensive to convert those shovels and trucks to electricity and thereby reduce operating costs and emissions.
Our team can provide the analysis to determine if converting from diesel to electricity will provide emission reductions and your return on investment (ROI) over the long term. As engineers, we also know that simply electrifying equipment is not a one-size-fits-all approach. We can also complete an electric-battery vehicle validation study to make sure it is the right fit.
Nicole: It is important to consider that as the cost of carbon increases each year, the ROI will increase. But I’d certainly encourage everyone to consider their ROI holistically. Leading the transition can have many returns, including investors, access to lower cost capital, employee retention and attraction, and customer loyalty. There are also grants and special financing that help organizations make the transition to a low-carbon economy. We have experts in this field and can help organizations find financial resources to assist in this area.
Five or 10 years ago, organizations were hearing about this energy transition as a possibility and futuristic. Now it is becoming a reality.
Nicole: I would say we see both types of clients. Five or 10 years ago, organizations were hearing about this transition as a possibility and futuristic. Now it is becoming a reality from a customer relations, access to capital, and even an investor relations perspective. Moreover, we are seeing this across all sectors—manufacturing, agriculture, public, mining, energy. The need for ESG programs and the management of climate-related risks is here today.
Large companies are trying to act quickly to have something in place. We have worked with several companies that are trying to go from essentially zero to be being fully compliant. This takes time. I would say it is very similar to what we went through 20 years ago with health and safety. Customers were demanding that you have a health and safety program in place, and the business world has largely achieved that goal. Now, the new requirements are ESG, managing climate-related risks, and GHG mitigation.
Nicole: Our teams use rigorous data analysis and processes to create climate change risk assessments that help you best understand and quantify climate-related risks. We deliver risk profiles and adaptation suggestions that will assist in prioritizing your actions. We’re able to provide you with the high-level advisory recommendations, but as a full-service consulting firm, we also roll up our sleeves and can help bring these plans to fruition.