Integrating Climate into Strategy and the Organization 

Boards serve a critical role in engaging with management on the strategic direction of their organizations and in overseeing operations and risk management. Strategic and organizational integration is a foundation of Board Leadership for Growth and Resilience: Guiding Principles for Climate and Nature Governance developed by Chapter Zero Alliance, the World Economic Forum, and Deloitte. This article offers directors guidelines on planning and decision-making in this domain.

Barriers to Integrating Climate into Strategy and Organizational Planning

To be effective, climate strategy must link to an organization’s strategy and operations, addressing all material risks and opportunities. Research by Deloitte identified several key challenges C-suite leaders experience in integrating climate strategy and goals throughout the organization:

• Lack of clear direction: there has been uncertainty and change in the rules governing sustainability reporting, and with change comes risk. Many organizations are fearful of the reputational consequences of a “misstep” and the uncertainties associated with regulatory and stakeholder expectations across relevant jurisdictions.
• Conflicting expectations: a competing stakeholder environment can make it challenging to identify a strategic direction, especially when facing the consequences of litigation and political backlash.
• Decision fatigue: with an overwhelming sense of uncertainty over many climate-related decisions, many organizations may be challenged to determine the “right” strategy and any associated investments.

The board’s focus and engagement on climate—including how the organization is integrating climate considerations into strategy and operations—can provide impetus and direction to the C-suite.

Integrating Climate into Strategy, Operations, and Risk Management

Climate should be considered within the organization’s long-term strategy, as the transition to a low-carbon economy, consideration of water usage, and power-use efficiency are driving changes throughout the ecosystems of all types of enterprises. This requires boards to determine how management is factoring first- and second-order climate impacts into strategy, operations, and risk management across the organization and its supply chain.

Regularly Review Management’s Strategic Outlook and How Climate Risks and Opportunities Are Considered

The board plays a critical role in shaping and “pressure testing” an organization’s strategic direction. Through its dialogue with management on key assumptions underpinning strategy development, the board can help inject climate considerations into strategic planning. For example, explore how management’s assumptions about future business conditions would be affected by the physical or transition impacts of climate change. The board can also support the long-term investments needed to position the company for a low-carbon future, while balancing near-term financial performance. And the board can explore whether the company has a climate transition plan.

Explore How Management is Integrating Climate Considerations into Operations

Many organizations’ climate programs started within their internal operations through initiatives such as energy, water-use, or waste reduction. These programs, often integrated with third-party frameworks or assessments like the Science Based Targets initiative (SBTi), provide several benefits, including reducing operational costs, mitigating climate impacts, and/or helping the organization to adapt to a shifting climate.
 
However, Deloitte research indicates that such initiatives may not fully integrate into compensation, operational KPIs (e.g., number of renewable power purchase agreements), or investment parameters (e.g., an internal carbon price), unless there is top-down support from the board and buy-in across the C-suite. One option to increase buy-in is to demonstrate how climate and sustainability help the company's business materially, whether it be from a risk-management or an opportunity-creation perspective. Companies can do this by quantifying, in economic terms, the incremental business the company can win because it has better sustainability programs than its competitors.

Include Climate in the Organization’s ERM

Boards oversee management’s efforts to manage and mitigate risks, including the effectiveness of the company’s enterprise risk management (ERM) programs. Boards should examine how climate has been integrated into the risk identification and assessment process—and should likewise ensure that risk analysis is effectively integrated with the corporate ERM process. For example, how has management assessed climate change’s direct risks to the organization, such as risk to physical assets or operations (e.g., unprecedented weather patterns impacting construction projects)? What were the scenarios and time frames used for their analysis? Boards can also review with management how climate will serve as a driver or amplifier of other risks (e.g., regulatory changes or shifting consumer patterns). The board should also consider how management is integrating climate adaptation or mitigation efforts into the ERM program (e.g., changes to the location and/or construction of sites to minimize potential flooding impacts).

Connect Innovation to Strategy

Climate-related transformation often requires new processes and technologies, so it can be a catalyst for innovation and competitive advantage. Companies should consider how physical and transition climate impacts might inform new investment opportunities. For example, one company leverages its materials innovation to help customers meet their climate goals. Its enhanced glass used in medical vials requires less energy to produce—a valuable factor for companies looking to reduce Scope 3 emissions.

Questions for Boards to Consider

Board governance is an important catalyst for effective corporate climate stewardship and for driving focus, accountability, and transparency. As boards begin to integrate climate with the overall strategy and operations of the organization, here are some questions to consider:

• How is climate change impacting industry dynamics—key players, value chain, ecosystems, potential areas of convergence, markets, technology trajectory, customer demands, and regulatory issues? How do these changes influence how we create value in the short- and long-term?
• Which climate risks are most material to the organization and should be reflected in the board’s long-term strategy?
• What can the organization do to strengthen our value proposition in a low-carbon economy? Where should we prioritize investment and resources to position the company for success in the next five years?
• What practices are being used to embed climate into the organization’s strategy? Are climate goals linked to executive compensation, KPIs, and investment parameters?
• Where do climate risks exist throughout the organization? How are we mitigating those risks and leveraging related opportunities?
• What operational changes can help improve the organization’s resilience?
• Has the organization conducted scenario analysis as well as physical and transition assessments to determine critical climate risks?
• How are climate factors integrated into the organization’s overall ERM processes?