Insights+ | Thursday June 1, 2023

How New Regulations Are a Game-Changer in Just and Sustainable Business

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Blog | Thursday May 25, 2023

Land Value at Risk

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In The Risk to Insurance, we discussed how climate change has made insurance industry modeling practices far more difficult to rely upon. Now, we dive into the climate justice risks surrounding the insurance industry’s ability to protect land-based assets and livelihoods, and we urge business to seek opportunities across their value chains to build inclusive resilience through risk mitigation and adaptation.

Climate impacts are raising the specter of uninsurability, giving new prominence to the role of insurance in driving climate mitigation. In 2022, the world saw an estimated US$313 billion global economic loss due to natural disasters, thanks in large part to historic and persistent climate change events. From flooding in Pakistan that displaced 7 million people to droughts in Europe, countries around the globe saw the impacts of climate events on their assets, of which only US$132 billion was covered by insurance.

Those most vulnerable to climate impacts are severely underserved by insurance options, exposing their assets, communities, and livelihoods to great risk. The insurance penetration rate is below 3 percent in Africa—one of the most vulnerable continents to climate change. Here, an increase in catastrophic events—from South African floods to Algerian wildfires—brings both endemic poverty and high exposure of key economic sectors, such as food and agriculture, to climate risk. The IPCC report projects reductions in yield could reach 50 percent by 2020, but small-scale farmers face a dearth of low-income insurance options.

In the US, climate risk has reduced insurance options across the board: hurricanes in Florida have seen large providers leave the state, while rampant fraud has pushed up home insurance premiums to the highest in the nation. Laurie Schoeman, Director of Climate and Sustainability at Enterprise Community Investment, sounds the alarm:

“When carriers step out, there’s less variety and the prices go up. You get stranded assets where households, families, and communities lose their economic legacy—and for low-income communities that’s an extreme impact.”

This could lead to an avalanche of economic displacement: communities lose residents, businesses, and livelihoods—and with them the tax benefits that are passed onto schools, services, and infrastructure. Meanwhile, more insurable locations can come under strain with the influx of those forced to relocate—that is, climate refugees.

This risk is further compounded by the need for reinsurance, which is when an insurance company purchases insurance to protect itself from the risk of loss. As more insurance companies struggle, the availability of reinsurance for those companies is also reduced as fewer organizations are willing to risk reinsuring languishing entities. AI adoption across the insurance industry could help, improving risk analytics to reduce costs and increase the capacity of reinsurance.

Cat Bonds are rising in response: these high-yield debt instruments are designed to raise money for insurance issuers, releasing money from the bond only in the event of a natural disaster.

A Three-Fold Solution

Several programs have been created to better protect homeowners and developing countries from catastrophic weather events caused by climate change. The Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF) utilizes insurance-linked securities (ILS) to create a multi-country risk pool that acts as an insurer for many Caribbean countries in the event of any catastrophic weather event. Payouts have included stabilizing drinking water plants; repairing critical infrastructure such as roads, bridges, and schools as well as homes; and support for the agricultural sector. However, programs like these are remedial, rather than preventative, and rely heavily on the handouts of developed countries.

The perils require a three-fold approach to mitigating and managing the risks, combining a push for secure land tenure, innovative insurance options that incorporate mitigation, and business leadership.

Secure land tenure is widely recognized as a key to climate change mitigation and adaptation. It ensures local landowners can invest in land-based solutions from carbon sequestration to flood management, improving their resilience to climate impacts and thereby their insurability, protecting both frontline communities and their livelihoods. Tenure also enables investment in long-term solutions to protect land in critical geographies from degradation. Businesses and insurers can join in advocacy and action to respect land rights and extend secure land tenure—as a foundation for pursuing insurance solutions and risk mitigation strategies. For instance, Coca-Cola and Illovo Sugar Africa have joined with communities and traditional leadership to support the development of improved land registration systems in Malawi to support smallholder farmers in sugar supply chains.

Effective insurance options to support resilient communities need to be affordable, accessible, and designed to promote and enable mitigation efforts. One model is the California Earthquake Authority, which offers insurance premium discounts to homes retrofitted to better withstand earthquakes and offers support to help homeowners make changes to qualify—equivalents are needed for climate risks. A less proactive but increasingly prominent solution is parametric insurance, which insures policyholders against the occurrence of a specific event at a certain magnitude (such as a specific flood level). The Munich Climate Insurance Initiative advocates for solutions that combine parametric insurance and climate mitigation support with disaster risk financing strategies, including gender-sensitive approaches, and encourages collaboration between social and climate protections. Risk reductions bring a moral hazard, though: they might incentivize rebuilding only to expose communities to chronic and growing risk, where in fact an equitable and inclusive approach to relocation is required. Businesses have a responsibility to engage communities in their value chain in co-creating long-term transition plans.

Citizens are exposed to both direct climate impacts for land and property as well as indirect ones, such as impacts on energy costs. Uruguay has adopted climate insurance to protect consumers from electricity rate hikes if its hydraulic power supply is hit by drought, causing it to fall back on expensive fossil fuels. In the long term, this also protects the economy while it seeks to scale renewables.

While states are wise to explore protections, global executive leadership is also needed to help engage, guide, and protect both industry and citizens. As concerns grow around land-based insurance and its potential to impact homeowners, businesses, and land-based livelihoods, it is important that business step up in these ways:

• Identify at-risk communities in their value chains, particularly those dependent on land-based livelihoods such as food and agriculture.
• Understand the needs of at-risk communities and co-create solutions with them to promote land tenure.
• Advocate for insurance discounts for those who actively mitigate against extreme climate change events.
• Advocate for insurance, mitigation, and transition options for those unprotected by national programs.
• Advocate for federal laws on disclosures for land transactions in high climate risk areas for floods, fires, hurricanes, and drought, ensuring that buyers are informed and acknowledge the risks.

Blog | Wednesday May 24, 2023

Canada’s Modern Slavery Legislation: Key Recommendations for Business

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On May 11, 2023, Canada became the latest country to adopt legislation targeting modern slavery across corporate supply chains, following in the steps of the UK and Australia. The S-211 bill, “Fighting Against Forced Labor and Child Labor in Supply Chains Act,” which will enter into force in January 2024, will require companies to disclose measures to prevent and address violations linked to any step of the production, distribution, and import of goods within and into Canada.

Key Provisions

The Canadian Act requires companies to publish an annual report, of which the first is due before May 31, 2024. The Act applies to a similar scope of companies as the UK and Australian Acts, with general requirements for the company to have connections to Canada and establishing thresholds related to revenue and the number of employees.

Companies will have to provide information on corporate policies and due diligence related to forced labor and child labor, an assessment of risks within the business and its supply chain, and measures taken to remediate violations. The new Act requires companies to report on efforts to remediate the potential impacts on income to the most vulnerable families due to corporate action to eliminate forced labor and child labor— the first Act to consider these types of potential impacts. Finally, reporting disclosures will also need to outline the effectiveness of anti-slavery corporate policies.

Contrary to the UK and Australian Modern Slavery Acts, Canada’s S-211 bill presents the possibility of imposing pecuniary fines of up to CA$250,000 (around US$186,000) on businesses that fail to submit a report, obstruct an official in related investigations, or knowingly make a false or misleading statement. If the government determines that a particular entity is not in compliance with the Act, they may order corrective measures.

While the law has been principally criticized for not imposing victims’ compensation on a company that may have caused, contributed, or is directly linked to their exploitation, the Act expands the existing Customs Tariff to explicitly prohibit imports made with child labor, defining the term more broadly and raising the age to 18—with various caveats.

Recommendations for Business

1. Collect information for reporting. As companies are mandated to present their first modern slavery report no later than May 2024, businesses should start to collect more detailed information on their business structure, approach to modern slavery, and their risk profile—both across operations and in Canada—including specific policies and processes related to this region.
2. Strengthen monitoring and evaluation of human rights due diligence. Even though sanctions do not relate to the substance of the information disclosed, companies should expect heightened scrutiny on their reporting, especially as it relates to supply chain mapping, prevention, and due diligence for risks of forced and child labor.
3. Enhance remedy and mitigation measures. As the Act requires detailed information on the effectiveness of forced labor risk mitigation, companies have an opportunity to revise their approach to remediation as a pillar of the UNGPs. Measuring efforts also requires companies to establish KPIs tailored to evaluating anti-slavery action.
4. Engage the Board. As the statement will have to be approved by the board of directors, building internal consensus on the importance of corporate modern slavery policy is critical.

The law will expand modern slavery reporting requirements to a host of new companies and reinforce policy efforts to address modern slavery across private sector by creating a level playing field for transparency. While no single company can address the scale of today’s modern slavery, these policy developments represent an opportunity for business to demonstrate their commitment and action in addressing human rights impacts in line with the framework of the UNGPs.  

BSR’s anti-trafficking team advises business from across sectors on due diligence and management of forced labor risks. Please get in touch with any questions.

Blog | Wednesday May 17, 2023

Sustainable Coconut Partnership: Toward a Responsible and Resilient Sector

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The BSR Sustainable Coconut Partnership team discusses the recently launched Sustainable Coconut Partnership, the unique challenges facing farmers, and how it plans to scale impact in the year ahead.

Could you tell us about the Sustainable Coconut Partnership?

The Sustainable Coconut Partnership (SCP) is the global platform for coconut sustainability and is a multi-stakeholder initiative aiming to build a responsible and resilient coconut sector that solves a generational challenge of sustainability for millions of coconut farmers.

Working across all coconut products on a global scale, SCP unites stakeholders to drive positive impact for farmers’ livelihoods by establishing industry-wide best practices and impact programs. With around 20 active members and a community reach of more than 500 professionals, SCP is already well-positioned to establish a much-needed common approach to coconut sustainability. Our members are active on the ground in producing, processing, and sourcing coconut products, and their membership positively influences supply chain partners. SCP also welcomes members from civil society, associations, financial institutions, academia, research organizations, and governments who are change-makers in their own capacity and bring much to our joint vision.

What is your mission and strategy for impact?

SCP’s mission is to catalyze responsible coconut production and market transformation at scale by establishing industry-wide best practices and impact programs.

Both in-depth research and our members active on the ground report that industry players alone are poorly equipped to tackle the underlying sustainability issues in the coconut sector. SCP addresses the lack of linkages between public and private programs by driving transparency and collective action and develops impactful, game-changing projects in production landscapes.

One of the first milestones was to define a common language for coconut sustainability in the Sustainable Coconut Charter, which was developed with over 100 organizations worldwide. We can operationalize the coconut charter’s goals if impact projects adopt these guiding principles so that they become industry-wide, scalable, and replicable best practices, thus inspiring farmers and new entrepreneurs to adopt sustainability principles. Establishing the right structure and strategy to increase investments and secure success has been a true test of SCP’s ability to work through divides, unite stakeholders, and change the narrative to ultimately accelerate positive impact across the supply chain. 

What are the key challenges when addressing issues such as farmers' livelihoods? How can SCP help?

It all starts with farmers. Currently, they are not reaping the benefits of the product that they grow. Ranked among the world's poorest, most smallholder farmers that are dependent on coconut are trapped in a vicious circle of poverty, unable to invest in their farms. SCP intends to solve this once-in-a-generation challenge and support the livelihoods of millions of farmers.

More than half of the world’s coconut trees are becoming senile, resulting in lower yields and a daunting replanting phase. This is driving new generations to leave farms, rather than start in these conditions with limited resources after already observing their elders struggle to make a living income. Ironically, despite these challenges, demand is currently outpacing supply as consumers seek sustainably sourced coconut.

Although a growing body of evidence shows coconut plantations can support farmers while benefiting the environment as exceptional carbon sinks, this requires the right investment. SCP aims to address this challenge in a field in which more than 95 percent of coconut plantations belong to smallholder farmers, mostly unorganized.  

One of our flagship initiatives, the Impact Project Accelerator, exemplifies SCP’s impact focus. The Accelerator provides dedicated support and expert advice to impact projects through their design, recruitment, and funding phases, which fills an identified resource gap among individual member companies and addresses a current lack of connection between public and private programs. Members can suggest projects for consideration and receive guidance on developing credible products that are accessible to upstream producers, buyers, and investors.

So, what’s going to be keeping you busy in the coming months?

We’re already very busy! After establishing the organization and defining an ambitious scope of work with our members, we are now starting to drive change at scale. SCP is focused on supporting members to find their partners, public and private, to accelerate impact projects while upholding the ambition and principles of the Sustainable Coconut Charter.

In the next months, look out for SCP’s revision of the Sustainable Coconut Charter, the first cohort of projects from the Impact Project Accelerator, new information on regenerative agriculture and protection of the environment, and our flagship roundtable event in November in Indonesia, where we will be announcing exciting new partnerships.

We invite organizations that have direct involvement in coconut supply chains, as well as civil society organizations, associations, trade bodies, governmental organizations, and other players indirectly involved in the coconut industry, to join SCP. For more information, please contact us.

Support for SCP comes from a multi-year program between BSR and the Swedish International Development Cooperation Agency (Sida) to promote business-led multi-stakeholder collaboration.

The creation of the SCP steering committee and partnership has been facilitated by The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH as part of a development partnership on sustainable coconut (oil) production under the develoPPP program. As part of this, GIZ will furthermore continue to support the organization of the Roundtable meetings.

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Grégory Bardies

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Blog | Wednesday May 10, 2023

Applying an ESG Lens to Crypto

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Cryptocurrencies continue to attract investors against the odds. How can businesses approach these opportunities in a way that maximizes their potential for empowerment and inclusivity, while guarding against significant environmental and social concerns?

We’re still witnessing the fallout of cryptocurrency exchange FTX’s collapse last November. Two crypto-focused banks in the US, Silvergate and Signature, have since buckled under heavy losses, sending crypto firms looking to banks in Switzerland for loans. While regulators rush to strip crypto of smoke and mirrors, a report from economic advisors at the White House offers the damning judgment that “crypto assets currently do not offer widespread economic benefits…[and] are too risky at present to function as payment instruments or to expand financial inclusion.”

The risks were evident before FTX filed for bankruptcy. In 2022, hackers stole over US$3 billion from crypto investors—but neither the thefts nor the exchange’s failure has proved a strong deterrent. The top cryptocurrencies also held up well in the wake of Silicon Valley Bank’s more recent collapse, while Bitcoin and Ethereum surged.

Advocates pin crypto’s resilience on the decentralized, transparent, and (in theory) auditable nature of its blockchain foundations. And while it isn’t insulated from the flaws of mainstream banking (SVB’s collapse heavily impacted Stablecoin issuer Circle, for one), it continues to attract both traders and those up against the limitations of centralized finance.

Advocates point to these theoretical advantages:

• Cheap and instant peer-to-peer transactions across borders, cutting out middlemen and supporting people in emerging markets and those dependent on remittances
• Financial opportunities for the unbanked, with potential gains for women in particular, who are less likely to have a bank account than men
• Alternative access to finance for those subject to government corruption or restrictions
• Ownership of financial assets (akin to keeping gold under your mattress) affording some protection against hyperinflation
• New fundraising sources for start-ups, again with particular gains for women-owned businesses, which receive less than 3 percent of venture capital funding.

Beyond the World’s Paywalls

While cryptocurrencies can prove as volatile as fiat, they have offered a lifeline where geopolitical challenges have cut people off from salaries and savings. Ukraine has seen an increase in crypto use with restrictions on currency cash transactions and to enable foreign donations. In Afghanistan, crypto has offered a way to pay gig workers cut off by economic sanctions, including women. In Lebanon, young people are turning to cryptocurrencies to counter dire currency depreciation and bring in money from abroad. In these extreme cases, liquidity trumps stability, while the anti-establishment roots of crypto attract those who have never known a trustworthy government.

However, the potential of crypto to drive financial inclusion where it is needed most is limited by smartphone access—particularly impacting women, who are 18 percent less likely than men to own one. Innovations might help: Sorted.Finance supports crypto wallets on basic feature phones. Its app has 4000 users, finding its largest markets in Pakistan (which has one of the highest gender gaps in phone ownership), Nigeria, and Tanzania, with usage focused on daily transactions and remittances.

Sorted's wallet supports Bitcoin and the dollar-paired stablecoins Tether (USDT) and USD Coin (USDC)—limiting the options for good reason: underprivileged people have been targeted for the rollout of crypto, only to be exposed to scams. As COO Stephen Browne explains:

“It’s against the free nature of crypto to limit a wallet, but we felt it was important to protect people from scams. Yes, Bitcoin could be hacked—but it hasn’t been since 2009. As for the stablecoins, we can’t guarantee their deposits, just as any bank account is vulnerable to theft and loss of value—but we make it clear that you transact at your own risk.”

Risks and Recommendations

Greater protections are needed to insulate all consumers from a range of risks:

• Debt and bankruptcy: One study found that trading cryptocurrencies overlaps strongly with trading high-risk stocks, while soaring loan interest rates and flash loans can expose users to exploitation and addiction.
• Access to risk-taking activities, such as drugs and gambling: Cryptocurrencies offer anonymity that can be used to fund illicit activities—although legitimate activity is growing more rapidly than criminal usage.
• Risks to minors due to weak age verification systems
• Lack of insurance provision from the likes of the UK’s Financial Services Compensation Scheme or the US Federal Deposit Insurance Corporation
• Value collapse spurred by hacks, "bank" runs, or regulation, such as China’s crypto ban

These add to well-acknowledged environmental risks: The energy demands of coin mining and minting have been a factor in bans in Iceland and China, while the US just proposed a 30 percent excise tax on the power demands of crypto mining companies.

Regulators are playing catch-up, but there is a clear opportunity for environmental, social and governance leadership from private sector players. Recommendations include:

Environment
Prioritize applications that use the coin mining method Proof-of-Stake to cut energy consumption by 99 percent compared to Proof-of-Work. Beyond this, support renewable sources to scale, look for opportunities to conserve energy and use low-carbon products, and consider partnerships such as the Crypto Sustainability Coalition, exploring how web3 technologies can drive climate action.

Social
Engage in partnerships, including with governments, to support inclusivity at every stage of design and implementation. Design for interoperability and inclusivity to maximize access and empowerment, and take a gender-sensitive approach to address crypto’s gender gap and protect women users.

Governance
Advocate for legal and regulatory frameworks to safeguard minors, marginalized communities, and other at-risk groups. Pursue standards, transparency, and accountability. In strategy setting, unite around the specific challenges you aim to solve with crypto, and seek to deliver gains across the board.

Questions to Business

• What specific challenges can you identify to which crypto can offer a solution?
• How can you support the potential of cryptocurrency to empower individuals and communities in your supply chain?
• Where can you play a role to protect the financial, social, and mental well-being of those engaged in cryptocurrency activities?

Blog | Wednesday May 3, 2023

Anywhere the Smoke Blows: The Health and Climate Risks of Wildfires

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Wildfire smoke is a growing public concern. As climate change alters the severity of wildfires across the world, experts are making unsettling discoveries about the ramifications of prolonged exposure to smoke. A new understanding of the environmental and health impacts has significant implications for the role of business in wildfire prevention, management, and adaptation.

Recent wildfires causing damage of historic proportions, from Australia to California, are driving new research on the impacts of smoke—with disturbing revelations. One is its role in greenhouse mitigation reversal. As forests burn, they release CO2, intensifying global warming and increasing wildfire risk. A recent study found that carbon released from California’s 2020 wildfires amounted to 127 million megatons and dwarfed the state’s emission cuts over a 16-year period. Protecting forests from wildfire risks is therefore crucial to maintaining the impact of mitigation efforts to date.   

Equally alarming are the disproportionate health impacts of fires for communities hundreds of kilometers downwind: in the US, three-quarters of deaths and hospital admissions attributable to wildfire smoke occur in the East, where population density is highest, not in the West where the majority of large fires occur. Not only are these impacts more far-reaching than previously thought, they are also more severe and long term: fine particles that travel cross-continent on the wind reach deep into our bodies, with significant neurological, respiratory, and dermatological impacts. These converging environmental and health impacts call for greater scrutiny of wildfire risks across value chains, examining how specific activities contribute to wildfire risk, as well as where both proximate and distant exposure to wildfires and related smoke poses a risk to communities and workers.

A Major Challenge to Emissions Reduction and Public Health

The impacts of wildfires on global warming go beyond the reversal of carbon mitigation efforts. Researchers in Singapore found that carbon monoxide from wildfire smoke could be both accelerating natural processes that produce methane and slowing those that remove it from the atmosphere, with much greater impact on global warming than previously thought. This presents a complex and escalating climate feedback loop: both smoke and warming drive methane levels; both carbon emissions from smoke and methane drive warming; warming drives wildfire incidence and intensity, increasing levels of smoke and methane.

The risks to brain health, evident in populations over 300 kilometers away, have huge implications for the workforce and communities, both immediate and long term. A number of studies link the fine particles of smoke to degenerative conditions such as Alzheimer’s disease as well as depression and psychosis. High exposure has also been linked to skin conditions like eczema and psoriasis and worsened birth outcomes. Particulate pollution from higher levels of methane is also more likely to aggravate respiratory and cardiovascular disease. Disproportionately impacted populations include outdoor workers—such as construction and farm workers, both with a high level of migrants—and socially disadvantaged groups with limited adaptive capacity, particularly in densely populated areas.

The Business Implications

Recognition of the climate and health impacts of smoke, alongside the push for businesses to fight air pollution, could heighten business liability and lead to stricter climate risk requirements across all company value chains:

“Acting to prevent wildfire smoke across the value chain is a climate win, a public health win, and a reduction in business risk” says David Wei, BSR's Climate Director.

Outdoor labor will be increasingly hazardous, and potentially subject to restrictions. Air quality reporting may be required for both outdoor and indoor environments, raising demand for energy-efficient filtration systems. Adaptation may also mean relocation—both in fire-prone areas and downwind. Poor communities, unable to relocate or filtrate, will increasingly face a clean air health divide, among a plethora of climate justice concerns.

Land-based sectors are on the frontline. Prolonged exposure to wildfire smoke can both disrupt farm labor and also destroy the outer layers of crops and affect soil composition. This can lead to chronically underperforming crops, potentially driving financial and job losses.

Fresh impetus for nature reporting and ecosystem regeneration can be harnessed to support mitigation. Agricultural experts in California have called for targeted grazing to manage vegetation as a cost-effective wildfire fuel reduction method. Controlled burning has long been used to protect ecosystems and communities from wildfires and support regeneration, but while preventative action can reduce insurance premiums, insurance for this practice is increasingly expensive or unavailable. Diverse forests, less susceptible to wildfires than monocultures, will be critical, a clear call for action to the pulp and paper industry, as well as for afforestation projects. Businesses dependent on forest inputs can advocate for regenerative approaches, as well as scouring their value chains for mitigation opportunities ahead of stricter requirements.

All sectors could be affected by the implications for decarbonization. Demand in the carbon offset market is high and expected to increase over the next few decades; however, the potential of wildfire smoke and other climate impacts to disrupt forestry-related projects and negate carbon reductions could drive a more critical look at offset quality and effectiveness. Despite the urgent need for investment in nature-based solutions, companies may favor technological carbon removals and inadvertently limit nature’s role in addressing both the climate and biodiversity crises. We may also see increased interest in methane removal.

In line with the IPCC’s latest report, as we emphasize here, it’s time for companies to look beyond emissions reduction to adapt to climate impacts. Where wildfires are concerned, the climate feedback loop means adaptation will also reap benefits for mitigation.

Integration and Innovation

For most businesses, adapting to wildfires and smoke means doubling down on worker and community health and safety, investing in innovative approaches alongside personal protective equipment (PPE), air quality, and remote work options. Companies such as PG&E and Torch Sensors are using AI technology for ultra-early-stage fire detection. Emerging aerial and space-based technologies are expanding possibilities for detecting early warning signs of wildfires. Breezometer’s Active Fires and Smoke Pollution Map provides businesses with fire-related pollution tracking and up-to-date fire alerts across 100+ countries.

However, while co-creating local solutions to the hazards of wildfire smoke is essential, businesses also need to respond to its dispersed impacts. Truly effective adaptation and mitigation will demand an integrated, multi-stakeholder response across sectors and even across continents. The recently published Roadmap for Wildfire Resilience supports an “all-of-society" approach, advocating collaboration across all levels of government, Tribal Nations, the private sector, and other stakeholders. UNEP is calling for countries to adopt a “Fire Ready Formula," in which 66 percent of spending is devoted to planning, prevention, and recovery from wildfires, and the remaining 34 percent is spent on response. Businesses should bolster such cross-sector initiatives and collaborate to drive more responsible forestry practices in their supply chains.

The climate, health, and environmental justice hazards make this a material concern for any companies, however remotely they are subject to fire and smoke risk.

Questions for Business

• What action can you take to address wildfire impacts across your value chain?
• How might you prepare for enhanced supply chain climate risk requirements?
• How does smoke affect health and safety for your business?
• How resilient is your carbon reduction strategy to the impacts of wildfire smoke?

Blog | Tuesday May 2, 2023

Climate Transition Plans That Enable Business Transformation

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Investor groups and key climate organizations are expecting clarity on how companies are moving from target-setting to taking action with a climate transition plan. The Glasgow Financial Alliance for Net Zero (GFANZ), the Task Force for Climate-Related Financial Disclosures (TCFD), and the CDP, among others, have released climate transition plan disclosure frameworks and guidance recently. In March 2022, the UN Secretary General’s High Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities published its final report with ten recommendations for non-state entities, which include creating a transition plan.

Calls for these disclosures are a response to gaps between companies’ targets and progress, as well as meaningful emissions reductions. In its latest progress report, the Science Based Targets Initiative (SBTi) highlights this gap—of 692 companies analyzed in the report, only 46 percent reported progress against all their science based targets.

Climate transition plans are a set of actions and accountability mechanisms that ensure business strategies and operations deliver GHG emissions reductions and a net-zero transition. While definitions and frameworks are evolving, climate transition plans should state the company’s climate objectives and goals and how they will be achieved via a net-zero aligned resilient business strategy, governance and accountability, business and financial planning, implementation, organizational culture alignment, and engagement with value chains, industry, and policy. In addition, climate transition plans should ensure a just and equitable transition, as well as the protection and restoration of nature and biodiversity.

To ensure that companies make meaningful progress toward their climate commitment, climate transition plans must enable net zero-aligned business transformation. Effective climate transition plans:

1.     Are integral to a resilient business strategy.

Integrating climate actions into business strategy will not be sufficient to deliver meaningful progress—it will require a paradigm shift. Resilient businesses anticipate material changes to the operating environment, systemically develop and test strategic plans in the context of such changes, and allocate resources that enable success in multiple potential futures. By focusing on building resilience, companies will develop and implement transformative climate transition plans that drive meaningful progress toward climate targets and deliver long-term business value. Building a resilient business may require a rethinking of business models, long-term value, and growth.

2.     Are overseen by the board and executive leadership.

Board and executive-level oversight enables alignment of governance, strategy, and internal processes with climate targets and resilience building. Executive decision-making that is consistent with purpose and long-term value generation avoids short-term thinking that sets failure on targets. Governance, accountability, and the integration of stakeholder feedback are vital for companies to remain on track to deliver emissions reductions and be equipped to respond to a changing regulatory environment.

3.     Allocate resources toward decarbonization programs.

A transition toward net zero will require most companies to radically transform their operations and product and service portfolios and address high-carbon assets. Such interventions will require companies to rethink how they allocate resources and deploy human and financial capital. Prioritizing the allocation of financial resources toward these actions will require upfront investment but can build resilience to changing market conditions and bring long-term returns. Financial metrics must be adapted accordingly.

4.     Integrate climate into skill development and corporate culture.

As business models evolve, climate and sustainability-related responsibilities will be embedded across corporate roles that will involve cross-functional collaboration. To facilitate this integration, companies need to invest in skill development, such as reskilling employees from high-emitting business units to transition programs or providing company-wide training on climate change basics.

In addition, companies will need to create enabling cultures, by openly communicating climate-related plans, policies, and procedures to employees and engaging them in decision-making processes. Leadership will have a role in framing climate change as a priority issue for the company.

5.     Lead to closer engagement with value chains.

According to the CDP, upstream scope 3 emissions of the average global company are 11.4 times greater than its direct operations emissions. To meet Scope 3 targets, companies will need to drastically invest in responsible sourcing strategies. By working with upstream and downstream business partners that have aligned priorities, companies will be able to advance collaborative solutions. Facilitating supplier access to sources of finance, technology, and training will ensure value chains have the critical support needed to advance their own climate transitions.

The disclosure of climate transition plan and other sustainability-related information is key to generating decision-useful information for stakeholders. While it is important that companies disclose high-quality information, they must ensure that climate transition plans are integrated into business strategy, lead to short-term action and emissions reductions, and generate a net zero-aligned business transformation. This approach will ensure that companies will be equipped to manage climate-related risks, generate long-term value, and remain competitive in a net-zero global economy.

Beyond business transformation, climate transition plans should lead to system-wide interventions that facilitate a net-zero transition. This requires engagement with public policy, industry, and communities affected by climate and transition policies. BSR will cover these topics in upcoming blogs.

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Pek Siok Lan

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Ms. Pek Siok Lan is Head of Investment Stewardship at Temasek International, responsible for the development and implementation of corporate governance
and stewardship frameworks.

Prior to this, Ms. Pek was General Counsel of Temasek for a decade, leading its global legal, regulatory and compliance function. She was also a Global Executive Council member, serving on Temasek’s investment, strategy, and management committees.

Before joining Temasek, Ms. Pek was General Counsel for more than 20 years at the Singapore Technologies Group and ST Telemedia Group, with responsibilities spanning governance, mergers and acquisitions, corporate restructuring, litigation, and compliance.

She serves on the board of Mandai Park Holdings, a company committed to wildlife conservation and on the investment committee of Temasek Trust Asset Management, a firm dedicated to impact investing.

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Laurence Pessez

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