Sustainability and business – how many planets are enough?

For boards, climate change needs to be made meaningful not in terms of “did we do a good thing”, but in terms of “what are the dangers and opportunities this company faces in the years ahead?”.

By Richard Spencer

I watched a TV programme this week on how to create a new planet. It was light scientific stuff but it reminded me of the WWF statement that “If everyone in the world consumed natural resources and generated carbon dioxide at the rate we do in the UK, we’d need three planets – not just one − to support us.” Our populations and consumption are growing at exponential rates supported (or not) by a finite resource. This is not sustainable.

Natural capital is the value of the earth’s resources and the Natural Capital Coalition, of which the Institute of Chartered Accountants in England and Wales is a founding member, commissioned a study of 26 leading early-adopter businesses on “natural capital management”. Companies included the likes of Dow, PepsiCo, Nestle and Rio Tinto.

Asked what their resource concerns were for the next three to five years (not a long period) they put the top four as fresh water, climate change regulation, food and fibre, and were clear that delayed action on these was a substantial business risk. Asked what their challenges were likely to be, they identified a lack of harmonised methods to assess impact, a lack of government regulation and consumer demand.

So what does this all mean? Well, I think for those of us advising boards, it means that we need to start thinking about environmental issues not as things we’d like to have but as sources of risk we need to address – and with some urgency.

A great example is climate change. One very quick way to make a big dent in this one would be to end the $1.4trillion spent in energy subsidies. This is the figure the IMF calculates as the cost to society and the environment (so-called “externalities”) in the form of air pollution and climate damage caused by fossil fuels, and argues that this figure should be levied in taxes. This is based on a modest cost of carbon of $25 per tonne, but even at this modest estimate it is still 2.5 per cent of global GDP. If the IMF is saying this – the issue is now out of the fringes and into the mainstream. This could well mean additional taxes and lots of them.

October saw the introduction of regulations requiring UK companies to report their greenhouse gas emissions (GHG). This represents about 1,100 companies. The regulations require these companies to disclose annually, in either their Directors’ or Strategic Reports, the greenhouse gas emissions for which they are responsible, the methodology they used to calculate the data, at least one intensity ratio and the information disclosed in the previous year. The regulations came into force on 1 October 2013 for financial years ending on or after 30 September 2013.

But what is the point of this disclosure requirement? From Defra’s perspective it is to help the government reach its climate change objectives: based on the belief that public disclosure will drive behaviour change and efficiencies, thereby lowering the country’s emissions. As the Directors’ and Strategic Reports are aimed primarily at investors there is also clearly the hope that they will use this information in their investment decisions.

This of course depends on investors, and businesses, actually wanting to use this information. Investors have seemingly been reluctant to use such information to date and, if companies simply produce the footprint and intensity ratio, then one wonders how it will be meaningful or useful information for investors. Indeed those businesses that regard these regulations as yet another costly burden will presumably wonder at their value.

For GHG information to be valuable it needs to be linked to an assessment of physical and regulatory risk as well as to strategy. The Climate Disclosure Standards Board (whose Technical Working Group ICAEW is a member of along with other accounting bodies around the world and the leading accountancy firms) has developed guidance along these lines and I urge you to read it.

For boards, climate change needs to be made meaningful not in terms of “did we do a good thing” or a public relations home-run, but in terms of “what are the dangers and opportunities this company faces in the years ahead and are we ready to steer this organisation through them?”.

As board members and advisors we cannot continue to ignore this thing called sustainability.