Time to suit up

Over the past 50 years, economic activities including the consumption of fossil fuels, industrial processes and deforestation have released greenhouse gasses responsible for trapping an explosive amount of heat energy in the Earth’s atmosphere – the equivalent of about 25 billion atomic bombs.

As a result, the average air temperature at the planet’s surface is nearly 1.2 degrees Celsius hotter than in the pre-industrial era and could exceed three degrees heating by the end of this century if we fail to slash greenhouse gas emissions.

In order to meet the Paris Agreement’s goal of limiting global warming to well below two degrees, and preferably 1.5, the United Nations recently concluded we need to reduce emissions by 45 per cent by 2030. Achieving this scale and speed of emissions reductions will require system-wide transformation. The rapid recalibration of our economy to meet this safe target is likely to be jarring and profoundly disruptive to New Zealand businesses.

It’s time to get in the game. That’s the message for boards from Dr Charles Ehrhart, KPMG International’s Global Head of Climate Risk, Resilience and Adaptation, and a Partner at KPMG New Zealand, where he co-leads the firm’s Climate Change, Decarbonisation, ESG and Sustainability services.

“We’ve left many of the hard decisions until too late in the game and now climate change has become a climate emergency. We have a shared responsibility to protect our organisations and build resilience across New Zealand’s economy,” he says.

Dr Charles Ehrhart

Ehrhart sits on the governing board of the World Economic Forum’s Climate Governance Initiative (CGI), a global body that seeks to enable effective climate governance and mobilise boards to act. The CGI supports 29 chapters, including the IoD’s Chapter Zero New Zealand, representing more than 100,000 directors in 71 countries. He is also on the Chapter Zero NZ steering committee.

“Directors quite rightly understand their ordinary role as one of working ‘on’ their business rather than ‘in’ it,” Ehrhart says. “However, we’re contending with extraordinary circumstances. The metaphor I’m hearing from many leading directors is that it’s time to come down from the bleachers.”

Ehrhart doesn’t mean that directors should necessarily become ‘players’ – that’s management’s role. But, he suggests, it’s time for directors to take a more hands-on role, whether as coaches, cheerleaders or ambassadors.

This is not unfamiliar territory to directors. The pandemic was a good example of an all-hands-on-deck moment, he says. “If we understand this as a climate emergency, we see the parallels right away.”

Helping their organisations succeed in the turbulent times ahead will require new knowledge, and boards should actively set out to raise their “climate literacy”. However, the pillars of good governance – keeping an eye on the long game, learning together, holding to account, and ensuring compliance – are no less vital.

Climate governance is not just a risk management exercise or a discreet environmental, sustainability, governance (ESG) issue. “It cuts to the core of a business’ strategy, its culture, its social licence to operate, its fundamental value proposition,” Ehrhart says.

From the perspective of the CGI, there’s even more at stake. Good climate governance is not only essential to the wellbeing of individual businesses, but also to the vitality and resilience of the systems underpinning our global economy – especially when it comes to the leadership of bank, insurance and fund directors.

Ehrhart suggests that, for this reason if no other, we all have an interest and role to play in the orderly transition to a net- zero carbon future.

“We are already seeing significant change across a range of sectors,” he says, “including major funds screening out slow-acting businesses, banks offering ‘green’ finance to early actors, insurers pulling back from high-emissions industries, and regulators requiring carbon transparency.”

The overwhelming majority of New Zealand businesses are not captured by current climate disclosure requirements, but many are already quantifying and reporting their emissions. When he speaks to directors, Ehrhart says he finds a lot of genuine desire to address the climate emergency.

But it’s not all good news. Too many businesses are still watching from the sidelines, unwilling to get in the game. “Delayed action or no action – we can always come up with a reason why now’s not the time, or I’m not the one,” Ehrhart says.

That’s why organisations such as the CGI and Chapter Zero NZ are so important, he suggests. They help boards share inspiring examples and experiences while building a movement for the common good.

Countries have spent decades building critical infrastructure and financial systems that are not designed to withstand the increasingly extreme realities of climate change or the speed of transformation required by our economy.

Boards need to decide how they want to position their organisations in this transformation. “Setting emissions reduction targets is important,” Ehrhart says, “but so are targets aimed at managing other risks and capturing opportunities for value creation.”

The direct and indirect impacts of climate change are poised to radically disrupt New Zealand’s business ecosystem. This disruption may be sudden and non- linear. Key questions for directors to ask, Ehrhart says, include: “Do we want to be disrupted or be a disrupter? Do we want to play defence or offence? And – just as important – what can we do to build the resilience of the value chains and broader society we depend on to thrive?”