There is a growing focus on setting corporate emissions reduction targets and implementing decarbonisation action plans in the lead up to COP26. Addressing climate risk is one of the great issues of our time but what are the trends that are driving the decarbonisation agenda in the Defence & Manufacturing sector? Without doubt, it has become a top boardroom topic and rightly so. It’s a high priority for investors too. Indeed, the push from the investment community is getting ever stronger.
In the last few years, climate change has moved from being viewed in the boardroom as primarily a CSR matter to being recognised as a key financial risk and opportunity. It’s a resilience issue now. The Covid-19 pandemic has contributed to this, highlighting how the macro risks can become all too real for corporates.
However, while the pandemic hit us with incredible immediacy, one of the most difficult aspects in mobilising the climate change response is that it’s a long-term issue. Even setting a Net Zero commitment for 2030 can seem like a long way off.
Making climate risks real
From my conversations with clients in the Defence & Manufacturing sector, it is clear that there is a focus on finding ways to make the issues real in the here and now. There is a growing emphasis on training for staff to raise awareness and understanding of the risks and impacts for the business. Rather like cyber security training which 5-10 years ago didn’t really exist but has now become widespread, I expect we will see such training becoming commonplace. There also needs to be detailed work and thinking about how climate related risks affect each individual part of the business. It’s only by working up specific impacts – and associated actions – that we’ll make it real on the ground for everyone.
Another aspect I’m seeing coming through is that metrics and targets around climate change are increasingly being incorporated into both executive and management remuneration packages – always an effective way of making something real.
Up and down the value chain
Another key theme is that companies are very focused on thinking about the entire value chain they operate in and which businesses want to commit to science-based targets. We all know that Scope 1 and 2 emissions are (relatively speaking) straightforward to measure – it’s the Scope 3 picture that is much harder to quantify. Many Defence & Manufacturing businesses sit very much in the middle of their value chains – a bit like the filling in a sandwich, as one client put it. The upstream suppliers that extract the materials and resources have a much more immediate environmental impact; while it’s the downstream customers who actually use the products that then generate further carbon impacts.
But it’s about recognising all organisations are part of the continuum. One company’s Scope 3 is someone else’s Scope 1 or 2, after all. All parties in the value chain therefore have a responsibility to work closely with others to measure impact and work towards low carbon solutions.
It can also be instructive to look outside of the immediate box. For example, some of the strongest and earliest pressure for change may fall on the automotive sector due to the need to shift to more sustainable vehicle models at scale. So those in defence and manufacturing may be able to learn a lot from how the automotive industry shapes its response.
Reporting is key
Another really important strand is reporting. TCFD requirements have already become mandatory for premium listed companies. Clearly, there is the technical challenge of ensuring that your reporting complies with the requirements. But there is also a broader challenge – to bring out a really coherent and integrated narrative that tells your story. Many companies have included a section on TCFD in their annual reports, but increasingly investors and other stakeholders are looking for a more joined-up picture. Whether it’s in the chairman’s statement, the CEO’s report, a free-standing sustainability report – the messages have to be consistent across the piece.
But it’s not just about big picture sentiment in the front half. We will also see increasingly visible impacts in the back half of annual reports. There’s a growing focus from the accountancy regulator, the FRC, on climate-related impacts – in fact, it’s often their first question in any file review with auditors. Audit teams are therefore going to be asking more and more about it in their work and this may feed into some of the key accounting assumptions and estimates used. We may see impacts in areas such as impairment analyses and useful economic life assessments – at the moment, the effects of climate related risks in such matters tend to be hidden in qualitative reporting but they may start to come out more in the quantitative reporting too.
There is an awful lot for Defence & Manufacturing executives to get to grips with and the pace will only intensify. Given the size of the cultural shifts needed to deal with such a systemic risk, my advice would be: Be Bold. However, it’s got to be more than rhetoric, so focus really hard on translating your company’s ambitions and targets into real, pragmatic and deliverable actions and bring everyone on the journey with you.