Steve Kenzie, UN Global Compact, discusses the opportunities and challenges in making the transition to net zero
Many SMEs feel that the corporate responsibility agenda does not apply to them because they are too small to have an impact and this notion is often reinforced by government policy. For example, the UK Equality Act’s Gender Pay Gap reporting provisions only apply to companies with more than 250 employees and the UK Modern Slavery Act’s reporting provisions exempt companies with less than £36 million turnover. However, when it comes to climate action, every business, no matter the size, has a role to play.
The UK government’s commitment in law to make the country net zero in its carbon emissions by 2050 makes climate action everyone’s business.
Achieving the net zero target will require massive cuts in carbon emissions across every sector of the economy and this will impact every aspect of our lives. Net zero means that any UK carbon emissions that cannot be eliminated must be offset by removing an equivalent amount of greenhouse gases from the atmosphere via planting trees or using technology like carbon capture and storage. These offsetting schemes have a critical role to play in getting us to net zero, but they can be costly and sometimes controversial – and they are not a substitute for deep cuts in carbon emissions.
For the UK to be net zero, every business, however small, is going to need to be net zero. This may sound daunting, and a transformation of this scale undoubtedly presents risks for many enterprises, but these risks pale beside the damage that unchecked climate change will bring. The best way to mitigate the risks of both climate change and the transition to net zero is to act now!
Climate risks can be divided into two categories: physical and transitional. Physical risks include extreme weather and flooding. Transitional risks can include anything from geo-political conflict (as countries fight for scarce water) to carbon taxes (as governments seek to mitigate the worst physical risks). Denying these risks or wishing them away is not a solution. The UK government’s net zero target is amongst the most ambitious in the world, but it still won’t protect the UK from exposure to physical risks. And ironically, it will likely make the transitional risks more acute. Once again, the best way to mitigate those risks is to act now!
The first step is to understand the risks to which your business is exposed. The physical risks may be relatively obvious, but it is still important to systematically think through the full implications of both the threat and the solution. Are your physical locations exposed to flood risk? Are you prepared for power outages/road closures/school closures caused by extreme weather? What about your essential suppliers, employees, and customers? Every business needs to be asking these questions and the answers will point towards solutions.
Transitional risks may not be as obvious, but for many SMEs they are even more serious and more imminent. What steps will the government take to avoid a climate catastrophe? It is profoundly pessimistic to think that the UK government (and the governments of other countries) will not forcefully intervene at some point. The Principles for Responsible Investment optimistically refer to this as The Inevitable Policy Response. Their list of “inevitable” policies includes carbon taxes, 100% clean power targets, 100% zero emissions vehicles, prohibiting fossil-fuel heating systems for buildings, and many more. Even before these policies come into force, the expectation that they are coming will start to change behaviour and impact markets.
Have you considered your company’s exposure to any of these policies? Would you be able to comply? It is highly likely that within 10 years you will need to. This must be taken into account as you consider signing new leases on property or contracts with suppliers, renewing your fleet, designing new products and services, and refreshing your business model. Of course, suppliers, customers, and employees will also be affected by these policies and this will impact your business.
Many larger companies are already asking these questions. They are being called upon to comply with the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD) which has developed a framework to help companies understand and effectively disclose climate-related risks and opportunities. The framework is a useful tool for companies of all sizes. For smaller companies, the ICC’s SME Climate Hub is an outstanding resource.
It is important to note that climate change and the race to net zero present both risks and opportunities. Ignoring the opportunities is as big a management failure as denying the risks – and just as the risks need to be managed now, so do the opportunities.
Achieving the net zero target will require massive cuts in carbon emissions across every sector of the economy
The UK Government is already creating policies and regulations to create a market environment that increases consumer and business demand for low-carbon solutions. Net zero companies have a growing advantage in public procurement because the government now considers social value along with more traditional criteria in their purchasing decisions. Net zero companies have a growing advantage selling to other companies because when everyone needs to be net zero, no one wants your carbon footprint in their supply chain. Net zero companies have an advantage selling to consumers because a significant and growing majority of consumers want to reduce their impact on the environment.
The UK Government is encouraging private sector investment in support of net zero. Banks are seeking to de-carbonise their loan books and investors their investment portfolios. This means that net zero companies will have advantages accessing capital at favourable rates.
There are many other business benefits that will accrue to companies large and small that join the race to net zero. Not least of these is alignment with stakeholder expectations around the broader corporate sustainability agenda and the UN Sustainable Development Goals.
To conclude, the UK Government’s commitment to a national net zero target means that every business will be affected by climate change in one way or another in the years ahead. Transitioning your organisation to net zero is not optional – start making that transition now with every business decision you make; consider if it is taking you nearer to net zero or further away. Doing it sooner, rather than later, will bring both short- and long-term benefits to your business.