Why everybody hates you: Climate change
Reputation is formed from three main components: your own behaviour, the manner in which your behaviour is communicated, and the context in which that behaviour takes place. It is possible to change your behaviour, and you can certainly influence the manner of communication but in order to either of those things you need to understand the third – context. Many of the issues that affect your reputation are exceedingly complex. Money, race, gender, inequality, climate change – how can you possibly be expert enough in each of these areas and more in order to stay ahead of your critics and be (seen as) a ‘good company’?
This essay is the latest in a series that explains the context in which your corporate reputation is being formed, so that you can guide your own company safely through. Here we will discuss the varied ways in which climate change is already making an impact upon corporate balance sheets and reputation, from physical threats to public opinion, regulators and lawsuits.
A quick crib sheet for anyone who has started to skim over the scary facts of climate change. If you look at average temperatures in the UK since the Met Office started recording them, all of the top ten hottest years have occurred since 2002. None of the coldest have happened since 1963.
In 2018, data compiled by 27 European national science academies showed the impact that these increasing temperatures had made on extreme weather events:
“Globally… the number of floods and other hydrological events have quadrupled since 1980 and have doubled since 2004, highlighting the urgency of adaptation to climate change. Climatological events, such as extreme temperatures, droughts, and forest fires, have more than doubled since 1980. Meteorological events, such as storms, have doubled since 1980.”
These changes have happened as a result of a global temperature rise of just over 1 degree (celsius, which I will be using throughout) from pre-industrial levels (we hit that in 2015). Current baseline projections (in which we change nothing) expect the world to warm by 4.1-4.8 degrees. If we sustain current policies to cut our carbon footprint then 2.8 -3.2 degrees might be possible. But might is the important world here: if you take the probabilities generated in the studies recognised by the UN or World Health Organisation or World Bank and run a simulation over and over again, on one-in-ten occasions we exceed 6 degrees of warming. Nobel laureate William Nordhaus’s work for the National Bureau of Economic Research calculates that there is a one in three chance that we’ll overshoot the UN’s worst “business as usual” scenario and go beyond a 5 degree rise. The last time our planet experienced these average temperatures, the sea was 130 feet higher.
As the weather becomes more extreme, some parts of the globe will become far less forgiving for humans to live in: too hot to go outside or farm, or farmland flooded with inhospitable saltwater. The UN currently projects that we will see 200 million climate refugees by 2050. As a point of comparison let’s consider the Syrian conflict which has created the worst refugee crisis of recent years: 5 million refugees left the country, most stayed in Turkey, and between 500,000 and 1 million made it to Europe, unleashing a vitriolic populist backlash amongst the countries that host the largest number of people in need. Arguably the Syrian war itself has been inflamed by climate-related tension but for a purer example let us consider Bangladesh, which may well be the first non-island nation to become submerged under rising seas. Bangladesh is home to 165 million people. The World Bank also expects refugees flowing from sub-Saharan Africa as heat becomes an overwhelming threat to life and livelihoods, and from Latin America and the rest of South Asia. The UN predictions go on to list a much bleaker worst-case scenario: a billion fleeing their homes. The foreign minister of the Marshall Islands describes a lack of action to address these probabilities as ‘genocide’.
An important key to imagining our future climate is to remember that today is likely to be beyond best-case scenario. More than half of the carbon we’ve pumped into the atmosphere has been produced since 1988 and it takes a while for the effects to build up. Even if we stopped producing any carbon, right now, we would still be feeling the additional warming for centuries – and some of the results are not reversible. So right now is the most temperate and docile our climate is going to be in our lifetimes. We are not so much boiling a frog as a planet.
Even before we talk about reputation, you better believe that these facts are going to impact your business model in many, far-reaching ways. According to the World Economic Forum’s 2019 Global Risk Report, environmental threats are now the single most likely global risk, and the second most destructive in terms of impact (just behind weapons of mass destruction).
Here are a few categories to help you consider your own exposure:
Transition risk. The risks, often financial, faced by an organisations as they navigate the transition to a lower-carbon economy. For example, business models undermined by heavy regulation, or research and development spend to create more sustainable products.
Physical risk. Direct, physical manifestations of climate change that cause harm or loss. Including, but not restricted to, flooding, mudslides, heatwaves, wildfires, crop failure, and hurricanes.
Indirect risk. The after-effects of physical risks, not just clean-up costs and disaster relief but also world food price fluctuations, impacts of illness, insurance premiums and debt pricing – amongst many others.
Systemic risk. The build-up of multiple physical and indirect risks. As more extreme weather events take place, systems that have been able to cope thus far will come under stress from multiple directions. For example, emergency systems dealing with both a major flood and a heatwave in close succession, or financial systems suffering shocks in several markets at once. The impact of multiple shocks is far harder to model and prepare for.
Unfortunately for the fight to reduce carbon emissions, transition risk is far easier to both imagine and quantify than any of the others. It is easy to say that you cannot afford more R&D spend or that it is ‘impossible’ to reduce the emissions of a key manufacturing process. EY has been gathering a heap of deeply troubling (though sadly unsurprising) evidence on the way in which companies compile their annual reporting and they find that the vast majority significantly underestimate the impact of even the direct, physical risks of climate change – let along the more opaque, indirect ones. This confirms the findings of Mark Carney (Bank of England) and François Villeroy de Galhau (Governor of the Banque de France) that “If some companies and industries fail to adjust to this new world, they will fail to exist.”
For those companies that are not laid low by flooding or supply-chain disasters there is, of course, a fifth category:
Reputational risk. As climate change becomes more troubling for and understood by the general public, it presents an ever-larger threat to the reputations of organisations. A failure to take this seriously threatens the 87% of company valuations now made up of ‘intangible assets’.
The good news for companies that want to talk about this topic, is that there is a pretty clear consensus on climate change. According to the European Social Survey:
93% of British people think that the world’s climate is changing
95% think climate change is at least partly due to human activity (as opposed to natural causes)
When asked “how worried are you about climate change?” 70% described themselves as either very, extremely or somewhat worried
28% are not at all or not very worried
Younger and more educated groups think that the consequences of climate change will be worse than older and less educated groups do.
When compared with our other, more quotidien, priorities, climate change sometimes loses out. But even here salience in on the rise: in Ipsos MORI’s monthly issues tracker for January 2020 the slightly amorphous category ‘Pollution/environment/climate change’ ranked third after Brexit and the NHS. Concern about the topic fell significantly in the wake of the 2007/8 financial crisis but has been on the rise again since 2014.
And if you trade internationally then you needn’t worry that these numbers are unrepresentative. If anything Britons are less woke on this issue than other nations. A Hope not Hate poll in September 2019 found that residents of seven other big nations around the word were even more concerned than us:
Climate and reputation
Unsurprisingly, given the momentous physical changes taking place and the fairly stable consensus among the public, the impacts of climate change are already being felt on corporate reputations and valuations. Over the past decade, the five largest listed oil and gas companies have delivered average total shareholder returns of just 5% compared to a return of 14% on the S&P 500. Credit ratings agencies have repeatedly warned that concerns over carbon mean heavy emitters will face downgrades to their credit ratings. This doesn’t just apply to fossil fuel extractors and emitters, analysts are questioning the creditworthiness of sectors from banking to car manufacturing and chemical plants, shipping to building materials. As Larry Fink - the world's biggest investor - put it in the 2020 edition of his famed annual letter to CEOs “Climate Risk Is Investment Risk”.
The financial status of these companies is being questioned because they face myriad challenges: the direct effects of climate change, increased scrutiny from regulators, the possibility that carbon ‘assets’ may in fact need to stay in the ground, and endless clean-up costs. Each time one of these challenges washes over a company it leaves the underlying economics tighter and the license to operate more tenuous. Legal challenge is also a growing threat. A recent report from the London School of Economics charted the increase in lawsuits. Co-author Joana Setzer says “Until recently businesses might not have considered a climate change lawsuit to be a risk, but this is something all corporations should now be taking into account.” You have only to consider the size of settlements by tobacco companies and opioid manufacturers to give you a sense of the potential fallout if whole countries are submerged by rising seas.
Direct consumers are also starting to take note, with survey data showing an increase (from 11% to 33%) in individuals saying that they have switched between products based on the environmental reputation of a company. Survey data of these types of intentions is notoriously unreliable so perhaps we would be better off looking at trends amongst marketeers to see what they think will attract new customers. Centrica Business Solutions found that 36% of businesses have changed their brand positioning to be more environmentally friendly over the past year.
Another faint hope is offered by survey data that shows that the public increasingly feel they do have a responsibility to make a personal effort – but they also don’t feel that their efforts are likely to be particularly effective. Products that give the public hope and make individuals feel that they have agency will be good both for business and the planet.
What to do about it? Three key points to consider
Climate change can often feel like a problem far too big for us to make an impact. Companies and governments, however, are the ways in which humans have historically organised themselves in order to tackle problems that are bigger than one person: exploration, disease, outrageous amounts of computing power. The organisations in which we work are threatened by climate change in myriad ways but these threats also veil opportunities for innovation, for admiration, and for truly life-saving decisions.
In future, I’ll talk far more about how organisations can navigate these tricky issues (subscribe here if you want to be sent my articles as they appear each Wednesday) but for the time being, these are my key takeaways:
Most businesses underestimate the threats they face from climate change.
Reputations are already being damaged by our changing climate and that shows in more fragile licenses to operate and lower profits.
In adversity lies opportunity. As consumers become more educated, and the problems of climate change ever more urgent and clear, there is an advantage to be gained by being an early mover in this area. Rapidly reducing carbon footprint, innovations that reduce waste or help to power us to net zero will be rewarded by investors, regulators and consumers.
This essay is a starting point that will equip you to understand the debate about climate change and the role it plays in your corporate reputation. There is much, much more to this conversation. What have you read that cast a light on this? How have you tackled this problem in your organisation? I’d love to hear more from you and will add reading suggestions to this resources list so it can improve over time.
British Social Attitudes: Climate change: Social divisions in beliefs and behaviour
David Wallace: The Uninhabitable Earth
Grantham Research Institute: Climate change litigation
BlackRock: Larry Fink’s 2020 CEO letter
Katherine White, David Hardisty and Rishad Habib: The Elusive Green Consumer. Harvard Business Review. July-August 2019
World Economic Forum: Global Risks Report 2019