The historic agreements reached at the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow from 31 October to 13 November, which will accelerate coordinated action toward the goals of the Paris Agreement and the UN Framework Convention on Climate Change, will have important implications for governments and businesses worldwide.
On 2 December, Trialogue, in association with the Sustainability Institute (SI) and the Institute of Directors South Africa (IoDSA), hosted a climate change webinar that explored key topics around awareness of COP26 outcomes and related climate change issues among South African directors.
The rationale for the survey and consequent panel discussion was that new codes, standards and frameworks, such as the Task Force on Climate-Related Financial Disclosures (TCFD) and the International Financial Accounting Standards (IFRS) Foundation’s proposed sustainability standards will fast become important for directors and executives to adopt and integrate into their business model and governance framework. These changes will be overlaid with international and national green tax structures and regulations that are either in effect already or pending finalisation.
The webinar was part of a research and webinar series to empower South African directors to make informed decisions about climate-related issues, driven by a context-specific understanding of the relevance of these issues to South African businesses.
Most Directors Still Don’t Know What They Don’t Know
The survey of directors conducted by the IoDSA returned a number of remarkable findings. 70% of respondents were directors, board members and senior executives of JSE-listed entities, with 37% representing large or medium-sized companies. The implication was that the respondents provided a good cross-section of top-level decision makers across critical industries and impactful businesses.
48% of respondents said they could comfortably explain the causes of climate change, and 55% said they could comfortably explain the impact of climate change on their industry. 49% said they could comfortably explain the impact of climate change on business in general.
Though this represented an improvement from the statistics from the first Trialogue webinar dealing with climate change impact, 48% of respondents said they had no or limited engagement with COP26 and its outcomes, and only 48% considered South Africa’s concessional climate finance deal with the UK, US, France and Germany to be relevant to their business.
Alarmingly, only 21% of respondents considered the JSE’s net zero by 2050 commitment to be relevant to their business. Only 28% considered the decision by the G7 and G20 to stop financing foreign new coal projects to be relevant to their business. Less than 8% of respondents were fully aware of South Africa’s green taxonomy, only 10% were aware of South Africa’s Nationally Determined Contributions (NDCs), 18% were aware of the National Treasury’s Sustainable Finance Initiative and less than 33% of respondents were aware of COP26 taking place.
These statistics point to a very limited understanding amongst respondents of the full range of implications of the diplomatic agreements reached at COP26. The South African government, by establishing the Presidential Climate Commission (PCC) to coordinate the country’s Just Transition to a net-zero economy by 2050, has been proactive in developing a common vision for the shift to a low-carbon and climate-resilient society that takes into account implications for employment and society’s most vulnerable groups.
Dumisani Nxumalo, project coordinator at the PCC, said the government is looking at pathways and technologies to achieve this vision while protecting livelihoods. “Our role as the PCC is to broker social consensus on how to move to a more sustainable environment, society and economy from both a regional and national point of view.”
To this end, the government has sought to partner with labour, business constituencies, NGOs, civil society, academia, the health sector and the youth. “Entire value chains of businesses will need to be assessed for infrastructure change requirements, interventions and climate change impact,” Nxumalo said.
In this light, the February 2022 deadline for developing a draft framework for the country’s shift in its attitude toward carbon emissions is both important and highly relevant to local business leaders’ decision making.
View Dumisani’s full presentation here: PCC presentation to IOD Climate Webinar
What does this global ramping-up of support for developing countries mean in the South African context? Nicole Martens, senior associate consultant at Trialogue, said the findings of the directors’ survey were discouraging because it is clear that top-level leaders of impactful businesses still need to invest in competence building to integrate climate change into business strategy.
“The outcomes of COP26 will affect the entire energy structure of South Africa, and the JSE may soon create a requirement for companies to each have net-zero targets. That is entirely relevant to every listed company and all related organisations in their value chains. Unless your company is completely off the grid already, which is highly unlikely in the South African scenario, the financing of no new fossil fuel projects will definitely affect you. This indicates that climate change understanding among business leaders is either insufficient or incorrect,” said Martens.
Suggested Approaches To Incorporating Cop26 Outcomes
Anelisa Keke, head of ESG at Redefine Properties, said she could empathise with directors who simply felt overwhelmed by the complexity and enormity of the climate change adaptation and mitigation agenda. “It has been beneficial for us to take a step back and approach the challenge systematically. The first port of call is whether the organisation has a firm grasp of the risks and opportunities that climate change poses – for example, extreme weather changes and events or key regulatory changes. To what extent must the business adapt and what risks arise to marketing and selling the business’s products and services?”
Keke said each business must consider what a failure to adapt will mean, in financial and operational terms. “For one thing, a failure to adapt will mean the cost of funding for more carbon-intensive projects will be more expensive in future and the sources of funding much narrower. The business must also have a firm grasp of risks in its broader supply chain – particularly in suppliers which cannot be replaced at short notice.”
Sustainability audits are one route to discovering whether the business will be critically harmed by interruptions to the supply chain as a result of climate change. “TCFD is the most recognised way to speak about this in business terms because it forces you to drill down to risks and opportunities and assess their likelihood and severity of impact. Once companies do that, they can start to see areas for investment and the time frames to handle those risks,” Keke said.
She said investors and funders will begin to price in risks that apply to every company in a sector, which meant it is vital that peers in every sector coordinate a common understanding of risks to their industry and respond as a collective.
“Climate change issues will persist beyond careers of business leaders. At board level, from a governance perspective, this means processes must be defined to ensure that targets are implemented and monitored and even rebased if necessary, beyond the tenure of the board and committees. They must be created to be relevant to successors, and an understanding of these issues must inform human resource succession planning activities so that there is continuity into the future.”
Though overwhelming in scale, climate change issues and responses are easily demystified through access to resources, such as the UN Global Compact. “This will help companies that want to embark on the net-zero journey to begin defining the scope and boundaries of their commitment. The PCC has done a lot of important work in easing the regulatory burden and restrictions to the transition. Leaders should take it one bite at a time. It is impossible to change business models in just a few years, so the entire workforce should be prepared for what is to come.”
How Businesses Are Responding To Climate Change
Sue Lund, chartered director and advisor to Infrastructure South Africa, said the PCC’s leadership in this space is critical. “It makes all our jobs a great deal easier with their guidance. My observation is that the tide is turning. Investor and lender policies are firming up and with no access to competitive financing, carbon-intensive projects will go nowhere. In response, boardroom strategies must dig deep and think hard about investment plans.”
She said stakeholder activism is stronger than ever. “Reporting transparency and disclosure on climate issues is no longer optional – it is now a requirement for funding. There are many tools available for disclosure, and their use has become essential. Leaps in technological advances have also been extraordinary and pricing has come down. There is now no reason to ignore the options for doing the right thing.”
Despite the positive signs, Lund said directors and boards needed to play a stronger role. “Non-executive directors in particular, have an important role to play in all committees. The climate questions should arise everywhere, not just in the social and ethics committee, to start shifting the strategy discussions. The questions being asked are not trivial because a Just Transition and changes in the generation, provision and distribution of low-carbon energy will have a profound impact on companies’ options, regulation, costs and access.”
Lund’s recommendation is that boards ask chief executives to conduct a maturity assessment on climate change. “This should look right across the spectrum of where the company stands on mitigation, adaptation, opportunities and the risks to which the company is exposed. It is useful because it involves everyone in the company. From this assessment, the board and executives can unpack a roadmap and prioritise: what’s achievable, manageable and affordable? Start with quick wins and then develop a longer-term vision that stakeholders and shareholders will buy into. The CEO should be accountable for establishing the big picture climate roadmap with the executive team, not leaving it to the head of ESG.”
The availability of concessionary financing – even at company level – and partnerships to help adaptation and mitigation measures be put in place is a major win, Lund said. “Carbon taxes will come and will increase. As a business leader, are you prepared? Where will you be hit and when? Have you done forecast modelling? Have you invested too late in assets that will now not realise value? What about liability and insurance implications for failing to adapt? How can we change to manage these risks? These are hard business questions that require new strategies for a different future.”
The key to changes in performance lies partly in executive performance measures including climate change indicators. “What indicators can we use to measure all executives to confirm that the company will become climate-resilient and contribute to the Just Transition? It is important to listen to employees and stakeholders to find interesting and useful solutions in creating a practical roadmap to 2050. It is encouraging that South Africa’s two largest carbon emitters, Eskom and Sasol, have signalled their intent to chart strategic change on their climate impact and are developing costed plans, milestones, and measurement for the new future,” Lund said.
While the answers are not all available yet, committing to paths of action is an important first step.
“The role of leadership at every level is to make sure the right questions are being asked. We don’t need to know all the answers, but there are specialists and resources available. Collaboration across industries will help us figure out the solutions. The Sustainability Institute is doing great work in creating handbooks for leaders on the key questions to ask. That will get the wheels turning to put in place the many components of an effective transition strategy. There is no need to do everything at once, but there is a need to start,” said Martens.
Nxumalo added that climate change impacts and strategies were slowly but surely being understood. “I cannot say enough about risks and early warning systems being put in place. Europe’s carbon taxes will start discouraging imports into Europe of carbon-intensive products. These are among many market signals to South African businesses who export to developed markets. Businesses need to begin putting responses in place now.
“If we can transition and decarbonise the major players like Eskom, we will do a great job in improving the country’s competitive advantage in the market. The carbon budget offers companies the opportunity to start preparing around their emissions threshold and achieving offsets under the carbon tax regime. Other instruments will allow companies to diversity their investment portfolio, starting new carbon liability offset projects,” Nxumalo said.
The PCC continues to raise awareness of the opportunities in Just Transition financing. “It is our ambition to develop a Just Transition fund, which will accommodate smaller players by providing access to funding to improve their project pipeline at a scale that is reasonable. We are engaging with Treasury around this regulatory environment and concessional funding. Funders like the Development Bank of SA, the IDC and NEF are already looking at climate change-related topics in their value chains. These are all important signals business leaders should be reading to help them transition their businesses” he said.
Watch a recording of the previous webinar in this series: “What climate change means for South African businesses”:
- The Presidential Climate Commission: https://www.climatecommission.org.za/
- COP26 in brief – What business leaders should know: https://www.mckinsey.com/business-functions/sustainability/how-we-help-clients/cop26/on-demand
- COP26: Key Outcomes From the UN Climate Talks in Glasgow: https://www.wri.org/insights/cop26-key-outcomes-un-climate-talks-glasgow
Climate change series: The following four videos are part of a four-part series on Climate Risk and Climate Oversight for South, produced by the IoDSA in partnership with the Embedding Project.
- Climate Change for South African Directors: What corporate directors need to know about climate change and the science behind it. Watch the video.
- Climate Change Impacts for South African Directors: What corporate directors need to know about the impacts of climate change in South Africa. Watch the video.
- Climate Risk for South African Directors: What corporate directors need to know about the risks climate change poses for companies. Watch the video.
- Climate Governance for South African Directors: What corporate directors need to know about climate risk governance. Watch the video.
Tools and frameworks to get your started on your TCFD journey:
- Hear from Trialogue associate senior consultant Nicole Martens to learn more about TCFD and how you can get started. https://youtu.be/cH84K5zUJY8
- IoDSA Guidance Paper: Responsibilities of governing bodies in responding to climate change. Read the report here.
- The latest TCFD status report describes progress on climate-related disclosure and TCFD implementation efforts, insights, and challenges. Read the report.