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Climate change – Addressing the leadership challenge

April 2022

Spencer Stuart was a Lead Sponsor at the 2022 FT Climate Capital Conference. Here we summarise the key takeaways from our conversations with leaders at the event and at a pre-conference dinner hosted by the firm.

Against the backdrop of the war and rapidly unfolding humanitarian crisis in Ukraine, the 2022 FT Climate Capital conference brought leading thinkers from a variety of disciplines to London to discuss how capital can best be deployed in pursuit of climate change mitigation and adaptation.

Business has a critical role to play in solving climate change. As they transition their organisations towards net zero, leaders will be expected to demonstrate genuine commitment to reducing greenhouse gas emissions and averting biodiversity loss. They will need to exercise power in the most effective way and for the greatest collective good, while meeting their obligations to stakeholders. Leaders will benefit from harnessing the energy and creativity of a diverse workforce, but they must be scrupulous about avoiding greenwashing. Above all, they need to look for the opportunities, not just the risks, that come with embracing the transition. We examine these and related topics below.

As at COP26, where business leaders showed up in large numbers to demonstrate their willingness and intent to take action against climate change, it was evident in session after session that in this ‘decade of action’ a different kind of leadership is needed to dismantle barriers that have traditionally separated legacy businesses, entrepreneurs, innovators, financiers, policy makers, NGOs, academics from each other.

A systems-thinking mindset will deliver lasting impact on the path to net zero.

Little can be achieved by any of these interest groups in isolation. Vision, ambition and purpose-driven leadership are necessary but not sufficient, since it is only through the formation of cross-sector and cross-disciplinary alliances that lasting change will occur and at scale. Few of today’s leaders built their careers on pre-competitive collaboration, cross-sector partnerships and industry alliances, and yet it is precisely this systems-thinking mindset that will deliver lasting impact on the path to net zero.

It is increasingly clear that most climate change initiatives cannot succeed without collaboration. This is particularly true given that some companies, for example in the consumer sector, have carbon footprints the size of small countries, yet they may only directly control as little as 5% of the emissions linked to their products. The rest fall within scopes 2 and 3, which means a business will need to drive massive change in the supply chain, from adopting renewable energy and new forms of packaging to supporting renewable agriculture and slowing deforestation.

Effecting change on such a large scale takes commitment, ingenuity, empathy and understanding across the value chain. Leaders will be helped in this task if they focus on developing their in-house talent and building more diverse leadership teams to address the climate challenge; whatever backgrounds and experiences have dominated leadership circles in the past will not necessarily be fit for purpose in the future.

Backgrounds and experiences that have dominated leadership circles in the past will not necessarily be fit for purpose in the future.

One leader from the fossil fuel industry questioned whether companies are overhauling their staff fast enough – a question that leaders in every sector might do well to ask themselves. “We need to reskill our people to face the climate challenge and acquire new skills.

Leaders are having to weigh the long-term viability of their business models against short-term competitive pressures, shareholder expectations and the very real risk of reputational damage inherent in ‘business as usual’. An array of stakeholders are watching their every move. What’s more, making headway with decarbonisation, shifting the focus from negative to positive environmental impact, has been made instantly harder by the realities of war, economic sanctions, scarce commodities and rising prices.

While some argue that inflation, scarcity and the need for energy security will eclipse efforts towards net zero, others argue forcibly that the strategic imperative of reducing dependence on fossil fuels has been bolstered by the current crisis and is bound to accelerate investment in renewables. “The short-term threat of having to turn off the lights is forcing us to address the issue with even more urgency,” said one commentator.

We may be entering an era of certain volatility, but there is plenty to be optimistic about, as several leaders were quick to point out. It is easy to fall into negative thinking, given the size of the task ahead and the unrelenting pressure coming from investors, employees and consumers, but leaders need to remain positive, seeking out opportunities to develop new products and adapt their business models to the green economy. They must combat what one CEO called ‘incumbent inertia’ – the inability of some large organisations to change, innovate and grow.

Achieving profitable growth along the path to net zero will prove difficult for many companies. Participating fully in the energy transition will be a costly exercise, and companies are going to have to spend money on things they didn’t have to before. “We need to pay more to fix externalities such as deforestation, human rights violations in the supply chain,” said one leader, “but it is a difficult balancing act. The vast majority of consumers care about the issues, but most are not prepared to pay a premium on the goods they buy.”

Businesses are increasingly facing the dilemma of wanting to do the right thing but having to absorb increased costs. “Our economic development has been built on structurally low energy costs that have not priced in environmental damage,” one CEO told us. “We will all – businesses and citizens – have to make compromises in future.”

Rising energy transition costs could easily lead to a race to the bottom, creating price competition that undercuts those investing in decarbonisation. Business leaders have tough decisions to make, especially when they are pressured to direct funds to activities with an uncertain return. Most are agreed that policy makers need to take a more strategic approach that will enable energy transition initiatives to flourish.

To this end, business leaders have been calling for international convergence on carbon pricing to create a level playing field. Governments rarely press for more regulation except in the wake of a crisis, and yet we expect investors and business leaders alike to become increasingly vocal in advocating for carbon pricing as a catalyst for innovation and investment in decarbonisation and green tech. Voluntary efforts are clearly not enough to move the dial. As one CEO stated: “Technology is moving faster than expected. We have the technology and the capital – now we need the policies to make this transition happen.”

As we move to a more prescriptive disclosure regime, the reputational danger of greenwashing will only grow. Leaders must ensure that what is happening on the ground matches what the company is saying through its corporate communications.

Since leaders can’t possibly know everything going on inside the business, they must put significant resources into building knowledge and awareness among employees of climate-related goals and best practices. Reputations are easily damaged when one part of the organization is out of kilter with the rest of the business.

Stakeholders are less likely to take company statements at face value and are particularly critical of vague declarations about offsetting. The wise advice is to under promise and over deliver.

Transparency is the best way to prevent accusations of greenwashing. Businesses that fully disclose their progress towards to net zero are far less likely to invite censure than businesses that provide partial or no information. Despite the growing drumbeat of demands for transparency it is remarkable how few companies declare the amount of capex they are dedicating to fighting climate change; this is particularly true of most legacy oil and gas companies.

Leaders have a duty to ensure that the top climate-related risks for the business are escalated to the board. Having the right capabilities in the boardroom is critical – to ensure that the right questions are asked of the leadership team and that the business stays firm on addressing medium- to long-term goals. It will be easy for incumbents, particularly in the energy sector lose ground rapidly as the energy transition progresses. As one panellist asked: “Can you claim to be transitioning if you are spending less than 50% of your capex budget on new energy technologies?”