Wilful Blindness Series Part 4: Climate Change

We ask Margaret about the biggest wilful blindness today. Her answer is climate change which she says is now at crisis point. In her article Margaret looks back over three decades and explains how we can and should take action.
United Nations, New York, USA, September 06, 2019 - Environmental activist Greta Thunberg, along with climate activist Alexandria Villasenor and friends demanding Climate Polices During a Protest today at the UN Headquarters in New York.Photo: Luiz Rampelotto/EuropaNewswire

"Trustees and boards are so often conflict averse"

I first encountered it when reading the transcript of the trial of Enron Chairman and Chief Executive, Ken Lay and Jeffrey Skilling. But since then, my work has shone light on governance failures from BP to VW and GM to Wells Fargo, Fukishima, #MeToo, Carillion and Thomas Cook. It persists, in large part, because executives, trustees and boards are so often conflict averse, uncomfortable asking the challenging questions that it is their job to ask. Human beings are social creatures and want to maintain a sense of belonging; when that slips into conformity, groupthink develops, the most critical feature of which is that a cosy sense of togetherness amplifies the appetite for risk. The tendency for many boards to be composed of similar kinds of people (with little ethnic, gender, educational or cultural diversity) exacerbates these tendencies. Prevailing business, financial or economic models tend to draw attention to confirming data, while marginalising, trivialising challenging data. And when personal financial gain depends on not disturbing the status quo, the scene is set for wilful blindness all around. Nowhere has this phenomenon been more prevalent than in the corporate response to the risks posed by climate change. We have known about global warming ever since the NASA scientist James Hansen testified to Congress about it in June 1988. In the three intervening decades however, it has been hard to see governments or corporations responding to this existential threat with the urgency, insight and determination that Hansen and others anticipated. Instead, wilful blindness has been the order of the day, with more carbon dioxide emitted since the 1992 Earth Summit than in the whole of preceding human history. Little in the way of challenge, debate or leadership has been found in corporate boardrooms. Instead, alibi-seeking – shareholder return, the 2008 crisis, the need for growth – has prevailed, with greater energy devoted to turning a blind eye to the problem.

"Science rarely deals in simple absolutes"

One of the bigger challenges of climate science has been the practical difficulty of proving causal links between specific events – such as a forest fire or a flood – and the general system of climate change. Such ambiguity has proved a gift to laggards and deniers. But science rarely deals in simple absolutes. Living in a household where someone has measles doesn’t guarantee that you will contract the disease, but you’d be irresponsible not to be vaccinated against what can be a deadly infection. It is in the nature of science that you don’t have to believe in it for it to be true. Since Hansen’s initial findings, the evidence has mounted that climate change is real, that it has become a current crisis, and that the failure to act will spell disaster, for companies, economies, countries and the planet as a whole. The 2016 Paris Accord called for all nations to keep the increase in global average temperature to well below 2 °C above pre-industrial levels; and to pursue efforts to limit the increase to 1.5 °C, recognising that this would substantially reduce the risks and impacts of climate change. Since it was signed, however, none of the major industrialised nations have implemented the policies the Agreement envisioned, nor have they met their pledged emission reduction targets.[1] Even if they had, the sum of all member pledges (as of 2016) would not keep global temperature rise well below 2 °C.[2]  It has taken a 17 year old Swedish girl, and the mass mobilization of citizens, to shatter the wilful blindness that has settled into governments and board rooms in the last thirty years.

"Large corporations must now step up, take responsibility for their action (and inaction)"

No corporation in the world now can escape questions concerning their strategy with regards to carbon reduction, capture and elimination. A vast array of new and developed technologies provides solutions to this epic challenge; the problem lies with getting them implemented. The large corporations which dominate the global economy must now step up, take responsibility for their action (and inaction) and focus their resources on reducing emissions fast and eliminating the carbon that is already in the air. With its commitment to become carbon negative, Microsoft has taken a lead here – Google swiftly followed – but earlier would have been better. Public confidence in corporate governance depend on how much happens – at what pace – in this decisive decade. We have already seen how this can play out in the case of GE. Over the last three years, their share price is down some 60 percent in a market that is up some 50 percent. Why? Largely because producing the turbines for large, centralised coal-powered fire stations had become such a large part of GE’s business. As late as 2015, it even bought its largest European competitor, Alstom. Focus on old, centralised technology, left it blind to the swift fall in the price of renewable energy. The large coal powered plants were no longer able to secure financing and hundreds of billions of dollars were wiped off the value of what had once been the lodestar of Wall Street leadership.[3] GE was still operationally fine at doing what they’d always done – but, blind to the fact that, in a changing climate nobody wanted it any more, the company fell out of the Dow Industrial Index.

"Tragedy of the horizon"

Much is made of the uncertainty that global warming generates. How, when and where its impact will next be felt is inherently unpredictable. But that isn’t an excuse to stand by and wait to see what happens next; it’s a cogent argument for companies to get ahead of the problem and become part of the solution. Some of the world’s largest emitters of CO2 are energy companies; these are also some of the biggest dividend payers in UK pension funds. Those dividends will come under threat. This is what Mark Carney, Governor of the Bank of England, calls a “tragedy of the horizon”, meaning that by the time the threat is obvious and present, it will be too late to fix it. That’s why the wilful blindness of the last 30 years had been so wanton. “What,” Carney asks, “can bring the future into the present and cause action today?” To some degree, nature is doing that for us: forest fires in the U.S. and Australia, recurrent flooding in England and in the Midwest of the United States is rapidly, and tragically, bringing the future into the present for farmers, manufacturers, homeowners and citizens. “Every pension fund, every insurer, every company in the land needs a plan for how it would operate in a warmer world and should look at its assets and ask how their value might change,” says Carney. According to leading pension fund analysis, the current policies of companies are “consistent with degree warming of something in the order of 3.7 degrees to 3.8 degrees” Celsius. This is recklessly above the 1.5 degrees that people say they want and governments are demanding. The question for every company, financial institution, asset manager, pension fund or insurer, Carney argues, is: what’s your plan? It’s the question every investor, trustee and board manager must ask – and keep asking. Climate change will impact all economies, all asset classes and all industries. So sustainability is no longer an optional extra, a marginal nicety that can be addressed through small, under-powered Corporate Social Responsibility programmes that have typically spanned everything from literacy campaigns to arts sponsorship. Strategic sustainability has now become the acid test of a board’s expertise, effectiveness and strategic coherence. But according to Fiona Reynolds, CEO of the United Nations Principles for Responsible Investment, too few investors are thinking about the impact of climate change on their investments. It is, she says, the number one risk faced by investors and boards that have a fiduciary duty to incorporate environmental, societal and governance (ESG) issues into their investment analysis and decision making. When investors work together, they can make a sizeable impact. She cites the example of Climate Action 100+, a group of 370 global investors representing 35 trillion dollars of assets under management. By engaging with 100 of the world’s largest emitters in 28 markets, they are starting to see some positive outcomes. Glencore, for example, the world’s largest exporter of coal, has agreed to cap production. Maersk, the world’s largest shipping company, has committed to net zero emissions by 2050. Investors now must choose between active participation, of the kind that Reynolds cites, and divestment: selling all investment in any business that depends on fossil fuels and accelerate global warming. The argument for divestment is that it doesn’t require complex analysis, looks ethical and releases capital for investment in new, greener technologies. The argument against it is that the capital withdrawn is easily replaced and that influence is more powerful and constructive than abdication. Many investment firms choose a blend of both: divesting from businesses that are unwilling or unable to change while also investing in more sustainable long-term businesses.

"Climate crisis adds significant new responsibilities to corporate governance"

Belatedly, Blackrock’s Larry Fink argues that the “evidence on climate risk is compelling investors to reassess core assumptions about modern finance” and there is no doubt that climate crisis adds significant new responsibilities to corporate governance. Governor Carney hopes to lighten these by mandating consistent, standardised reporting. But even those will require that trustees bring new analytic skills to their deliberations. Board members have always brought traditional business expertise of one kind or another – legal, accounting, operations experience and insight. Now every board must demonstrate the capacity to understand, differentiate and challenge climate change strategies. Like all investors, they will need to assimilate the language and metrics of climate science, to know the difference between direct and indirect emissions, between Scopes 1, 2 and 3, zero and net zero. We have long seen how jargon can stymie debate, so boards now must ensure that they don’t fall into such obfuscating traps. Scientific understanding will need to be added to the other technical qualifications of a competent board. In the U.K., carbon net zero by 2050 is now the law of the land. That makes it part of every trustee’s fiduciary duty. It is rare in history for every business in the world to be confronted by the same simple, stark priority simultaneously. No amount of capital, ingenuity or political clout will protect organisations that fail to define and execute active, informed strategies for reducing and capturing carbon emissions. There is no alternative planet, nowhere to hide and no alibis that will suffice if we do not rise to this challenge. This new decade will prove decisive. If the discomfort of demanding meaningful action on the greatest threat of our age is awkward or uncomfortable, that will be as nothing compared to the searing questions our children will ask if wilful blindness is allowed to persist.
[1] Victor, David G.; Akimoto, Keigo; Kaya, Yoichi; Yamaguchi, Mitsutsune; Cullenward, Danny; Hepburn, Cameron (3 August 2017). "Prove Paris was more than paper promises". Nature. 548 (7665): 25–27. doi:10.1038/548025a. PMID 28770856. [2] Rogelj, Joeri; den Elzen, Michel; Höhne, Niklas; Fransen, Taryn; Fekete, Hanna; Winkler, Harald; Schaeffer, Roberto; Sha, Fu; Riahi, Keywan; Meinshausen, Malte (30 June 2016). "Paris Agreement climate proposals need a boost to keep warming well below 2 °C" (PDF). Nature. 534 (7609): 631–639. doi:10.1038/nature18307. PMID 27357792. Mooney, Chris (29 June 2016). "The world has the right climate goals – but the wrong ambition levels to achieve them". Washington Post [3] In India, for example, over the first nine months of 2018, India installed forty times more capacity for renewable energy sources than for coal-fired power. https://www.nybooks.com/articles/2019/04/04/future-without-fossil-fuels/

Author

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Margaret Heffernan

Margaret Heffernan is an entrepreneur, CEO, writer and keynote speaker. She is currently a part-time lecturer at the University of Bath School of Management. Heffernan is the former chief executive officer of five businesses and is the writer of five books that explores business and effective leadership.

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