The release of the Intergovernmental Panel on Climate Change (IPCC) report last week brought climate change into stark focus, dragging the problem from a future risk to the here and now.

And, as the world looks ahead and plans to emerge from COVID, there is increasing focus on ESG (Environmental, Social and Governance) which will also need to factor in our changing climate.

From a straightforward commercial perspective, this should be high on the agenda for all companies, but it is particularly important for those industries which are more likely to be affected by climate-related risks and opportunities.

For industry sectors such as Energy, Natural Resources, Transport, Manufacturing, Construction and Agriculture, those effects relate to exposures to transition and physical risks around greenhouse gas emissions, energy or water dependencies that are associated with those organisations’ operations and products.

The business imperative

Investors across the globe are increasingly demanding organisations outline their ESG framework and approach in order to assess the organisation’s long-term sustainability.

At some point in the future, every business will need to be sustainable. However, until we reach that target, those that have addressed sustainability issues will have an advantage.

At the World Economic Forum Davos Agenda in January 2021, Larry Fink, the founder and CEO of Blackrock, noted an increasing gap in business valuations between those that take climate change seriously and those companies that do not.

Many other investors are calling for companies to be transparent about the effects of climate on their current and future activities. The reality is that, unless businesses embrace the need to build climate change into their strategy and planning, they will pay higher costs of capital or, in some cases, will not be able to raise capital at all.

Companies that make themselves part of the solution, by starting their transition to a low carbon economy sooner rather than later, will have the opportunity to develop and maintain sustainable business models which thrive in the short, medium, and long term.

Linking incentives to sustainability

To achieve sustainability and other ESG targets, companies should implement long-term incentive schemes that align targets to executive KPIs, bonuses and shares.

Specifically, Directors need to understand what sustainability issues they have and ensure that director and executive remuneration, and incentive schemes, are aligned to those particular elements and targets. To be effective, measurements and targets should be in place over the short, medium and long-term period.

Sustainability – a strategy for growth

Ultimately, ESG should not be viewed as a standalone strategy, but rather as part of the broader picture. The conversation should not be on just sustainability strategy, but rather how to embed sustainability into business strategy.

A robust strategy can help attract the right talent and investors. To achieve a shift in sustainability we need to stop viewing ESG as a ‘nice to have’, it should be part of business strategy and risk management that can have a direct and positive impact on financial performance.

This is backed by independent research, which has demonstrated that companies with a strong ESG framework perform better and are more resilient to impacts such as COVID-19.

These strategies can take years of concerted effort and require substance to make an impact on performance and investor sentiment but are a worthwhile investment.

Forward looking companies are likely to conclude that it will be better for enterprise (and shareholder) value if climate is brought high on their agenda sooner rather than later.

This article has been drawn from What Directors need to do to align ESG with strategy and sustainable growth and ESG, and the business case for dealing with climate change.