The future of leadership is climate-smart. Are you ready?
Aotearoa New Zealand’s CEOs and board directors are in uncharted territory when it comes to climate action and must prepare to address this challenge head-on, says University of Auckland Professor, Rod McNaughton.
The Institute of Directors named climate action the first among five priorities for directors in 2023. Rising sea levels, extreme weather events, biodiversity loss, and environmental degradation threaten the nation’s economic stability and social fabric. These consequences of climate change pose significant business risks but also create new opportunities.
The leaders of companies and organisations are at a crossroads where traditional notions of risk management and fiduciary duties intersect with the urgent call for climate action. CEOs and board directors must become climate-smart, helping to find ways to reduce emissions and avoid drastic climate impacts while adapting their company to a rapidly changing environment. How can business leaders shoulder these responsibilities and prepare to lead their organisation’s response to this global challenge?
A new mindset is needed
Many business leaders still see a dilemma in balancing their obligation to safeguard the short-term financial interests of shareholders with accounting for the long-term risks and opportunities associated with climate change. But the reality is the interests of shareholders are aligned with those of other stakeholders in responding to climate change. Boards and CEOs must embrace a broader perspective that considers the long-term sustainability of their organisations and the well-being of all stakeholders. This mindset recognises that addressing climate change is both a moral imperative and an excellent strategic business decision.
Failure to shift ways of thinking and neglecting climate risk may lead to missed opportunities, litigation, reputational damage, or business failure. By aligning their business strategies with climate goals, CEOs can position their companies as pioneers in a changing market landscape and drive positive change beyond their organisations’ boundaries.
This way of thinking was recently enshrined in law. The Companies (Directors’ Duties) Amendment Bill added wording to the Companies Act to clarify that “… a director may consider matters other than the maximisation of profit (for example, environmental, social, and governance matters).” Ironically, some legal experts opposed the amendment because they believe the Act already provides broad scope for directors to account for ESG (environmental, social and governance) factors in their decisions and regularly do so.
The expectation that directors take reasonable care concerning ESG factors in setting business strategy and business operations is increasing rapidly, fueled by a general increase in knowledge about environmental risks, regulatory protection of the environment, sustainability reporting requirements, and investor and consumer interest.
Navigating the regulatory environment
Board directors and CEOs must also stay on top of NZ’s regulatory response to climate change and its far-reaching implications for their businesses. Regulatory changes will impact industries, supply chains, and financial markets as the country strengthens its commitment to reducing greenhouse gas emissions and enhancing climate resilience. Understanding the details of these developments is crucial for effective risk management, strategic planning, and compliance. Failure to align with evolving climate policies and emission reduction targets may expose companies to financial penalties, reputational damage, and increased costs.
NZ’s regulatory response to climate change is grounded in a comprehensive policy framework focusing on reducing greenhouse gas emissions and enhancing climate resilience. The Climate Change Response (Zero Carbon) Amendment Act guides the Government’s approach, setting a 2050 target for net-zero domestic emissions and establishing the independent Climate Change Commission. The Act requires the Climate Change Commission to recommend emissions budgets, with the Government releasing its first Emissions Reduction Plan in 2022, which outlined how it will meet these budgets and achieve the long-term target.
To drive emissions abatement and meet reduction targets, NZ relies on the New Zealand Emissions Trading Scheme (NZ ETS) as one of its essential policy tools. The NZ ETS has undergone recent reforms to improve its effectiveness, including auctioning units, a cap on available units, and accounting changes for forestry. The Government is also taking specific measures to reduce emissions from the agriculture sector, which accounts for a significant portion of the country’s greenhouse gas emissions, with plans to price agricultural emissions from 2025.
In addition to its focus on emissions reduction, NZ is committed to enhancing climate resilience through adaptation measures. The country has released its first national adaptation plan, which addresses the risks associated with climate change impacts. Furthermore, NZ is exploring sustainable finance options to support climate change action, with initiatives like New Zealand Green Investment Finance funding emission reduction projects and the recently announced $2 billion renewable energy fund in partnership with US investment fund Blackrock. Mandatory climate-related financial disclosures for specific organisations have also been introduced to promote climate transparency and accountability.
Professor Rod McNaughton
Shouldering responsibility for change
Business leaders need to proactively respond to climate change beyond complying with regulatory requirements. Potential benefits include attracting socially responsible investors, new business opportunities, increased employee engagement, and enhanced brand loyalty. CEOs and board directors have a unique opportunity to lead by example, driving meaningful change within their organisations and beyond. Climate leadership demands vision, innovation, and collaboration – characteristics business leaders have cultivated. Business leaders have the skills and control over the resources needed for meaningful change.
Instigating and leading change can’t be left to governments and climate advocates alone. CEOs and boards are custodians of corporate governance and strategic decision-making and have the power to shape the direction of their organisations and influence industry practices. With access to substantial resources, they can invest in R&D and implement sustainable technologies and practices. Understanding market dynamics enables them to identify emerging trends and anticipate the growing demand for environmentally friendly products and services. Business leaders have extensive networks, allowing them to collaborate with peers, industry experts, and policymakers to advocate for climate policy and support community resilience initiatives.
By championing climate-smart leadership, CEOs and board directors can set an example for their employees, customers, and other stakeholders, inspiring broader societal change. They can encourage leaders of teams across all business functions, from finance and operations to marketing and human resources, to play a crucial role in orchestrating climate strategies.
Collaboration among executives and functional areas is essential to align actions with the organisation’s climate goals. For example, finance can develop innovative financial models prioritising climate-friendly investments and risk assessments, operations executives can drive sustainable supply chain practices and energy efficiency measures, and marketing can amplify the organisation’s climate initiatives and work to shift consumer behaviour to more climate-friendly practices.
Preparing for climate-smart leadership
To lead their companies effectively in addressing climate change, CEOs and directors can take several proactive steps:
- Invest in climate literacy training: Leaders should invest in climate literacy and training programs for themselves and their executive teams. Workshops, webinars, and external resources can help deepen their understanding of climate science, the latest climate policies and agreements, and the potential impacts on their industries and business operations.
- Engage with experts: Climate experts, environmental consultants, and sustainability advisors can provide invaluable insights and expertise. Such experts can help navigate complex climate challenges and identify innovative solutions to reduce emissions and enhance climate resilience.
- Integrate ESG considerations: Integrate ESG considerations, including climate change, into corporate strategies, policies, decision-making processes and incentives. By incorporating ESG metrics into performance evaluations and incentives, leaders can align their teams’ efforts with broader sustainability goals.
- Collaborate with industry peers: Collaborate with industry peers and collectively participate in industry-wide initiatives to address climate change. Sharing best practices, innovative ideas, and successful case studies can accelerate the transition to a low-carbon economy.
- Set ambitious climate goals: Set ambitious goals aligned with national climate targets and the objectives of the Climate Change Response (Zero Carbon) Amendment Act 2019. Promote transparency by sharing these goals and progress toward meeting them with stakeholders.
- Embed sustainability in company culture: Foster a culture of sustainability by encouraging open dialogue, idea-sharing, and sustainability-focused innovation. Recognise and reward employees for championing sustainable practices.
Addressing climate change head-on
Business leaders face a defining moment in the fight against climate change. As guardians of corporate governance and strategic decision-making, controlling significant financial and human resources, they must balance driving short-term financial performance success with longer-term sustainable practices. Climate-smart CEOs and directors can lead their companies towards a more resilient and sustainable future by preparing themselves and their executive teams to navigate the uncharted territory of climate change.
The urgency of this global challenge demands a shift in mindset, with CEOs and directors recognising the alignment between shareholder interests and addressing climate risks. Increasing expectations that directors consider ESG factors mean business leaders should proactively embrace climate-conscious decision-making and anticipate the growing demand for environmentally friendly products and services.
Furthermore, the regulatory environment in NZ requires CEOs and board directors to stay informed and compliant with evolving climate policies and emission reduction targets. Understanding the implications of the Climate Change Response (Zero Carbon) Amendment Act and its impact on industries, supply chains, and financial markets is essential for effective risk management, strategic planning, and future-proofing business operations.
By actively investing in climate literacy training, engaging with experts, and integrating ESG considerations into decision-making processes, business leaders can prepare themselves to lead their organisations in the fight against climate change. Collaboration with industry peers and setting ambitious climate goals reinforce the role of CEOs and directors as climate leaders who inspire broader societal change and foster a culture of sustainability within their organisations. By shouldering their responsibilities and tackling climate change head-on, business leaders can drive meaningful change and contribute to a sustainable and resilient future for their companies and the nation.
Professor Rod Mc Naughton is the University of Auckland Business School’s Director of Innovation and Professional Development, and a director of Ngā Ara Whetū, the University’s new transdisciplinary research centre for climate, biodiversity and society.
