In a previous article, I highlighted the five climate change risks that retailers need to understand, and in this article, I’ll aim to cover how boards can have constructive and meaningful conversations about climate change risk.
Rather than this critical issue being placed in the “too hard” basket, it needs to be front and centre of boardroom discussions across the retail sector. There are simple conversations, processes and tools that every boardroom could be adopting today to ensure they are taking climate action responsibly.
Discussing disclosure risk
Retailers across Australia are investing in green and sustainable practices, following demand from customers, investors, staff, and partners. While most organisations are well-intentioned when setting ESG goals, not all follow through on these commitments, which can lead to instances of “greenwashing”.
In the latest federal budget announcements, $17.3 million has been allocated over four years to ASIC to promote sustainable finance markets, including additional resourcing to investigate and take enforcement action against greenwashing and comparable misconduct. As well as financial consequences, businesses also risk losing customers. Recent research shows three-quarters of consumers are more likely to invest in products verified by an independent source amid the rise of greenwashing, and 88% of consumers expect their investments to be responsible and ethical.
As one of the key roles of boards is to ask the right questions, they should gain a thorough understanding of the regulatory landscape and where their organisation fits within it. ESG practitioners should leverage reporting tools to help boards gain a clear understanding of progress against carbon targets, peer benchmark disclosures, and scope 1, 2, and 3 emissions.
Discussing capability risk
While many employees will have the best intentions to understand their role in driving climate action, not everyone will have the actual skills required.
Conducting a sustainability skills gap analysis starts at the top with boards and the executive leadership team assessing their own capabilities internally to determine whether the company is currently equipped with the skills and knowledge to deliver on its climate goals. If not, assess where on-the-job upskilling could be implemented, whether third party trainers or consultants are required, or whether new hires could help the business drive more effective climate action.
Discussing timing risk
What are the consequences of increasing the resources dedicated to climate action today, in comparison to investing a month, a year, or a decade from now? How do the costs change over time? What is the likely impact on the customer base, partner network, and supply chain? How will employees engage or disengage with the organisation, and will this impact productivity?
The climate emergency is here and requires direct action, though not all businesses are treating it with the urgency consumers are demanding. Asking questions around the financial, productivity, and customer impacts of a delay are important to addressing timing risk.
Moreover it is vital to understand how climate risk stacks up and engages with other organisational risks, so you can determine which climate goals to prioritise. For example, retailers may need to choose between installing LED lights in stores or eliminating plastics. Having the insights as to which one might have more of a direct impact on financial or operational risk, will help to inform that decision.
Discussing Scope 3 emissions risk
Boards, especially audit committee members, need to better understand how Scope 3 emissions reduction fits into the overall business strategy to appropriately manage governance oversight responsibilities.
It may be beneficial for some retailers to develop a Scope 3 inventory to better prepare for future carbon regulations. For example, energy or emissions taxes or regulations in a retailer’s supply chain may significantly increase the cost of goods. Understanding Scope 3 emissions helps retailers plan for potential regulations and can guide corporate procurement decisions and product design.
Discussing profit risk
Boards need to ensure climate change risk is being discussed and actioned as part of the organisation’s overall strategy, and is a part of its larger risk management framework. Ask how climate change is impacting the business’ products and services, customer engagement, brand, financial outcomes, and more. Just as profits should never be discussed in siloes, the impact of climate change on revenue should be discussed and understood holistically.
While climate change is a complex and ongoing challenge for the retail industry, boards have an opportunity now to be driving effective conversations around climate change risk that could lead to tangible climate action. Rather than shying away from the tough questions, start discussions that bring people together around common goals.
Simon Berglund is senior vice president & general manager of APAC at Diligent.