Integrating Climate into Strategy and the Organization 

As part of their long-term stewardship of organizational value, boards serve a critical role in engaging with management on the strategic direction of their organizations and in overseeing operations and risk management. Strategic and organizational integration is one of the World Economic Forum’s guiding principles for effective climate governance, and this article offers directors guidelines on planning and decision-making in this domain.

“The board should ensure that climate systemically informs strategic investment planning and decision-making processes and is embedded into the management of risk and opportunities across the organization.”

Principle 5, How to Set Up Effective Climate Governance on Corporate Boards
World Economic Forum

Barriers to Integrating Climate into Strategy and Organizational Planning

To be effective, climate strategy must link to an organization’s strategy and operations, addressing all material risks and opportunities. This is easier said than done, however.  Research by Deloitte identified several key challenges C-suite leaders experience in integrating climate throughout the organization:

• Lack of clear direction: there has been a global shift from voluntary to mandatory sustainability reporting, and with change comes risk. Many organizations are fearful of the reputational consequences of a “misstep” and the uncertainties associated with US climate policies and regulations.
• Conflicting expectations: a competing stakeholder environment can make it challenging to identify a strategic direction, especially when facing the consequences of litigation and political backlash.
• Decision fatigue: with an overwhelming sense of uncertainty casting a pall over many climate-related decisions, many organizations may feel unmotivated to establish long-term investments and would rather focus on short-term security.

These barriers need not block board engagement. Indeed, the board’s focus and engagement on climate —including how the organization is integrating climate considerations into strategy and operations—can provide impetus and direction to the C-suite. However, NACD survey data suggest that climate oversight may not be receiving sufficient focus in the boardroom. For example, 50 percent of responding directors noted no increase in frequency of climate change discussions on their board’s agenda in the last two years. The same survey found that 47 percent of respondents ranked climate change as “an issue, but not a top priority within the company” while 17 percent noted climate change is “not a concern for the company.”

Integrating Climate into Strategy, Operations, and Risk Management

Climate should be considered a core component of the organization’s long-term strategy, as the transition to a low-carbon economy, consideration of water usage, and power-use efficiency in general are driving changes throughout the ecosystems of all types of enterprises. This requires boards to determine precisely how management is factoring climate into their/their suppliers’ ecosystems in the organization’s strategy, operations, and risk management.

• Regularly review management’s strategic outlook and how climate risks and opportunities are considered. The board plays a critical role in shaping and “pressure testing” an organization’s strategic direction. Through its dialogue with management on key assumptions underpinning strategy development, the board can help inject climate considerations into strategic planning. For example, explore how management’s assumptions about future business conditions would be affected by the physical or transition impacts of climate change. The board can also support the long-term investments needed to position the company for a low-carbon future, while balancing these with the needs of near-term financial performance. Finally, the board can explore whether the company has a climate transition plan, and if so, play a role in strengthening it.

• Explore how management is integrating climate into operations. Many organizations’ initial climate programs have started within their internal operations through initiatives such as energy, water-use reduction, or waste reduction. These programs, often integrated with the guidance of frameworks or assessments by third-parties such as the Science Based Targets initiative (SBTi), provide several benefits, including reducing operational costs, mitigating climate impacts, and/or helping the organization to adapt to a shifting climate. Best Buy, for example, has adopted a circular economy approach to find cost savings through waste, water, and energy reduction.
  
  However, as Deloitte research indicates, such initiatives may fail to achieve further integration into compensation or into its operational KPIs (e.g., number of renewable power purchase agreements) or investment parameters (e.g., an internal carbon price), unless there is top-down support from the board and buy-in across the C-suite. One option to increase buy-in is to demonstrate how climate and sustainability help the company's business materially, whether it be from a risk-management or an opportunity-creation perspective. Companies can do this by quantifying, in economic terms, the incremental business the company is able to win because it has better sustainability programs compared to its competitors. The more companies can show how climate and sustainability contribute to business success, the more likely climate will be integrated into the overall business strategy.

• Include climate in the organization’s ERM. Boards provide oversight of management’s efforts to manage and mitigate risks, including the effectiveness of the company’s enterprise risk management (ERM) programs in identifying, managing, and mitigating key climate risks. Boards should examine how climate has been integrated into the risk identification and assessment process—and should likewise ensure that risk analysis conducted as part of a process such as a TCFD-related analysis are effectively integrated with the corporate ERM process. For example, the board can explore how management has assessed climate change’s direct risks to the organization (e.g., risk to physical assets or operations, such as unprecedented weather patterns impacting construction projects) and the scenarios and time frames used for the analysis. They can also review with management how climate will serve as a driver or amplifier of other risks (e.g., regulatory changes or shifting consumer patterns). The board should also consider how management is integrating climate adaptation or mitigation efforts into the ERM program (for example, changes to the location and/or construction of sites to minimize potential flooding impacts).
• Connect innovation to strategy. With climate at the core of their strategy, organizations may identify many opportunities for innovation and gain a competitive advantage. In doing so, they should consider how physical and transition climate impacts might inform new investment opportunities. At John Deere, the board finance committee is charged with oversight of sustainability in funding plans. The board also can explore with management how the company’s existing or new services or products could help customers with climate change adaptation or mitigation, as well as with advising their client’s overall climate strategies. Corning leverages its materials’ innovation to create products that help their customers manage new levels of climate risk. One example is an enhanced glass used in medical vials that results in less waste and less energy consumption during manufacturing—a valuable factor for companies looking to reduce Scope 3 emissions.

Questions for Boards to Consider

Board governance is an important catalyst for effective corporate climate stewardship and for driving focus, accountability, and transparency. As boards begin to integrate climate with the overall strategy and operations of the organization, here are some questions to consider:

• How is climate change impacting the dynamics of the industry, including key players, value chain, ecosystems, potential areas of convergence, markets, technology trajectory, customer demands, and regulatory issues? How are these changes impacting how we create value in both the short- and long-term?
• Which climate risks are most material to the organization and should be reflected in the board’s long-term strategy?
• What can the organization do to increase the value of our offerings and services in a low-carbon economy? Where should we prioritize our investment and resources to position the company for success in the next five years?
• What practices are being used to embed climate into the organization’s strategy? Are climate goals linked to executive compensation, KPIs, and investment parameters?
• Where do climate risks exist throughout the organization? How are risks being mitigated and opportunities being utilized?
• What changes to our operations can help improve the resilience of the organization?
• Has the organization conducted scenario analysis as well as physical and transition assessments to determine critical climate risks?
• How are climate factors integrated into the organization’s overall ERM processes?

This article is part of an  8-part series that provides guidance in applying climate governance principles in the US boardroom. Click here to access the full series and learn more about NACD resources for effective climate governance.