The Impact on Climate and Nature with David Wei

Transcription

David Stearns:
Welcome to BSR Insights. I'm your host, David Stearns. We're joined today by David Wei, BRS Managing Director for Climate and Nature. David works with companies to develop and implement credible environmental goals to manage their climate and nature risks and to integrate justice into their environmental action. David also works with companies to incubate collaborations, which are instrumental in helping to build a net zero economy. Today's conversation will focus primarily on the evolving regulatory landscape explored predominantly through a climate lens. So first of all, welcome, David.

David Wei:
Thank you so much for having me.

David Stearns:
Thanks for being here today. We wanted to start with a broader question. What specifically are you excited about with these new changes in the regulatory landscape?

David Wei:
I'm really excited about two things, David. First, I'm excited about the inbound shift that is happening in climate and sustainability, that what was once voluntary disclosure is about to become mandatory. That really means that the long tail of companies who have not yet engaged on climate and on nature will have to do so, and the resulting impact might be many times greater than those of voluntary efforts. The resource that companies commit on the whole to sustainability certainly is going to increase. So I'm definitely excited about that as a first thing.

The second VMX I'm excited about is the new earth system boundaries. It's totemic that climate sears have talked about the 1.5 degrees Celsius goal now for about a decade, and we know that that's a hard limit. We know the dangers of passing 1.5 degrees Celsius of warming. Now for the first time for other environmental issues, we also have the same hard limits in play. They're all part of the new earth system boundaries. And that's really great news because it raises the possibility that in the future companies will have even better scientific guidance on how to act in a manner that helps well, humanity stay within a thriving world.

David Stearns:
Well, I definitely would like to come back to talk about how these disclosure rules might be relevant, particularly in a world where it's increasingly recognized that 1.5 degrees may actually be out of reach even though it's been a target for the world for many years now. But before we go there, I'd like to talk a little bit more specifically about how these rules and regulations apply specifically to net zero reporting and other climate related commitments. So between the ESRS, the new SEC or pending SEC Climate Disclosure Rules, it's going to be require reporting on impacts across the full value chain for companies both upstream in supply chains and downstream via the use of products. What does this mean for reporting on net zero or other climate related commitments?

David Wei:
Yeah. Well, a short answer is that very soon for companies who have net zero commitments, there is going to be no hiding from their own progress. That regulation is going to make clear and transparent in a consistent and a comparable way everyone's progress towards their net zero goals. And that's really helpful because that is what the atmosphere sees. And if disclosed progress raises hard questions about why a company isn't making the progress it should be on decarbonizing its value chain, for example, because decarbonization is not happening as fast as growth is happening, then frankly those questions need to be put front and center.

In a more technical way, these new regulations indicate that companies are going to need to understand their value chain, that is their scope three emissions, to a degree that enables action. They will have to know where the hotspots are if they don't already. They'll have to come up with interesting tactics to address those hotspots even when those hotspots are very difficult to decarbonize. Even when those tactics have to involve new product innovation or collaboration or policy engagement when, if you will, they are not part of the low hanging fruit. So the inbound regulations really are going to mark a step change in the way that companies will have to take climate action.

David Stearns:
You mentioned that there will soon be no hiding from progress, that regulatory disclosure will uniform everyone's progress and their requirement to actually talk about it. And I'm wondering to what extent that will have an impact on the phenomenon of greenwashing, where companies may make claims around their net zero commitments that are not credible. Will there be a forcing action for companies around greenwashing that will make it less likely that that will be permissible or they'll be able to get away with that?

David Wei:
Yeah. It's a really interesting question and in honesty, one of the side benefits of the inbound regulation is that it is going to make it a lot harder to greenwash. If you have to disclose again in a consistent and comparable way your climate action, it's going to be much harder to make claims that substantially exaggerate that particular action. Interestingly, the regulation is also going to make it harder to green hush. That is to say nothing about your climate action and simply do it in the back because again, consistent CAMA disclosure is going to, if you will force companies to actually state what it is that they're actually doing. Both of these are really welcome developments. Greenwashing is a huge concern of the climate community and frankly so is green hushing. So anything that makes both of these things harder to do, that is another point in favor of the inbound regulation.

David Stearns:
So you mentioned the earth system boundaries earlier and I mentioned this growing recognition that 1.5 may not be achievable. I'd like to ask you a little bit about the tension between ambition and compliance in this new landscape. To what extent do you think these new requirements will actually help companies to increase their ambition and actually to drive more impact and achieve their net zero commitments?

David Wei:
Yeah. That's really the $64,000 question and it's the $64,000 question because our external situation is getting worse and worse. You may know that this past September, so the global temperature average for September, 2023 was about one and a half degrees Celsius above pre-industrial Septembers. So in some small way we are already touching on this threshold of 1.5 degrees Celsius. And because every 10th of degree matters, it means that how much action is taken by governments, by companies, by other actors becomes increasingly important.

And that goes to your question, which is are the regulations going to spark additional action or are they going to spark additional disclosure? And that is the primary tension. We know that there's going to be more money spent, if you will, on ensuring compliance with the regulations, but we're not certain yet if there's going to be money spent on the underlying climate action that the regulations forced disclosure of. So really the advice that we would have for companies is that compliance with the disclosure is required, yes, but you should focus on the action that underlies the disclosure.

So when you disclose scope three emissions, the question really is how do you incentivize your suppliers to reduce their emissions and how do you redesign products and services to reduce downstream emissions? When you disclose your transition plan, actually the real question is how do you mobilize capital to decarbonize your operations and your value chain? When you disclose whether or not you've done scenario analysis, the real question is your company's strategy resilient to multiple plausible climate futures? And when you disclose your board competencies, the real question is, are those individuals sitting on your board ready to oversee the material risks that climate and nature present to your company? So I think here there's this threat that the inbound regulation is going to be perceived thinly as a veneer of disclosure that doesn't spark additional action and that most of the resource that companies will muster is going to head towards straightforward compliance of disclosure rather than the action that the disclosure calls for.

David Stearns:
And this speaks to something we heard from one of our colleagues in another one of our conversations around the distinction between compliance with the letter of the law versus the spirit of the law. And I think you're speaking to that point excellently and it's a great transition at the center of all of this action is the chief sustainability officer and the boards who obviously have the governance responsibility over the actions and strategies that companies are taking. And I'd be curious if you could quickly summarize some of the challenges that climate focused sustainability practitioners, including the chief sustainability officer will be operating in as emissions continue to rise, as 1.5 seems to be increasingly out of reach, will these regulations help them in any particular way?

David Wei:
Yeah. That's also a great question. I think first, the sustainability function, a company sustainability professionals, they are going to need to be much more comfortable speaking many different languages, functional languages inside their company. So as before, sustainably professionals worked largely with operations to decarbonize operations and then slowly with procurement to address supplier emissions. These new regulations make clear that sustainability professionals are going to have to work across the range of company functions, with legal and with treasury, on disclosure and on assurance of climate information, with strategy on deeper business transformation, with public affairs on policy engagement.

So the range of friends, quite frankly, that sustained professionals will need to have to meet their objectives and to meet their responsibilities is going to expand. That's going to make the chief sustainability officer's role more difficult and more complex, more influential, and also more interesting

David Stearns:
In terms of their influence, obviously one of the most important constituencies for them to influence is their own boards. And I'm wondering if you could talk a little bit about some of the key competencies that boards are going to have to develop in very short order, in order to both comply and be prepared to deal with these new regulatory demands, but as you spoke of earlier, to ensure that the action is commensurate with the disclosure that the action is the prime objective here.

David Wei:
Yeah. So I think one of the most fundamental competencies that a board needs is subject matter competency. Many board members, if you will, aren't as familiar with environmental sustainability as they will soon need to be, and to the degree that they need additional training or education to accomplish that, that's certainly very helpful. What I do want to say is that boards their functions, their oversight of risk in particular and also of audit, already touch upon what these new regulations will require. So already through existing oversight responsibilities, boards are simply going to have to address climate and nature risks in risk management through the oversight of risk and also in oversight of audit and oversight of the financial statements. So in that sense, an understanding of how climate and nature intersect with these two subject areas, these two traditional competencies of boards is going to be very important.

David Stearns:
So that's really helpful guidance for both CSOs and members of boards. A follow-up question on this is we see a slightly different political atmosphere here in the United States, and I'm wondering to what extent the politicization of many of these efforts in the United States will be a challenge for chief sustainability officers or other leaders within companies who are at the forefront of this work?

David Wei:
Yeah. The United States certainly is a different environment than many other places in the world precisely because sustainability efforts or more precisely ESG efforts are being politicized. The good news is pretty simple. It is that even if acronyms and terms like ESG are being politicized, there're still broad-based and very strong support for the outcomes of sustainability action. So even those who are opposed or interpret a forced morality around terms like ESG, they support strengthening communities and treating employees well and managing material risks and being resilient and ready for an uncertain future. And in the end, fundamentally that is actually what the regulations are pointing to as well. So yes, it is a more politicized environment. It means that sustainability professionals and CSOs should, frankly speaking, speak with more substance and fewer empty acronyms, but they will find strong support for what they're actually doing.

David Stearns:
What do you see around the corner five, 10 years out from this, David? In a world where there is more disclosure, hopefully more ambition, hopefully more board competence, what do you see? Are you hopeful for the future or where do you see us in the future?

David Wei:
Yeah. I think there are reasons for both pessimism and optimism in the future. Let me start with what's right around the corner. You've spoken to different regulations. Certainly we're familiar with the IFRS disclosures and the ESRS disclosures. The disclosure that we've been all waiting for in the United States is the new SEC rule on climate disclosure, which is slated to arrive in October, 2023, and yet we're not absolutely certain that's going to happen. So I think we and many companies await with bated breath on this particular rule and what it contains. At the same time, whatever it contains, other disclosure rules have already been released. So in a sense, companies already need to be preparing for this additional regulatory disclosure.

If we look much further out, I think I mentioned at the beginning, the earth system boundaries. They're really interesting, not just in the abstract because there might be other global hard limits on other environmental issues that are not climate. I think they're interesting because they just might point the way to the future of environmental sustainability in five years. Is it possible that in 2028 that companies will have science-based targets for climate and then also other nature issues which are material to them and that they will speak about how they act within the earth's boundaries on all environmental issues? I think it's plausible, actually. It's certainly possible, and that's a really interesting future. The journey between now and between here and there is incredibly complex because other environmental issues are so complicated relative to climate, which is already very complicated, but it is fascinating to see glimmers of that future already emerging.

David Stearns:
Well, thank you, David. That's been very helpful, very illuminating. We thank you for your time and look forward to the next great insights coming out of BRS Climate Change team.

David Wei:
Absolutely. My pleasure.

David Stearns:
Thanks for listening. For more in-depth insights and guidance from BSR, please check out our website att bsr.org and be sure to follow us on LinkedIn.