The challenges and opportunities of being a climate leader in 2024

The “global stocktake” has laid bare the scale of the transition facing all industries and there is more clarity in relation to the nature of the regulatory and policy changes that will be implemented in national law. For business, it is imperative to get ahead of the change that is happening and not wait too long. However, the standard financial and performance metrics applied by markets and investors to assess corporate performance do not, yet, incorporate all factors relevant to such decisions.

Senior executives should already be familiar with how the climate and sustainability agenda is shaping the environment in which their businesses operate – whether because of the channelling of finance to ‘green’ projects and away from others, the stipulation of ESG requirements in contracts, or the disclosure requirements that shine a light on what companies are doing to reduce their greenhouse gas emissions and wider environmental impact, for example. However, for most businesses regardless of the geographies and markets they operate in, climate- and sustainability-related policy and regulation, necessary to give effect to the international commitments, remains insufficiently developed or detailed.

The resulting uncertainty is stifling the scale of investment in the new technologies and business models needed to deliver the ‘net zero’ global economy that countries reiterated the need for at COP28. The challenge for executives heading into 2024 is what to do about this policy, and policy implementation, gap.

The easiest option might appear to be to take a ‘wait and see’ approach – to let policymakers and regulators interpret what the latest commitments arising from COP28 should mean in practice and to then react to the new rules when they are developed.

However, this could at least mean falling behind competitors – including because of emerging environmental and social requirements for accessing finance or winning contracts – and the business being exposed to the risk of climate litigation and regulatory non-compliance, with the financial penalties and reputational damage that can follow. In the worst-case scenario, a business could find its entire business model is unviable from the point new policy or regulation is imposed on them.

Doing nothing, therefore, is not an option. The good news is that there are opportunities for businesses where executives demonstrate climate leadership at this juncture.

An immediate action to take, where they have not already done so, is to work with their leadership colleagues, in conjunction with in-house functions such as legal, finance and operations and external advisers, to set credible and science-based climate or sustainability targets for their business – such as the extent to which they plan to reduce greenhouse gas emissions arising from their own operations and those of their suppliers, and by when.

Where targets are set, businesses should develop a transition plan that connects actions they plan to take with the targets they aim to deliver – and ensure there are robust key performance indicators and ways of measuring progress towards the end goal.

These targets and the transition plan should be communicated in a transparent and authentic way – there is a growing amount of policy and regulation around transition plans and climate- and sustainability-related disclosure that promises to expose businesses that cannot evidence meaningful action towards the targets they have set. Businesses should not assume prior knowledge among their stakeholders of their business, their targets, or related actions.

Showing climate leadership also requires executives to understand their own agency and that of their business. There are matters within a business’ own control, and other matters that they can have an influence over – through the products or services they provide and/or impact on their stakeholders and communities.

For example, a review of measures a logistics company might undertake to reduce its own environmental impact is likely to identify a benefit from updating its fleet of vehicles so that they are powered by electricity or hydrogen, not petrol or diesel – particularly as the transport sector is estimated to be responsible for around 60% of total oil demand, globally. Yet, those businesses will also recognise the cost involve in moving to operating low or zero-carbon vehicles as well as the need for wider investment in underlying infrastructure – in the case of electric vehicles, sufficiently ubiquitous fast-charging points supported by grid connections. So, while the companies might invest some of their own money in transitioning their fleet, they could also lobby government to alter the underlying policy, regulation, and tax regimes to drive industry-wide change and ensure that they are not at a commercial disadvantage by being an early mover. 

This impact through lobbying and engaging with policymakers is critical and recognised as an important activity in a good “transition plan”, as promoted recently by the Transition Plan Taskforce.

The reality is that a business’ enlightened behaviours or individual lobbying efforts on their own will often be insufficient to trigger the type and speed of change in policy and practice that they want to see. It is why executives should also be participants in industry-level collaboration.

Industry collaboration might involve work on developing voluntary standards that can deliver meaningful change in an industry – standards which could even form the basis of future regulation. It could also involve the development of a joint industry action plan designed to affect change in policy or regulation. Recently, federations representing the breadth of Europe’s construction industry developed a ‘manifesto’ for delivering a “carbon and resource neutral construction ecosystem” in Europe – a prime example of how collaboration can deliver a stronger voice for industry-wide change and action by policymakers to support that.

Similarly, executives need to ensure their business is collaborating and engaging with its supply chain and wider value chain to ensure they contribute to the progress the business is working towards.

It is also essential to collaborate with your own employees, so that individuals understand their own agency. Change should be enabled from the top but delivered from the bottom up, and it will often be employees that have the best ideas as to how a business might deliver the change it seeks. How an employer addresses climate and sustainability issues is also an increasingly important factor in talent recruitment and retention – empowering employees to be change-makers is likely to help the business achieve a competitive advantage in an increasingly competitive labour market.

In our experience, executive teams and management can also benefit from organising and participating in materiality analysis and scenario planning exercises. These can be undertaken annually before budgets are set and business plans developed. Facilitated by expert advisers, these exercises can help leadership teams map out how different sustainability scenarios might play out and how they might affect the business.

This can arm executives with an understanding of the significant risks their business faces in, for example, the context of climate change, how customers and other stakeholders may be affected should those risks materialise, and what business practices may need to be adapted as a result.

These exercises are not just about risk – in fact their real impact is often in exposing the scale of the opportunity before a business. In financial terms, the International Energy Agency has estimated that $4 trillion of investment will be needed annually from 2023 to deliver the transition to a net zero economy in time for 2050. This is an economic opportunity greater than the industrial revolution for businesses able to seize it. Executives that engage in materiality analysis and scenario planning should be left with an acute understanding of what the opportunity means for their business, how their business processes might be adapted quickly, where the business might innovate, and where it can deliver new products and services to customers. In short, it can help with crystallising understanding of the business’ own agency.

The world is changing fast, and with elections in Europe, the US, and probably the UK too, in 2024, there is a degree of political uncertainty about what lies ahead. The reality for business, however, may be that the risk of inaction in relation to climate and sustainability issues at this moment in time is now greater than it was six months or a year ago – and significantly outweighs the scale of the opportunity. That, for the over 1,300 chief executives that attended COP28, may be its greatest legacy.