How the climate crisis will shape strategy

The climate crisis is a fundamental challenge to a growing number of businesses – either because it changes the value of their output or because it threatens their operations. A strategy must now take account of the climate crisis and GCs are well positioned to help navigate the issues involved.

Climate change will re-shape the world: either because we don't address it and the physical environment changes life as we know it, or because we do address it and the way we go about our daily lives is altered forever.

This means that the time has passed when businesses can close their eyes to the issue or deal with it by publishing vague aims in a dusty corner of their website. This issue will change their employees' lives, it will change the regulatory environment in which they operate and in most cases it will change their whole business strategy.

Climate change represents a vital and fundamental challenge to the strategy almost every business is following, and needs the attention of an organisation's leadership.

Hear more about climate change and strategy on the Brain Food For General Counsel podcast

This is a board issue, said Alastair Morrison, head of client strategy at Pinsent Masons. "You can't have a situation where something like this is outsourced to a department. It has got to be in the consciousness of an organisation."

Companies are increasingly recognising how central an issue this is, and that it requires a response combining strategic thinking, legal and regulatory expertise and a commitment to the difficult business of cultural change. This means that general counsel (GCs) are in an ideal position to provide leadership on this issue.

Morrison said that many GCs are already aware and taking action. "When we look at discussions that we are having with the general counsel community, it is really interesting to see the overall level of awareness and interest in seeking to make a difference. The kind of awareness at a personal level is really high - everybody knows the challenges and issues that we face."

"Very senior legal people have a great degree of influence within an organisation and many of them are really good advocates," he said. "So, armed with a technical knowledge or a good scientific background of the issues, coupled with the knowledge of what is going on within an organisation, one can therefore be using influence in the board, raising consciousness around the issue and seeing what an organisation can do."

The climate crisis

The climate targets set by the Paris Agreement in 2015 aim to keep global temperatures to less than 2°C above pre-industrial levels, and to aim to keep the rise to 1.5°C. We are currently on track for rises of 3°C.

This might not seem much to non-scientists, but the effects are dramatic. The last ice age was caused by a drop in temperatures of only 3.5°C – changes that might seem small to a layperson have a major impact.

We are experiencing the effects of a 1°C increase right now: more hot days, more heatwaves, bush fires in Australia and hard-to-reverse melting of the Antarctica ice shelf.

If we don't arrest the increase then we won't be able to be outside in parts of the world by the end of the century; food prices will increase; coastal flooding will affect 5% of the population and a weakening of ocean circulation will mean more unpredictable and extreme weather.

The role of business

So there is clearly an imperative to act. But should it be down to business to make these changes?

Philippe Joubert believes that it is, not just for society's sake but for the sake of those businesses themselves. Those that do not adapt will struggle to survive and thrive.

Joubert was deputy chief executive of transport and power equipment maker Alstom but left to found and run Earth On Board, which helps companies ensure their strategies take account of the climate crisis.

He said that 2015 – when the Paris Agreement was signed and the Sustainable Development Goals were adopted – was a watershed. After this, directors could no longer claim they didn't know climate was a factor when they made decisions.

"We need to change, and 2015 will certainly be seen as the year where the world has recognised this," he said. "Business is no longer a problem, it should be a solution. Business are certainly at the origin of 70% or 80% of the impact that we have, but business is the only human organisation I know that has the resources, the organisation and the speed of reaction to help us to find a solution. But to be the real solution we should design another business model that is not taking nature for unlimited and granted."

Joubert said that the business model of the modern economy uses nature as a free resource, and this has to change - the business model has to factor in the cost to the planet of using and contaminating water, air and the ability to pollinate.

Madeleina Loughrey-Grant is group legal and tax director at construction company Laing O'Rourke, and she said that there is a change in mood in business as companies recognise that they have a duty to change and to act.

"I think there has been a big shift even in the last 12 to 18 months," she said. "When people ask how it is possible to get this on the agenda in the boardroom, the answer is that it is actually very easy now. I think if you asked people who were trying to tackle this and move it up the agenda two to three years ago it would have been more of a challenge, but there has been a transformational attitude change at board level across all industries on this issue and recognition that it is a significant business risk. An opportunity yes, but a significant business risk that needs to be addressed."

And for those companies whose leadership might still not want to change, the law is likely to provide an incentive. Companies are facing legal challenges to their decision-making based on the climate impact.

New York City is taking energy companies to court over the costs of dealing with global warming, while a Peruvian farmer is suing an energy company in Europe over the effect of emissions on his environment.

And this year in the UK the Court Of Appeal ruled that a government policy which would have allowed for a third runway at Heathrow Airport was unlawful because it failed to take into account the UK government's commitments under the Paris Agreement.

Loughley-Grant said that this case and others send a strong signal to businesses and governments that things must change.

"What it does is it starts to put pressure increasingly on governments more widely and that will be the impact of that and other decisions that have come out. A decision like that will have major consequences for future infrastructure projects," she said. "In the Netherlands at the end of last year there was the decision of the Supreme Court where the government was effectively ordered to speed up its efforts to cut carbon emission. The Court based its judgment on the UN Climate Convention but also on the obligations that exist in the European Convention On Human Rights. So effectively that the government was breaching people's human rights by not acting quickly enough. Those decisions are not to be viewed in isolation, I think there will be similar decisions across the globe."

These legal challenges will have consequences for executives and board members, both because they will want to avoid these risks to the organisation, and because they will want to avoid risks to their own positions.

Action could focus not just on organisational behaviour but on individuals' decision-making and whether it is in line with the duties that directors have to the organisation.

Joubert said that after 2015 nobody could claim that they were not aware of climate dangers and responsibilities, and that if they are to execute their duties to their companies with the due care and diligence required then they must take the climate into account when making decisions.

"Due care and diligence is quite interesting because care and diligence means you do not need to be a specialist on everything, but you need to do your homework," he said. "You need to have eyes open on the risk and opportunities and you need to give some guidance to the management and, for me, I defend the idea that 2015 will be seen as the year of tremendous change in the duty of the board in this aspect, because of the Paris Agreement, you cannot say you do not know."

"This for me changed fundamentally the risk and the responsibility of the directors. 2015 is probably the year where being climate sceptic is not a safe harbour for directors and directors should go even further, directors should have very clear idea of where the risks are and what you are doing, what is your strategy to mitigate this risk and protect the interest of the company and put the company in a safe ground for growth," he said.

A green recovery

Governments around the world are going to have to spend an enormous amount on supporting their economies as they emerge from the coronavirus crisis. They are likely to invest in significant capital projects directly and through lending to ensure that there is work there for many people who will lose their jobs.

This economic stimulus represents an opportunity, said Morrison, a chance to create a green infrastructure that might otherwise have taken far longer to build.

"I think we should be creating awareness in the legal community about the kind of opportunity that exists to stimulate further clean sources of energy as we look to make our recovery, to put money and effort behind that," he said. "Governments can make a material and enormous shift in relation to climate change and that is the biggest shift. So, I think we can take this opportunity now and look to see how we can make that shift."