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Time to Get to Grips with Sustainability

The Global Turning Point: A Dutch Point of View

The climate is at a turning point: It is changing and fast. As a result, investors, employees, customers and suppliers will all want to know how sustainable and resilient your business is (or will be in the near future).

Businesses need to take sustainability metrics as seriously as they take financial performance

Due to climate change, stakeholders want to know how sustainable and resilient your business is (or will be in the near future). This expectation is being hard-coded into laws and standards such as the EU’s Corporate Sustainability Reporting Directive (CSRD) and accompanying ESRSs (European sustainability reporting standards).

Articulating high-level ambitions is therefore no longer sufficient. Key stakeholders are looking for hard data, sensible metrics or other evidence that shows that your business is on a path to sustainability. New regulations will make the clear and credible disclosure of corporate climate transition plans, as well as transparency regarding the progress made (or not), business-as-usual within the next few years. Given the potentially significant financial impacts, you can expect financial auditors to also inquire about this progress.

So don’t kick the can down the road. If you do, your reputation will suffer, your legacy will be damaged and you could be vulnerable to lawsuits alleging that you failed to meet your fiduciary responsibilities. The test here is: Would a reasonable person have known that they should have taken this into account? The answer is “yes”: Most large businesses now put climate-related issues near the top of their materiality matrix or top enterprise risks.

Rather than thinking of sustainability as something that an external amorphous body wants from your business, consider the concrete demands from your investors, your employees and your customers for data and evidence. Young people, in particular, are pressing their employers to tackle climate change, as shown in the results of the Deloitte Millennial survey.

How can you get to grips with this new facet of performance? Start by looking at the public commitments the business has made. In all likelihood, there will be a gap between those commitments and your actual performance. Many businesses have over-committed primarily because they wanted to demonstrate that they are taking the climate seriously, but did so without conducting a thorough feasibility analysis or making concrete plans.

Next, consider the expectations of your most important stakeholders. Those expectations may be changing. For example, customers may soon want you to disclose your carbon footprint, taxonomy eligibility/alignment in your invoices, so they can choose the more sustainable options and potentially record this data at transaction level for their own performance monitoring and steering.

Start developing a practical plan linked to strategic metrics. Treat sustainability as you would profitability – continuously monitor your operational performance and actively steer the business in the right direction. As you do so, you will probably need to talk to your suppliers and revamp your supply chain contracts and management. Given the materiality and mutual dependency of businesses on each other, whole system sustainability (and therefore scope 3 impacts ) is key. Therefore you need to start taking action with the system in mind.

Adaptation goes hand-in-hand with mitigation

At the same time, don’t overlook the need to adapt your business to a changing climate. The world is already different. In the usually temperate UK, for example, temperatures climbed over 40°C in July 2022, breaking records and disrupting all kinds of economic activity. Scientists say human-caused climate change made this extreme weather event at least 10 times more likely.

Such events are harming both individual businesses and the broader economy. In a June 2022 report, Swiss Re warned that: “Physical climate change risks, together with economic value accumulation in exposed areas, are leading to an increase in frequency and severity of secondary peril disaster events. These now make up more than half of global annual insured catastrophe losses, underlining the need for urgent mitigation actions.”

In places where your business has a physical presence, you need to start looking at physical risks. How hot will it be? Will people be able to work? Are they going to get sick? If there's an extreme weather event, what will happen? You need to start preparing and be ready for the disruption that is now inevitable.

The global investment community is well aware that climate change is now impacting financial performance. The ACCA (the Association of Chartered Certified Accountants) see it as a material financial risk, while the FTSE and Johannesburg Stock exchange have made the Task Force on Climate-Related Financial Disclosures (TCFD) a listing requirement.

The new reporting requirements in the EU call for businesses to develop clear transition plans. To do that, you need to have concrete numbers, demonstrate due diligence, that you've taking climate change seriously and understand quite specifically what it means for your business model, for your stakeholders, for your facilities.

To conclude, the days when climate change was an abstract concept are long gone. It is a material issue for your business. And your key stakeholders are demanding action.

[1] All the emissions that the organisation is indirectly responsible for, up and down its value chain.

[2] Source: According to scientists tracking how climate change is causing extreme weather events. https://www.worldweatherattribution.org/without-human-caused-climate-change-temperatures-of-40c-in-the-uk-would-have-been-extremely-unlikely/

[3] Source: https://www.swissre.com/institute/research/sonar/sonar2022.html

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