How does climate change intersect with the 'S' in ESG?

Climate change is often viewed as an environmental issue, considered the big “E” in the ESG acronym (defined as Environmental, Social, Governance), But the implications of climate change go beyond just its environmental impacts. Climate-related risks and opportunities are significant for the economy, society and for governance. Thus, climate change cannot be viewed in isolation of other ESG issues – it is inextricably linked. 

The transition to net zero is top of mind for governments, regulators, central banks, companies, investors, and the broader public. At the same time, the pandemic and ensuing socio-economic reckonings have established a new focus on the “S” in ESG. In the wake of rapidly evolving social expectations, and in the context of an unprecedented battle for talent, there are a series of new norms emerging that impact an organization’s social license to operate. 

Corporate directors today find themselves at the intersection of these “E” and “S” issues as part of their oversight responsibilities. This represents an opportunity to establish a more integrated and thoughtful approach to addressing climate change and the transition to net zero. 

Climate change impacts social issues – and vice versa

Climate change has direct and indirect implications for social issues and vice versa. This two-way relationship creates risks and opportunities for organizations as they transition to net zero. Some of the most noteworthy relationships for Canadian organizations include:   

•  Rights of Indigenous, First Nations and Metis – Physical impacts of climate change will disproportionately impact Indigenous, First Nations and Metis peoples of Canada. Crop failures due to extreme weather events threaten food security and livelihoods of remote communities. As the frequency and severity of forest fires, droughts, and floods increase, it further limits access to land, decreasing economic prospects and endangering livelihoods. The perspectives of Indigenous, First Nations and Metis peoples are also an essential part of Canada’s transition to net zero. As stewards of the land, traditional knowledge of Indigenous, First Nations and Metis peoples should inform our country’s climate change mitigation and adaptation approaches. Traditional knowledge is a compliment and an asset to scientific inquiry. Their traditional knowledge can and should be leveraged in organizations’ transition and adaptation plans. 

• Diversity, Equity and Inclusion (DEI) – Climate change will also disproportionately impact vulnerable and marginalized populations, further exacerbating the challenges in creating a truly just and equitable society. Research by the Sustainability Accounting Standards Board found that DEI is highly relevant to an organization’s ability to attract and retain talent, deliver new products and services, develop meaningful and positive relationships with local communities, and innovate while mitigating emerging risks. In the transition to net zero, DEI represents a major opportunity to harness the power of diverse viewpoints and perspectives, which will be essential given the transformation required to achieve net zero.  

• Employee Health and Safety – As the frequency and severity of extreme weather events grows, and the climate crisis accelerates, impacts on employees’ health and safety are growing. For industries that require ongoing maintenance of physical assets, such as utilities, mining, oil and gas and infrastructure, rising average temperatures and more storms means increased exposure to physical health risks. When it comes to mental health, the foreboding impacts of climate change have created a new term: “climate anxiety”. The Lancet did a first-ever study of climate anxiety in children and youth and the findings were illuminating – 59% of respondents globally were very or extremely worried and 84% were at least moderately worried about climate change. More than 50% reported each of the following emotions: sad, anxious, angry, powerless, helpless, and guilty. Climate change has the potential to amplify growing mental health issues accelerated during the pandemic. Organizations need to be aware of the impacts on employee health and safety on productivity, engagement, and turnover. 

• Human Capital Management – The pandemic has thrust the war for talent into the spotlight and human capital management is one of the top ESG issues for most organizations today. The ability to attract, retain and develop talent – particularly Millennials and Generation Z employees – will depend on an organization’s ability to articulate its approach to climate change and other ESG issues. According to Deloitte’s 2022 Gen Z and Millennial Survey, almost half of Gen Zs (48%) and Millennials (43%) say they have put some pressure on their employer to take action on climate change. Forward-thinking organizations are leveraging their ESG and climate change efforts to differentiate themselves in the war for talent and the potential gains could be huge. 

Historically, companies have viewed these topics in isolation. In our interconnected and complex world, stakeholders want transparency on how organizations’ responses to climate change are considering and addressing these important social topics. Capital market participants are seeking a more cohesive approach that addresses risk amplification and captures opportunities for value creation. Organizations that can do this well will have opportunities for competitive advantage in the low carbon transition. 

Key considerations for corporate directors

 In a November 2022 survey conducted by ESG Global Advisors and Argyle Communications, 88% of organizations surveyed had integrated, or were in the process of integrating, social risks into board governance responsibilities. Given their involvement in overseeing both environmental and social risks, boards have a key role in linking the organization’s climate change efforts with its broader ESG efforts.  

According to the ICD’s May 2022 Director Lens survey, directors identified the historical economic dependency on extractive resources (60%), lack of political will/public support (59%) and the significant existing demand for carbon-intensive products (55%) as the top three challenges in making the transition to a low-carbon economy. Over four in ten (44%) say their organization made a commitment to net zero, however, nearly half (46%) say their organization has not taken any action or developed a transition plan to achieve these targets. 

The path ahead is uncertain, and the net zero transition requires one of the biggest economic transformations in history. It is against this backdrop that corporate directors must navigate overseeing their organizations’ transition plans and reporting to investors and other stakeholders.  

Any successful net zero transition plan must consider social issues 

Given the challenges identified by Canadian corporate directors, any successful net zero transition must consider a variety of social issues in both national and local contexts. Our economic dependency on natural resources means that climate change will have implications for jobs, communities, and ultimately, all Canadians. Our approach to the net zero transition requires a multi-faceted lens that acknowledges the economic and financial impacts of decarbonization efforts, while enabling a productive and engaged workforce of the future that can provide the required low carbon goods and services. 

This complicated landscape presents massive opportunities for organizations that get it right – Canada may be a natural resources-based economy, but it is also a knowledge-based economy. In a global war for talent, organizations that can use their response to climate change to attract the best and brightest employees will benefit tremendously. In a country with a wealth of traditional knowledge of Indigenous, First Nations and Metis peoples, we have a unique opportunity to create a tailored response to climate change. In a country that thrives on diversity and immigration to drive our economic engine, DEI represents a enormous pool of talent to help organizations develop new thinking in their net zero transition. 

To get started, corporate directors need to develop an understanding of the interconnections between climate change and social issues. Leading organizations are conducting comprehensive materiality assessments that consider the viewpoints of multiple stakeholders who drive value creation in the short, medium, and long-term. Their findings should form the foundation for key climate and social issues in the organization’s net zero transition plan. The journey to net zero will take decades, but there are important steps that corporate directors can take today to ensure an integrated approach to transition planning that leaves no one behind.