Don’t knock opportunity

“The question at hand is ‘how resilient is my business, going forward?’,” says KPMG New Zealand Partner - Sustainable Value Alec Tang.

“There are economic issues, resource issues and more, and some of those are complicated by direct climate impacts. Others are impacted by longer-term climate trends. If you're not thinking about that, as a director, you're not actually assessing those risks and opportunities well enough.”

Tang will present a session on “Opportunities, risk management and scenarios” at the IoD and Chapter Zero NZ's Climate Governance Forum this month. And he has very deliberately put “opportunities” at the forefront of his thinking.

A board that gets its collective head around potential climate impacts, works through scenarios and ties those possibilities back to strategy, will have an enormous opportunity to add sustainable value to their organisation, he says.

“I’m very conscious that when we think about climate change, our natural default is  risks. We often forget that a key part of our response to climate change has to be about creating something – imagining new systems, new structures, new partnerships, new models, and so on. I want to try and get people into that mindset.”

Tang sits on the External Reporting Board (XRB) Sustainability Reporting Board, which has delegated authority from the XRB Board to prepare and issue climate standards and to issue non-binding guidance that relates to non-financial reporting. He sees climate reporting as an opportunity to open up the conversation about the opportunities embedded in our response to climate change.

“Climate reporting is a mechanism for getting people to think more broadly about what the future could hold. Whether you are a mandatory reporting entity, or not, doesn’t really matter. You’re still going to have to face into uncertainty.”

Scenario analysis is key as it can help boards get to grips with the possible climate change impacts across a range of business activities.

“You are painting a set of plausible futures that your business – the one you look after – may have to navigate, whether you like it or not. Scenarios are a really useful, strategic tool to help navigate through that.”

Scenario analysis is particularly important because this is a new challenge that our old ideas cannot address, he says. Simply tweaking and adjusting business models, as has been done for decades, may not be enough to ensure the sustainability of an organisation as the physical, regulatory and social impacts of climate change come to bear.

“What we have to do, if we are going to get anywhere near 1.5 degrees or 2 degrees [warming since pre-industrial times], is going to require quite a significant change.”

For boards, scenario analysis shows what this “significant change” might have to be, and inform the “opportunity mindset”. Who do you need to partner with? Who do you need to talk to? What new products might be created? Where are their likely to be new markets?

By being really clear about their climate impacts and strategies – and what else needs to be true to support their statements and expectations – directors can gain a view on their future business state, he says.

“It will require you to push harder in terms of challenging assumptions, challenging mindsets. I’m not going to lie and say it will all be easy and crystal clear. What we've learned through helping clients through the scenario process is, yes, you come out with a set of disclosures, but it is the change in view that is most useful – the insight into potential futures and prospective products, outcomes and outputs.

“Also critical is acknowledging uncertainty. Boards will have to deal with this by being more dynamic. We are entering a phase of needing more adaptive strategies.”