78% of executives across surveyed sectors worry climate risk could lose them their jobs over next five years.
Despite increasing pressure from investors, governments and regulators, the majority of company executives are not prepared for decarbonisation of their business models and lack the knowledge and resources to address climate risk, according to a new global survey of large firms.
Just a quarter (25%) of respondents to the survey said they work for companies that offer remunerative incentives for directors to achieve decarbonisation targets. Slightly more (27%) said their firms do not yet have decarbonisation targets.
Published by Big Four accountancy firm KPMG and global top ten law practice Eversheds Sutherland, ‘Climate Change and Corporate Value’ surveyed directors and c-suite executives across nine industry sectors, from 509 of the world’s leading companies across Asia, Europe, the UK and the US. The research revealed several inconsistencies in c-suite commitments to decarbonisation.
According to the report, the top three challenges currently faced by corporate leaders looking to decarbonise are the short-term costs (76%), technology resources (49%) and internal skills shortages (47%). Almost three-quarters of respondents said the board and management in their companies lacked the necessary skills to assess and respond to the risks and opportunities presented by climate change.
Almost half (51%) of companies surveyed revealed they do not report publicly on the climate-related risks they face. Two-thirds (68%) of the companies that do provide public reports do so because investors demand it; 78% of companies that publicly report climate-related risks said it is because of existing regulations or planned regulations.
“[We found that] the solutions and opportunities around decarbonisation and adapting to climate risk, as well as how to finance these efforts, were at best generally understood concepts rather than strategies capable of being successfully implemented,” explained lead authors Michelle T Davies, International Head of Climate Change and Energy Transition at Eversheds Sutherland, and Mike Hayes, Global Head of Renewables for KPMG International, in the report.
Executives are under pressure from investors to implement changes, despite lack of remunerative incentives for doing so. A total of 78% surveyed admitted managing climate-related risks will be an important factor if they want to keep their jobs over the next five years.
“To help move the needle internally, some companies are implementing remuneration incentives for directors to achieve decarbonisation targets,” the report noted. However, this raises the question of how to ensure remuneration policies drive the “right behaviour on climate risk”, as well as defining how to measure meaningful success.
The short-term cost of addressing climate risk
The world’s largest 215 companies estimate the financial impact of climate risks to total at least US$1 trillion within the next five years, according to figures from the CDP, underlining concerns about short-term transition costs.
The report included an interview with Jim Barry, CIO of BlackRock Alternatives Investors, on the importance placed on the decarbonisation of the economic system for investors. It presents investors with “huge opportunities”, he said, even as this will be followed by an associate risk where any activity with exposure to carbon is going to require change.
“We still see 10 to 15 years of cash flows from carbon assets, but the challenge is: Will you still be able to sell these assets in 10 years? […] Companies really run a serious risk of becoming a stranded asset if they do not transition – if you have to sell something in five to 10 years which is carbon intensive you may be inclined to take an earlier view,” Barry said.
However, the economic impact of Covid-19 has understandably delayed executive action on managing climate risk.
“Covid-19 has created a funding challenge, and solving the problem is not without its complexities. There is not so much a shortage of capital as a shortage of capital being mobilised for where it is really needed – not only to support the innovation agenda and climate transition development projects in emerging markets, but also climate transition within companies,” the report said.
Of the executives and board members surveyed by KPMG and Evershed Sutherland, 52% said the pandemic has “delayed decarbonisation strategies” and 72% acknowledged that “they have a lack of capital to invest in decarbonisation in the short-term”.
Sectors falling behind the curve
Some sectors are further behind than others – most notably financial services and consumer and retail (C&R).
In the financial services sector, 84% of respondents said skills relevant to managing climate risk needed improvement at a board and management level.
Just 9% said their company calculated the potential financial impact of climate-related risks and only 9% made any kind of public report on the topic. Just 18% of financial services companies surveyed have developed a decarbonisation strategy. None of the surveyed companies in this sector had implemented remuneration incentives for directors to achieve decarbonisation targets.
It is a similar story in the C&R space, which the report noted “significantly lags behind other sectors”. C&R organisations “do not see the importance of decarbonisation for future success and are less likely to have a decarbonisation strategy”, it said.
The report concluded that companies need a “defined strategy” when addressing climate-related risks, should they want to align themselves with key stakeholders, such as investors, customers and business partners.
“[Key stakeholders] will want to see a defined strategy from companies with whom they engage in order to satisfy their own climate risk and decarbonisation agenda, including whether a particular investment or transaction should be made or whether to exit.”