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Climate Change: Resolving the Disconnect Between Ambition and Action

With 97 per cent of over 2,000 CxOs, across 21 countries, saying their companies have been negatively impacted by climate change, we stand at the tipping point of climate action. Eight in ten say they have been personally impacted by climate events in the last 12 months. All say they are feeling pressure to act from their stakeholders.

These are the findings of Deloitte’s 2022 CxO Sustainability Report: The Disconnect Between Ambition and Impact. The report reveals that global C-level business leaders (or CxOs) are increasingly concerned about climate change and say the world is at a tipping point to act. Eighty-nine per cent of CxOs agree there is a climate crisis and 63 per cent say their organisations are very concerned.

CxOs have yet to fully embed sustainability into their core business strategies, operations, and cultures. This suggests that companies may be struggling to translate and quantify the cost of climate inaction.

The top obstacles to action cited by CxOs include:

  • difficulty measuring impact
  • insufficient supply of sustainable and low-emissions inputs
  • high cost
  • focus on near term business issues.

How best to overcome these obstacles? A good starting point is to ensure your emissions inventory is in place and that you are setting science-based targets and undertaking a cost-benefit analysis to identify the most efficient emissions reduction strategy. Factoring in carbon shadow pricing (which enables you to quantify the benefit of decoupling from fossil fuels; or the cost penalty of not), will support the business case for decarbonisation. For those organisations captured by the Climate-related Disclosures mandate that comes into effect December 2022, the External Reporting Board (XRB) recommends getting started on measuring and managing greenhouse gas emissions in preparation for the disclosure – for which third-party verification will be a requirement.

Beyond emissions baselines, a robust climate risk assessment is key to identifying risks and opportunities - and is also a requirement mandated by climate risk reporting entities. Having identified and prioritised your climate risks, you are then well placed to assess and quantify your financial exposure to climate risk. This level of insight enables businesses to formulate a longer-term planning and investment strategy that builds in greater climate resilience.

The highest-ranked benefits noted by CxOs include brand recognition and reputation; customer satisfaction; and employee morale and well-being. This suggests that CxOs see climate action as beneficial to stakeholder relationships. Interestingly, the lowest-ranked benefits include revenue from both longstanding and new business; asset values; cost of investment; and operating margins. This suggests CxOs continue to struggle with reconciling short-term costs of transitioning to a low-carbon future, with long-term business resilience.

In the New Zealand context, CFO’s tell a similar story. Brand recognition and reputation are rated among the top benefits of action. In the 2021 NZ CFO Sustainability Snapshot Survey, launched in collaboration with the Sustainable Business Council and Toitū Tahua: Centre for Sustainable Finance, 54 per cent identified competitive/reputational advantage as the top driver of sustainability action in their organisation.

Further findings from the CFO survey align with those in the Deloitte global CxO survey. In particular, that the short-term costs of transitioning are not understood or articulated -undertaking emissions planning, budgeting and forecasting, obtaining external assurance and accessing sustainable sources of capital and funding were the three activities that respondents identified as ‘unsure’ if they would progress or ‘not a priority’ to progress in our NZ CFO Survey. Furthermore, 59 per cent were ‘unsure’ if they would progress or it was ‘not a priority’ to progress internal carbon pricing.

Interestingly, inaction due to the uncertainty around costs of transition does not marry up with one of the core drivers of sustainability action identified in our NZ CFO survey, where 41 per cent of respondents said changing consumer preferences/demands was a driver of action, and 29 per cent identified investor or shareholder demands as a driver. The consumer base and wider stakeholder demands for companies that are transitioning to a lower-carbon way of doing business is recognised at present – however, the cost-benefit analysis is proving difficult for C-suite to undertake, articulate, and act upon.

Understanding the costs of transition is important, but this cannot be done without also understanding the benefits. Our Asia Pacific Turning Point report demonstrates that there is a significant economic benefit to be gained from rapid climate action: $47 trillion in the Asia Pacific region according to our models. This report explains that the cost of inaction is too high to ignore, especially considering the size of the possible economic benefit from rapid decarbonisation. The report debunks the myth that growth is incompatible with climate change solutions and provides a compelling argument for thinking not solely about the costs, but to give the benefits of climate change action the attention it deserves.

At Deloitte New Zealand, we are helping organisations to understand the costs and benefits involved in transitioning to a lower-carbon way of doing business. By incorporating climate change scenario analysis and utilising tools that enable climate risk assessment and cost-benefit analysis, we help organisations understand the true costs, in the short and long-term to enable meaningful action that supports sustainable, resilient and successful business operations. We can support businesses to assess their climate risks and opportunities, implement internal carbon pricing, and provide ESG due diligence assessments for transactions that enable consideration of costs for climate action not only during the deal process, but post deal too. We also support businesses to undertake integrated reporting, to articulate their strategy on ESG, climate action and future resilience.

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