Sustainability: the key to resilient recovery

But while this new existential threat has consumed everyone’s attention, another one is still as urgent as ever: climate change. And businesses must realise the two are connected. The better they respond to climate change by putting sustainability at the heart of their decision-making, the better-equipped they’ll be to recover from COVID-19.

That was the dominant theme as business and political leaders met (virtually) for this year’s UN Global Compact Leaders Summit. UN Special Envoy for Climate and Finance Mark Carney summed up the mood: “It’s now time for systemic and seismic changes to business models – a whole-economy change, every industry and every company.” Climate change, he said, is ‘the crisis from which no one can self-isolate.’ Lise Kingo, the Global Compact’s Chief Executive, rallied delegates: “COVID-19 has called out the fragile nature of our progress. Let’s use it as a wake-up call to recover stronger, more resilient and better to tackle the challenges of climate change and human development.”

All the evidence suggests they’re right. For example, social and environmental indicators have increased exponentially since the 1950s, from the degrading biosphere, disappearing tropical forests and acidifying oceans, to the rising population, energy and water use. As Al Gore told his Global Compact audience, climate-related disasters cost the global economy $2.5 trillion in the last decade - $1 trillion more than the decade before. Business has a clear stake in what happens next.

Think for tomorrow and today

But how can businesses reset in the way the UN Global Compact summit suggested? Many are struggling, focusing on today with little time to plan for tomorrow. Before COVID-19 struck, there was momentum behind moves towards more sustainable business. As Al Gore said, the fastest-growing jobs in the US are ‘solar installer’ and ‘wind turbine engineer’. But even though the UN’s 2030 Sustainable Development Goals represent a $12 trillion-a-year opportunity, the UN itself says only 46 per cent of businesses have made them part of their strategy.

Here and now, there’s an opportunity to capture. Businesses have discovered in this crisis that they can move faster than they knew, whether it’s UK restaurant chain Leon repurposing its restaurants into shops, or Tesco doubling its online capacity in three weeks instead of the three years it had planned. Consumers, too, have discovered they’re more adaptable than they thought, and they’re ready for that to continue. A UK and US survey found nearly 80 per cent of people said they’d change their lifestyles to combat climate change as much as they had for the COVID pandemic. It’s essential for businesses to take commercial advantage of this new adaptability, as well as to build it into their recovery.

Be resilient, manage climate risk

An important first step for individual businesses is to assess how they’re shaping up to address climate risk. That’s the key to being resilient in the face of shocks and uncertainties that are likely to keep coming. It’s also what banks and investors are paying more and more attention to. Governments and regulators are encouraging banks to price climate risk and make it part of their lending strategy. The UN as tasked Mark Carney with giving them the tools to make climate change part of every decision. In the UK, the Bank of England is helping the banking regulator in ‘supervising the financial risks of climate change’ and ‘supporting an orderly market transition to a low-carbon economy’. Similarly, ESG (environment, social and governance) scores are becoming an increasingly important part of how investment funds build their portfolios. And the Make My Money Matter campaign, founded by film writer and director Richard Curtis, is focusing people’s attention on where pension funds invest their savings so they can join calls to divert money away from fossil fuels or industries like tobacco. Developments like this suggest being on the right side of climate risk is likely to lower financial risk by making investment and capital easier to come by.

Governments, too, are showing that they want the recovery from COVID-19 to be a green and just one. Canada, for instance, has tied state-backed loans to obligations around climate-based reporting in line with the Taskforce for Climate-related Financial Disclosures (TCFD). Denmark, France and Poland have excluded companies from state support if they’re based in tax havens. Similarly, the EU has put sustainability at the centre of its recovery stimulus plans. It’s pumping resources into low-emission sectors like green heating, renewable energy and clean cars, and is hiking a border tax on carbon-intensive industrial imports. Hundreds of businesses (including PA) have also come together to urge governments to be bullish in seizing the moment to make climate change central to policy as economies try to rebound and shorten what’s set to be the worst slump since the 1930s. The clearer governments are about setting their course, the better businesses can plan their strategic investments.

Stay adaptable

Even so, it might not always be easy to plot where government policies on sustainability and climate are going. That’s especially true for large businesses with supply chains straddling several global blocs from China and Africa to Europe and the US.

It’s difficult to tell whether the transition to a low-carbon economy will be planned and orderly, or more chaotic. This makes it even more important to organise internally for flexibility. Rather than sticking single-mindedly to one business model and competitive platform, it could be necessary to develop several to hedge against uncertainty and diversify risks. In China, businesses like Alibaba and insurer Ping An are operating an ecosystem of autonomous yet interdependent businesses. Ping An’s includes healthcare, automotive, real estate, wealth management and smart-city technology. When a crisis changes customer needs, the ecosystem’s other offerings are still likely to meet them.

This points to the need to move away from rigid corporate structures that slow down decision making and action, and allow more experimentation. Businesses comfortable running with multiple models and product or service platforms are likely to be the most adept at changing course quickly.

Take the commercial opportunity

Governments, regulators, consumers, investors and people coming into the jobs market all favour businesses with sustainability at their heart. They want to know that businesses have thought through uncertainty and risk, and managed them. But there’s also the out-and-out commercial opportunity of sustainability. We’re working with our clients across sectors, re-assessing risk assumptions that might have been true for decades but no longer are. We’re revaluing assets, reviewing business cases for new products and services, and resetting innovation programme parameters. The guiderails for risk and commercial opportunity have changed substantially. The winners in this new reality will have a firm grip of the risk impact on their business and move quickly to seize new opportunities. Take circular economy for example, this one area alone offers vast scope for innovation and the chance to stand out. Extending the life of materials and components and designing out waste could be worth $1 trillion a year by 2025, according to the Ellen Macarthur Foundation – and that’s just in Europe. Opportunities for innovation are everywhere, from creating reusable gin bottles to re-inventing tea bags.

Being sustainable is part of being resilient. It lets businesses face up to physical risks, like extreme weather and scarce resources, and handle growing uncertainty. Businesses’ sustainability reputations are also increasingly important to their survival because they guide customers’ buying preferences and loyalties, sway investment and lending decisions and help attract the best people. So, the message is clear. Far from being a nice-to-have that businesses can only afford in good times, sustainability is vital to getting the world economy out of what could be its worst-ever crisis.