Integrate Climate into Strategic Planning

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    WBCSD Supply Chain Decarbonization Masterclass SeriesWBCSD Supply Chain Decarbonization Masterclass Series

Summary

Use scenarios and sensitivity analysis in climate-based strategic planning to identify risks/opportunities, prioritize actions for resilience & align portfolios with climate goals.

Context

In early April 2024, WBCSD and BCG conducted a masterclass on the topic of Climate-based Strategic Planning as part of a Climate Transition Roadmap masterclass series. This document summarizes the key learnings that were presented and surfaced via rich discussion among company participants under Chatham House rules.


Businesses today face the dual task of addressing the tangible effects of climate change, while also transitioning towards a low-carbon economy. Having strategic foresight is essential to mitigate risk and capture opportunities for growth, innovation, and competitive advantage. Moving forward, companies should integrate climate into strategic planning with a clear link to value to succeed.

"It is not about sustainability or business results, it’s both. Always. At the same time.… These things have got to come together. It has to be part of the business model." -

Amanda Sourry, former President of Unilever North America


Solution

Companies can take a variety of potential climate-related actions to advance their sustainability goals, respond to market expectations, and/or meet standards and regulations. The approach described below facilitates a thoughtful and holistic review of options to develop a successful climate-based strategic plan that accounts for both risk management and value-creation opportunities.

Overview of recommended steps to support climate-based strategic planning, with details to follow:

  • Step 1. Understand future scenarios

  • Step 2. Identify potential impacts to determine risks and opportunities

  • Step 3. Assess the range of possible climate actions to lower risk and drive

  • Step 4. Prioritize no-regret actions and realign portfolio for strategic bets

  • Step 5. Conduct sensitivity analyses

Step 1: Understand future scenarios

Scenarios are a tool that companies can leverage to pressure-test business plans against potential futures, thus supporting companies in strategic planning, developing resiliency, and building sustainability advantage amidst climate uncertainty. Scenarios represent a range of possible futures, that are stretched – but plausible; they are not comprehensive or exhaustive, and they are not predictions either.

To construct scenarios that help in understanding the macro-levers that may impact the business and industry, organizations can do the following [See Figure 1 for a summary of how to develop scenarios]

Figure 1: Steps to build scenarios to understand possible future conditions impacting an organization and its sector

  • 1: Start by mapping key dimensions of uncertainty that are most relevant to

    • Companies should consider multiple dimensions of uncertainty, some of which are shown in Figure 1

    • Identify the most material dimensions that impact company operations and drivers of competitive advantage. Many companies have used the SASB materiality map as another resource to support this step [See SASB Materiality Map].

  • 2: Determine end-points for each dimension of uncertainty

    • For each dimension think about the extreme “stretched-yet-plausible” ends, and what conditions and implications they would entail. For example, the dimension of ‘Climate Action’ spans the whole range of things that can be included from well-coordinated and aggressive action to fragmented and insufficient response from countries.

  • 3: Match points along the axes that align with future conditions to define scenarios

    • At this point, scenarios can be constructed top-down or bottom-up. For instance:

      • Bottom-up: Select a point on each of the (material) dimensions. Taken together, these describe a scenario. This approach can be used when there is a greater understanding of the macro drivers.

      • Top-down: Describe the scenario in terms of macro-level outcomes, which can be a helpful approach when these are better understood. Based on this, define points along dimensions.

Refer to these additional resources for a more in-depth discussion of future scenarios:

To effectively leverage scenario analysis, businesses should focus on factors crucial to their competitive advantage and core value drivers. The scenarios should be comprehensive enough to cover potential impacts (see Step 2) from changing climate conditions, and consumer demands and regulatory shifts. Coordination with strategic, financial, and risk and compliance teams is vital to ensure organizational alignment, agility, and informed decision-making.

Of practical importance, the dimensions of uncertainty have different implications depending on the industry and company. For example, in aviation, the most impactful dimensions may include market evolution on sustainable aviation fuel policies; the environmental reality of sea-level rise, flooding, and extreme heat impacting airports and infrastructure; and consumer demand for air travel and cleaner fuels. A chemicals company with a history of carbon fuels would be most impacted by increasing demand for cleaner fuels and the pace of change. Meanwhile, a construction company may need to be most cognizant of new green building codes and environmentally-conscious customers. An eye towards these trends and scenarios will lay the foundation for companies to understand risks and opportunities and potential actions.

Step 2: Identify potential impacts to determine risks & opportunities

Strategic planning should address both the physical impacts of climate change and the risks and opportunities associated with transitioning to a low-carbon economy, ensuring that companies focus not only on being resilient to environmental impacts but also adapting to ecosystem changes and capitalizing on market opportunities from the energy transition.

Physical risks:

  • Acute: Risks from sudden, severe weather events that can cause immediate and significant damage to assets and operations (e.g., hurricanes, floods, wildfires)

  • Chronic: Risks that stem from longer-term changes in climate patterns which can more gradually impact infrastructure, supply chains, and resource availability (e.g., sea-level rise, warming temperatures, and extended droughts)

Transition risks & opportunities:

  • Regulatory & Policy: Changes in laws, regulations, and policies aimed at addressing climate change (e.g., carbon pricing, emissions regulations, tax incentives)

  • Technology: Advancements in technology that help achieve low-carbon economy-related goals (e.g., improvements in energy and resource efficiency)

  • Markets: Shifts in supply and demand for products and services due to climate awareness and consumer preference changes, leading to new markets for green products or declining markets for products associated with high emissions

  • Reputation: Changing perceptions, either positive or negative, of key stakeholders regarding a company’s climate-related response; effective management can enhance reputations, while failures and “greenwashing” can damage trust and brand loyalty

To illustrate, the Industrial Goods sector provides a variety of examples of climate and transition impacts that require strategic planning [See Figure 2]. Note: this list is non-exhaustive.

Figure 2: Examples of consequential physical impacts and transition risks & opportunities for companies in the Industrial Goods sector

Step 3: Assess the range of possible actions to lower risk and drive value

With an understanding of risks and opportunities, the next step is to think about the full landscape of possible actions available to the organization across the full value chain and each business and support unit. Every part of the business and each employee has a role to play.

While there are many climate initiatives to choose from, organizations should align actions to meet strategic climate goals. There will be a range of diverse options that span the spectrum of hedging against risk and building green value over the long term—and many actions can simultaneously address risk and value.

[See Figure 3 for more illustrative examples of initiatives and the “Read More” section for examples of companies that have taken bold strategic choices along the spectrum of hedging against risk and building green value]

Figure 3: Illustrative example of actions spanning the range of hedging against risk and building green value

While there are many climate initiatives to choose from, organizations should align actions to meet strategic climate goals. Companies must remain nimble and prepared to adjust to emerging future conditions, while at the same time creating a robust and flexible strategy that can withstand sudden shocks. By analyzing various scenarios, organizations can make plans to pivot, as needed.

[See “Read More” for additional company examples of wide range of climate actions]

Step 4: Prioritize no-regret actions and realign portfolio for strategic bets

Having a high-level understanding of the full landscape of climate actions is a useful exercise for companies to assess their options. Through this process, it will become clearer that some initiatives may be urgent to meet new regulations or mitigate risk, while others are important but require a longer runway to set in motion. To narrow the list and prioritize actions, companies can use two filters:

  1. Identify “no-regret” actions: Actions that will deliver benefits regardless of which future scenario unfolds

  2. Determine your strategic bets: Key opportunities and risk mitigation actions that are worth investments today to secure future success and align with the organization’s mission

While each organization’s priority list is bespoke, some initiatives that may resonate with many organizations include:

  • As no regret actions

    • Maximize energy efficiency to reduce costs and emissions

    • Upskill employees across the company

    • Strengthen resilience

  • As strategic bets

    • Build and invest in critical partnerships

    • Invest in R&D for tech and materials

    • Advocate for better industry standards

Companies should prioritize actions in both categories according to business needs. [See “Usage” section for an example company journey for Interface]

Tips:

  • Balance Climate Goals with Financial Benefits: Seek opportunities where no-regret actions can lead to cost savings or revenue enhancements, supporting funding for more strategic, high-stakes initiatives.

  • Learn from Industry Leaders: Analyze the actions of sustainability leaders within your industry to understand effective climate strategies they have implemented, including no-regret moves and strategic bets that have enhanced their competitive edge.

Step 5: Conduct sensitivity analysis

A sensitivity analysis can help stress-test your climate-action plan’s key assumptions under different conditions to understand potential roadblocks, failure points, and key success factors. This process is important to make the plan more robust and adaptable to potential future scenarios.

More companies are conducting sensitivity analyses to:

  • Anticipate and prepare for change, including validation of no-regret moves

  • Increase flexibility, agility, and resilience, including via innovation and new market opportunities

  • Meet evolving expectations from investors, customers, insurers, and regulators (e.g., TCFD)

  • Identify growth drives for value creation and competitive advantage (viewing the upcoming climate and transition changes through the lens of growth drivers and value creation is an opportunity many companies miss)

The U.K.’s Transition Plan Taskforce (TPT) has implementation guidance on sensitivity analysis. Organizations should consider conducting a sensitivity analysis on their climate action plans to understand the key assumptions underlying a plan and how robust the plan is under different scenarios. Companies should know the most important dimensions that influence their scenarios and what key trends and signals should be monitored that may impact their plan. It is key to update the sensitivity analysis to reflect new data and insights to ensure strategies remain relevant under changing macro-conditions. Finally, expect the unexpected.


Usage

Several companies are embedding climate successfully in their strategic planning, addressing risk mitigation and value creation. Nestle, Philips, and Interface are three such examples.

Nestlé is a multinational food and beverage company known for its diverse product portfolio, which includes dairy products, coffee, infant nutrition, and more.

Nestlé has integrated climate-based strategic planning into its core business operations. To ensure resiliency against climate-related disruptions in their global supply chains, Nestlé conducted risk assessments and scenario planning that informed their strategy and led to a detailed roadmap with prioritized actions to improve water efficiency, achieving 100% renewable electricity by 2025, and more sustainable sourcing of its raw materials. It has committed to achieving net-zero greenhouse gas emissions by 2050, a goal supported by its investments in renewable energy, sustainable agricultural practices, and eco-friendly packaging solutions. Nestlé has taken a proactive approach to embed climate considerations into business strategy to mitigate negative environmental impact and ensure adaptability and competitiveness in rapidly evolving global markets.

See Nestle’s Net Zero Roadmap here.

Philips is a global leader in health technology, as well as consumer health and home care products.

Philips has proactively taken steps to assess and manage the physical risks associated with climate change across its operations, starting with identifying climate risks and publishing their TCFD report. In this regard, the company has implemented a comprehensive risk assessment strategy that includes analyzing vulnerabilities in its supply chain, production sites, and overall business operations, to adverse weather events and natural disasters exacerbated by climate change. These forward-looking assessments help Philips identify critical areas requiring adaptation and resilience planning. Additionally, Philips has incorporated climate risk considerations into its overall business continuity strategies, ensuring that the company can maintain operations, minimize disruptions, and meet customer needs even under changing climate conditions.

Read more about Philip’s climate goals here.

Interface is a global leader in the design and production of modular carpet tiles and resilient flooring.

For over 30 years, Interface has advanced its sustainability journey, beginning in the mid-1990s with a shift towards minimizing environmental impact. The initial Mission Zero® goal aimed to eliminate negative environmental impacts, a milestone successfully achieved. Building on this, their Climate Take Back ™ plan sets even more ambitious targets to further reduce harm and foster positive planetary impacts. Interface’s approach has included strategic, no-regret moves and investments in R&D to innovate processes and products, enhancing waste reduction, carbon emissions cuts, and recycling. These efforts extend across their entire value chain, reinforcing Interface’s role as a sustainability leader in the industry. See Figure 4 for an illustrative summary of their journey.

Read more about Interface’s sustainability journey here.

Figure 4. Interface impacted the industry throughout their 30-year sustainability journey


Impact

Climate impact

Climate-based strategic planning establishes a proactive and viable path forward on climate action for organizations, which serves to minimize risk and maximize value.

Business impact

Benefits, including (but not limited to):

  • Risk Mitigation: Identify and address potential vulnerabilities in operations and supply chains due to climate-related risk, reducing future disruptions and costs

  • Regulatory Compliance: Meet expected regulatory changes and emerging standards and internationally relevant policies (e.g., EU’s Carbon Border Adjustment Mechanism)

  • Competitive Advantage: Differentiate the business by showcasing a commitment to sustainability and advancing company activities toward greener value-creation opportunities

  • Innovation and Market Leadership: Be forward-looking on climate, enabling the business to lead in innovation and opening new markets and growth opportunities

  • Long-term Sustainability: Support the development of business models that are future-proofed to physical climate risks and transition risks

  • Investor Confidence: Demonstrate foresight and proactive strategic planning to attract investors and investment

  • Reputation and Trust: Enhance brand reputation and strengthen stakeholder trust by actively engaging in global climate efforts

  • Policy Influence and Advocacy: Position the company to better influence and shape supportive environment policies and regulations, aligning business goals with policy progress

  • Collaborative Innovation and Partnerships: Facilitate partnerships for innovation and sharing best practices, accelerating sustainable solutions across industries

Costs, including (but not limited to):

  • Climate Risk Assessment: Costs associated with conducting thorough assessments, which may require specialized consulting services or tools

  • Environmental Impact Studies: Expenses related to understanding the operational and strategic impact on the environment, including freshwater systems, biodiversity, local communities, etc.

  • Compliance and Monitoring: Ongoing costs related to monitoring systems for the latest data, compliance reporting for environment regulations, and additional costs for certification and audits

  • Stakeholder Engagement & Communication: Costs for engaging with local communities, investors, partners, and government to align strategies and gain support. Includes expenses for marketing, promotional campaigns, and targeted outreach to share strategic initiative

  • Opportunity Costs: Shifting focus towards sustainability may initially divert resources from other investments, requiring careful management. However, these costs are often offset by long-term benefits such as reduced operational expenses, improved resilience, and enhanced reputation, highlighting the critical upsides of climate-based strategic planning (which are often overlooked).


Implementation

Typical business profile

Businesses of all types and maturities on Net Zero/Nature Positive journeys can benefit from scenario planning to prioritize climate actions. For example, more mature companies can apply these approaches to refine existing plans, add more depth and detail, and identify opportunities; while those earlier on their journeys can adopt these best practices at the start and identify critical priorities that should not be missed. Companies at different stages of maturity would be able to extract different values from strategic planning, and as they progress their planning processes can get more sophisticated.

Key stakeholders

Internal stakeholders:

  • Senior Management & Board of Directors: Shaping the company’s vision by integrating climate considerations into the core strategy and operations, allocating resources (capital and personnel), managing risks, ensuring compliance, and engaging stakeholders on sustainability issues

  • Employees: Identifying operational efficiencies and pioneering more sustainable processes due to their on-the-ground knowledge; feedback mechanisms should allow employees to contribute to real-time adjustments

  • Risk & Compliance Teams: Focusing on identifying and assessing both physical and transitional climate risks, helping the organization prioritize and manage these effectively

  • Research & Development Teams: Evaluating and innovating solutions that align with strategic goals, adapting products and processes to enhance climate initiatives; critical to understanding the feasibility of climate actions

  • Management: Setting the tone for the organization integrating climate into strategy, and providing direction to the company

External stakeholders:

  • Investors: Sharing climate-based strategic plans with investors to get buy-in and support

  • Customers: Communicating strategy and sustainability product offerings to customers to help increase brand awareness, and engagement, and potentially create a growth market

  • Industry Groups: Collaborating to establish and elevate sector-wide standards and practices, facilitating better and more unified approaches to climate challenges (1)


Read more

Analysis of over 500 companies with sustainable business model innovations reveals common lessons among successful organizations. In combination, these four factors set companies apart and allow them to win from a strategic and value-creation perspective via climate-based strategic planning. Such leaders:

Merge climate, corporate, and innovation strategy

  • Only 1/3 of companies have integrated climate actions with drivers of value over time and paradigmatic changes that may yield a competitive edge. The companies that do this well merge climate considerations and innovation into their core strategy, viewing it not just as a compliance requirement but crucial driver of innovation and market differentiation. This enables a company to capitalize on emerging markets and regulatory shifts, enhance operational efficiency, and gain resilience against environmental disruptions. The proactive approach both mitigates risks and opens up significant opportunities in an increasingly climate-conscious global market.

Set a high level of climate ambition to get leadership buy-in

  • A high level of ambition is inspiring and can be an engine of excitement for the business. Climate action and strategic gains are not an “either-or”, but both!

Embed climate in the wiring of the business

  • Climate leaders accept and anticipate that there will be changes to how the business operates, but they believe the increase in efficiency and opportunities presented by the energy transition and changing climate have the potential to add value to the business and the planet.

Recognize all companies, industries, and ecosystems can benefit and have roles to play

  • Partnerships in the business ecosystem are needed. It is difficult to reach the full potential (e.g., Net Zero) without having sustainable ecosystems as well. It is critical to think about the company as part of the broader system that it is part of, the many feedback loops, and how it can lead the industry.

Resources for companies to consider when integrating climate into strategic planning

Figure 5. Available tools for risk assessment and climate-based strategic planning. Refer to company and tool webpages for more detailed descriptions.

Several leading organizations have climate-based strategic plans and roadmaps [See “Usage” for more details], including (but not limited to):

  • Con Edison moved or retired assets in areas prone to acute physical risk and chronic climate risks. In response to the increased risk of flooding and storms like Hurricane Sandy, Con Edison has invested in reconfiguring its energy infrastructure in New York. This includes elevating electrical equipment and reinforcing flood barriers around critical facilities.

  • IKEA invested in developing alternative green products and practices that have increased the company’s value proposition. The global furniture company has advanced its sustainability agenda by creating furniture from recycled materials and renewable resources such as bamboo and sustainable cotton. The company has also embarked on initiatives to decrease its carbon footprint, including a furniture buy-back program, investing in renewable energy, and aiming to become climate-positive by 2030. These green developments not only lessen environmental impact but also appeal to eco-conscious customers, enhancing IKEA's market position.

  • Iberdrola invested in upskilling its employees and management on climate. Iberdrola is a leader in renewable energy and has actively upskilled and reskilled its workforce for the transition away from fossil fuels to renewable sources. The company has invested in training programs focused on new technologies and innovative energy production methods. Additionally, the training prepares employees to handle the growing physical risks from climate change, including extreme weather's impact on energy production and distribution.

  • General Motors (GM) and Nucor engaged in a partnership to accelerate zero-carbon steel for automotive manufacturing. GM is using Nucor’s Econiq™, a line of zero-carbon steel, in vehicle production. This collaboration marks a significant step towards GM's commitment to reducing its carbon footprint and achieving carbon neutrality in its global products and operations by 2040. By integrating Econiq™ steel GM’s manufacturing, Nucor benefits by expanding its market for zero-carbon steel and solidifying its customer base in the automotive sector.

  • Cirba Solutions focused on developing a circular EV battery supply chain via recycling metals. Cirba Solutions emerged from a merger between Heritage Battery Recycling, Retriev Technologies, and Battery Solutions, to advance electric vehicle (EV) battery recycling technologies, specifically the sustainability and efficiency of recovering valuable materials from used EV batteries. By enhancing recycling processes, Cirba Solutions aims to reduce environmental impact, develop a circular EV battery supply chain, and support the growing demand for critical battery components in the EV industry amidst scarcity of critical metals.

Going further