New opportunities as the world moves towards sustainable technologies

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Climate change is rising up the corporate agenda and the policy and practical implications need to be urgently assessed, says Stephen Cheetham. The IR community has a vital role to play in this.

In the face of overwhelming scientific evidence, and frightening future scenarios, global momentum for action on climate change is building: this was a major subject of discussion at the recent IR Society conference.    Although there is as yet no political consensus, there are signs of voter opinion shifting in favour of decisive measures as the environmental impacts become ever clearer.  Companies and their boards cannot ignore this issue, and must plan ahead: severe risks to reputations and profits await those who are perceived to be dragging their feet.

The role of IR is paramount in this context: there is a pressing need for proactively communicating a compelling and consistent climate change narrative to investors as well as to other stakeholders.  This challenge comes at a time when the communication channels between companies and financial markets are already disrupted by the rise of passive investment and the impact of MiFID II: success in this environment will require unprecedented levels of focus and commitment from both IR functions and their boards. 

Climate change: what will the economic impact be?
It is likely that climate change will significantly disrupt global business, creating both losers and winners.  Companies with substantial carbon emissions in their own operations or their supply chains are clearly the most at risk, but unpredictable changes in consumption patterns are likely even in those businesses without obvious climate exposure.

From an economic point of view, the most logical likely next step is the meaningful taxation of carbon emissions, and although this may take different forms depending on national political priorities, it is a good place to start any company narrative, not least because it can provide a concrete input for financial modelling.

The financial impact is likely to be substantial, and there is an increasing effort by major investors and service firms to estimate what it might mean for company profits.  For example, investment firm Schroders estimates that a $100 per tonne tax on carbon dioxide could cut the value of a global portfolio by 15%.

As existing business models become less profitable, new ones are likely to emerge, and it would be a mistake to view climate change as purely negative.  It is certain that some firms will prosper in a low-carbon economy, and that some will profit from the disruption ahead as consumer preferences change, supply chains are reconfigured, and the parameters of growth are redefined.

The automotive industry – leading the way?
For all its obvious dependence on fossil fuels, and for all the negative press around ‘Dieselgate’, we believe the response of the global automotive industry to the looming climate emergency contains lessons for UK businesses.  

With substantial physical and intellectual capital invested in the internal combustion engine, and transition costs in the billions, car companies were initially reluctant to commercialise alternative powertrains.  Nonetheless, the rising tide of climate evidence coupled with disruptor businesses such as Tesla has reordered priorities.  All major automotive players are now racing to create viable electric platforms, to address significant electrification issues such as cost and range, and in parallel many are also investigating other propulsion technologies such as hydrogen fuel cells.  

Autonomous vehicles and ultra-lightweight materials may well also form part of a low-carbon vision for the industry, and the research and development for these is thus also a priority.   The key lesson here is the active pursuit of a portfolio of technical solutions in spite of uncertainty as to which will ultimately prevail: denial, lobbying or other forms of rearguard action are no longer viable.

A compelling narrative: key ingredients
Climate change is a growing priority for investors, and all have their particular perspective on the issue.  Meeting their information requirements with consistent high quality communication will require company boards and executives to work with their investor relations teams to craft and communicate their position and plans. Best practice activity should include the following:

• Senior level focus and action – for example, some companies have created a climate change strategy group with the participation of high-status individuals from management.
• Understanding where we are – a clear and rigorous carbon inventory of the existing business.
• A range of plausible and genuinely challenging scenario analyses for the future, with associated financial models.
• Clear quantification of risks, details of mitigation plans, and potential opportunities for growth.
• A specific, proactive and persistent plan for communication of the company narrative to equity and fixed income investors.
• Selective outreach to other stakeholders such as NGO’s and climate pressure groups.
• Appropriate resourcing of both the strategy group – including scientific expertise – and the IR function. 

Stephen Cheetham, senior consultant, Fidelio Partners.

Published 22 July, 2019