Disrupting ourselves: climate action and opportunity

James Shaw reckons the days of the old business argument – climate versus profit – are well and truly gone.

As Minister of Climate Change, he admits he is possibly in a bubble of progressive businesses. But, he says, “my sense is that the ground really has fundamentally shifted there”.

He points to the Climate Leaders Coalition as a sign business is seriously on-board for climate action.

“Those one hundred and five companies collectively represent something like 65% of New Zealand’s private sector emissions profile, which is colossal. And, I think, it’s very hopeful because it means you’ve actually got quite a small number of companies to engage with… get some collective action there and you’re going to see a tremendous shift.”

Part of the future-focused shift to embedding climate action into business is understanding not only what needs to be done for mitigation of climate change, but also looking at what is needed for adaptation.

Shaw says businesses are making good progress on mitigation: reducing emissions and trying to slow or stop climate change.

“That’s a good thing, in the sense that the best defence is a good offence. So reducing emissions and getting down to zero has got to be the top priority.”

But, he believes, adaptation – developing resilience to the effects of climate change that are already being felt and which will only escalate – needs to be given equal focus.

“The business community in New Zealand, I think, is much further ahead on mitigation than adaptation.

“Frankly, partially [government] has induced that because that’s where we’ve been focused as well.”

Time to adapt

Things are changing though. In August, the country’s first Adaptation Plan will be published.

And Shaw adds that before the end of this Parliamentary term, an Adaptation Act will be introduced.

Though both are future focused, the activities of adaptation and mitigation are fundamentally different, explains Shaw, “although you want to try to optimise across both”.

“Mitigation is: how do I reduce my pollution? That means switching my vehicle fleet over to EVs, or it means changing my plan or my industrial processes or inventing new products and services. And there’s some amazing stuff going on. We’re actually getting to a point where we are starting to see real innovation. And that is great because that’s where you start to see the opportunity and the upside, rather than just risk and cost.”

With adaptation, “you are mostly managing risk, but you’re also choosing where to put your investments”.

Shaw cites Westpac as an example of a company that addressed this early, publishing its Climate Risk Report in 2020, detailing its exposure to climate related financial risk and the need to manage it. The report identified that between 2% and 3% of the bank’s residential, commercial and agricultural mortgage lending portfolios were potentially subject to heightened risk from coastal erosion and flooding as a result of rising sea levels.

“That’s a fairly small percentage,” Shaw says. “But when you add it up in monetary terms… it’s a very, very big number. And so you can imagine their board is interested because it’s a material risk.”

When it comes to adaptation strategies that boards need to consider, he says it is “hugely industry specific”. Different industries obviously face different climate related risks they need to manage, whether it’s risky investments as in the case of Westpac, or businesses with high emission profiles, such as some manufacturers.

Opportunity knocks

Boards should not let a focus on risk management blind them to opportunity, though.

“The single greatest risk is missed opportunity,” Shaw emphasises. “Yes, you can and should look at [climate change] through a risk lens. One of the primary responsibilities of a board is to manage the risk register. But I think a lot of boards can – whether it’s climate or any other category – focus overly on risk and not enough on opportunity.

“I think there may be many, many companies in New Zealand with a sort of existing status-quo business. And if the board’s thinking too much about how do we preserve or protect that status quo, then that may actually cause them more harm than good. If you’re just looking at how do we defend what we’ve got, then you’re not thinking about disruption and what comes after what you currently offer.”

Shaw says he suspects industrial designers have a great future “because virtually everything that we currently have needs to be redesigned. So, that’s really your innovation cycle and your R&D piece. That does look different based on what industry you’re in”.

Shaw says that while climate change can’t be viewed solely through a reporting lens, it does have to be part of the picture.

“One of my first jobs was at PricewaterhouseCoopers, where I think the first thing that I was taught was what gets measured, gets managed. I do think that good reporting enables all of the other things to happen. It’s very difficult to have a more strategic view if you don’t have any data about your status quo or about what’s going on in the market or what’s coming up – or about climate change.

“If all you do is reporting, that’s hopeless – and probably negligent. So I take the point that you need to get beyond that, but I think you’ve got to start with that. Because you can’t really have a coherent strategic conversation without it.”

Be the disruptor

Climate action is a “technical filter”, Shaw says, for board members to apply to their decisions, in the same way as other governance considerations.

“It can help you to see things that you might not otherwise see. Was it Steve Jobs who said, we want to disrupt ourselves? We don’t want to be disrupted by somebody else. We want to disrupt our own product lines rather than have somebody else do it to us.

“I think that applies to climate change. It is a massive disruptor. But there are tremendous rewards in being the disruptor rather than the disruptee. So if you’re in a business that’s likely to be a disruptee, how do you flip and become a disruptor?”

Future-focused conversation for business involves thinking about the world we’re moving into and asking some big strategic questions, Shaw reckons.

“Ultimately… there will be things 10 years in the future, or 30 years, that are familiar and also things that are alien. And we can look back to 30 years ago and there will have been things that seemed both alien and familiar about the world we are in now.

“Thirty years ago… [we were told] this would be the smallest mobile phone you’d ever buy, and it probably had a wire to a suitcase attached to it. And it certainly didn’t trade your share portfolio or point out where you can go to get a coffee.

“So to me the strategic question is: in a zero carbon world, where are we going to be living with the effects of climate change, what are the products and services that need to be in that world? And how do we get ahead of that curve and design them now? Based on what our current core competency is, how do we move from here to there?”

Everyone counts

To business leaders who worry their climate action efforts will be too small to make a meaningful difference, Shaw points out that many small players can make a big difference collectively. As a country, New Zealand represents less than 1% of global emissions. But there are about 90 countries similar to ours.

“It’s a very large number of very small countries, but our emissions profile collectively is a third of the global total. So small countries acting together can make a huge difference, because 30% is more than the US. It’s more than China, more than India, more than Russia, more than the European Union. It’s more than any of the bigger emitters by themselves.

“So everybody has a part to play and therefore every company also has a part to play.”

This article originally featured in the Autumn 2022 issue of Boardroom magazine