Eight steps to climate leadership
- Identify the business case for climate change action.
- Put in place a strategy to manage the risks and opportunities in both the short- and long-term
- Go beyond direct operational impacts and consider the implications from supply chain to customer
- See regulation as an opportunity not just as cost and risk
- Take the discussion to the board on a regular basis
- Consider partnering with others, speak to suppliers and customers
- Consider a climate change strategy as a key competitive advantage
- Set ambitious targets, hold people accountable, and incentivise success
Countdown to a deal on climate change: What does this mean for business success?
Every CEO wants to be remembered for a long-term vision that shapes the future of their company. Yet the pressure to deliver short-term and largely financial success all too often gets in the way of creating a lasting legacy.
There’s no clearer example of this than the way CEOs have handled the issue of climate change. Many global companies acknowledge the reality of climate change and that it will impact their business. Yet, aside from a few very vocal advocates, CEOs have, up until now, tended to look at climate change through the short-term, tactical lens of rising energy costs and making energy efficiency improvements. As climate change starts to affect access to raw materials, the reliability and security of global supply chains, and even the type of products and services consumers demand CEOs must also take a strategic view – one that looks to the short, mid and long-term, to identify both the risks and opportunities for their business.
Every CEO wants to be remembered for a long-term vision that shapes the future of their company.
The upcoming UN Climate Summit in Paris (COP21) in December appears set to increase both risks and opportunities for global companies. So where do CEOs stand on climate change and how can they provide leadership now in order to deliver a lasting legacy?
PwC’s most recent Annual Global CEO Survey reported that global executives were the most confident about growth that they had been in years. And in our 17th Annual Global CEO Survey released in 2014, when we asked specifically about megatrends, 46% of CEOs agreed that resource scarcity and climate change was set to transform their business. in this latest pulse, we asked CEOs from all over the world to focus on growth in the context of climate change. Are they weighing up the risks but also considering the opportunities for growth from climate change? And are they responding by building strategies for short-term and long-term business success?
Energy cost concerns and the connection to regulation
It might seem counterintuitive that CEOs should be concerned about the effect climate change will have on energy costs at a time when fossil fuel prices are low and supplies are abundant. Nevertheless 61% said that a rise in energy prices was the main threat posed to their company by climate change and over half (56%) highlighted the risk posed by new government climate change regulation. Of those it was the biggest companies (over $1bn turnover) that expressed the most concern over regulation.
This may be short-term analysis on their part as a global climate deal that aims to limit emissions to meet the 2°C goal - or even a 3-4°C outcome - would inevitably lead to regulation that would see the cost of energy rise in the short term.
Dig a little deeper though and CEOs are also concerned about strategic issues such as the risk posed to their global supply chains by climate change (51%), and securing access to raw materials (49%). So while a broader base of CEOs see climate change through the lens of greater regulation and higher fuel bills, a smaller, leading, group is emerging that also view climate change from a strategic perspective. They‘re concerned with their whole value chain, from the supply of raw materials, to production and to the end customer.
Regionally, CEOs in Western Europe and Asia Pacific expressed the most concern about new government regulation (59% and 58%). Asian and Latin American CEOs were more concerned about supply chain disruption (58% and 62%) than their North American counterparts - possibly as they’re already feeling some of the effects first hand. When it comes to industry sectors, a higher proportion of financial services CEOs don’t see climate change as a risk to their business models compared to other sectors, which could highlight a disconnect with the sectors they finance.
Laudable motives but missing the opportunities
Does wanting to protect the interest of future generations result in cold hard business action?
Given their concerns over governmental regulation and the impact of potential higher energy prices you might think that CEOs would cite hard-headed business thinking when asked what motivates them personally to take action on climate change. Instead, 81% told us that what motivated them personally to direct their business to take action on climate change was a desire to protect the interests of future generations – a natural and personal response. But does this sentiment result in cold, hard business decisions on climate action? In the context of an ambitious climate deal, CEOs will need to align their desire to do right for future generations with formulating strategies that will make their own business more resilient and adaptable to succeed in a climate-change aware economy.
Our survey shows increasing evidence that an emerging group of leading CEOs do understand the business case for being proactive. Three in five surveyed (63%) said they were personally motivated by creating a reputational advantage. Just over half identified improving shareholder value as a motivator. They also realise success won’t be achieved in isolation. 58% of CEOs said their companies are partnering with suppliers to address climate change risks and opportunities and the same percentage are doing so with business partners. And 55% said they were collaborating with consumers on these issues.
An emerging group of CEOS are proactive about integrating climate change strategies into their business
Even greater collaboration would help. Less than a quarter of CEOs said their companies were partnering with competitors and just 27% were reaching out to investors. The former is perhaps understandable though, in broader areas of sustainability, pre-competitive collaboration within industry sectors such as apparel, beef and forestry have been shown to accelerate smart thinking and action. The lack of dialogue with investors suggests that even the more forward-thinking CEOs are only just starting to identify how climate change will impact their company’s value and profits.
Overall, the leading CEOs realise that there are crucial business reasons for integrating climate change strategies into their planning - from supply chain to marketplace, both from a revenue growth and risk management perspective - and are taking action to do so. Making these benefits clear and measurable, and communicating them widely, will be important to build deeper confidence in the business community, with government and with the public.
Smarter sustainable thinking = smarter products and smarter operations
Consumers are starting to understand that more sustainable products no longer means compromising on quality or style. The automobile industry, with the arrival of electric vehicle company Tesla, and innovation by traditional carmakers offers a high profile example of this shift in perception. The domestic energy sector, where improvements in solar power capacity are starting to reshape the relationship between consumers and suppliers, is another - although myths about the cost and reliability of renewables, access to finance in some markets and inconsistent regulation haven’t helped.
When we asked CEOs what actions they’d taken in response to climate change risks, three quarters (75%) told us their company had developed more sustainable products and services. Western European and Latin American companies were most active in this area; those in Asia Pacific and North America less so. Over half (54%) were making strategic investments to take advantage of green growth opportunities. When you take into account that 61% of CEOs are also changing how they manage climate change related business risks and 61% on how they take pollution levels into consideration in operational planning, it’s clear that many companies are taking active steps to become more sustainable businesses. They're doing so even if these actions are not yet being evaluated as a joined up corporate strategy or translating into tangible revenue growth.
Many companies are taking active steps to become more sustainable businesses, even if these actions are not yet being evaluated as a joined up corporate strategy.
Get the executive board on board
It’s clear from our findings that different divisions in CEOs’ companies are taking active steps to mitigate risk and seek business opportunities from the challenges posed by climate change. However, it’s also clear that many CEOs have yet to shape these different activities into a cohesive business strategy and narrative to communicate internally and externally.
Over half of CEOs surveyed say their board discusses climate change and extreme weather risks only when it impacts them (that was especially true of those from Western Europe). On the other hand, half of CEOs said they table this at least once a year with the board. The tendency to react to climate change rather than discuss it proactively isn’t so surprising, given that extreme weather and climate change is often still viewed through the lens of crisis and risk management, rather than strategic business planning. The more CEOs come to view climate change and sustainability as an opportunity for growth as well as a business risk (just 34% of CEOs told us that was case currently) the more likely it will command the attention of the top table more frequently – particularly if targets and incentives for executives are also aligned to delivering on climate change goals.
To Paris and beyond
The COP21 summit in Paris will generate headlines from now until early December. But CEOs tell us the potential for a binding agreement isn’t the main driver for climate change action in their sector. Taken literally that’s undoubtedly true – even a strong global agreement between governments will seem removed from the world of day-to-day business. And yet, a successful Paris accord will be the catalyst for major change on a national and regional level – a form of trickle down climate legislation that will have ramifications for all of business.
77% of CEOs said a clear, consistent and long-term national government policy framework would drive real climate change action in their sector. A COP21 agreement could give some governments the license to regulate in areas not previously touched on. It isn’t just the big stick of regulation that will drive change. 65% of CEOs say that improved access to government funds for ‘green’ business will help. Yet an even bigger driver for CEOs is consumer clout. 80% of them said greater public awareness and engagement around climate change would spur their sector into action, while 67% said demand for low carbon goods and services is important. Essentially, CEOs are telling us they want to governments to lead (and remove market uncertainty) with clear, consistent and long term regulation, and raise public awareness to gain the support of the consumers. Business will follow with lower carbon, more climate resilient products, services and solutions, and some of the finance.
Leadership in a changing climate
It’s clear to us at PwC that CEOs are on a “climate leadership” journey. At the very start of the journey are the sceptics - CEOs who, so far, either don’t believe that climate change is happening or don’t see it as a business issue. Further down the path are what we call the ‘operationalists’ – a pragmatic group of CEOs whose focus is on reducing risk and costs through energy efficiency strategies and operations - what well-managed company wouldn’t focus on reducing its fuel bills?
It’s clear that CEOs are on a "climate leadership" journey.
Further still along the climate leadership journey are what we see as the ‘opportunity seekers’ - CEOs who are taking a more strategic view. They’ve identified the revenue opportunities to develop new sustainable products and services, invest in new green growth opportunities, manage the risks of climate change more closely, protect resource and raw material availability and cost through resource efficiency and support biodiversity. Leading the journey are a small but growing number of CEO ‘advocates’ who are taking an activist stance with policy makers and making their voices heard publically on the business reasons for tackling climate change.
As CEOs continue on their own climate change journey, they’ll need to reconcile their long-term vision with their needs for short-term success. Ultimately, by replicating the focus and drive that has delivered results within three and five year timelines, and aligning it with both tactical and strategic climate change action, CEOs can drive sustainable growth that’s good for the planet and for their companies. That would be a legacy all CEOs could be proud of.
PwC’s CEO pulse provides a temperature gauge of global CEO sentiment on a variety of topical business issues throughout the year. For this pulse on climate change we spoke to 142 CEOs across Europe, Latin America, Asia Pacific, Africa, North America and the Middle East in July 2015.
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