Managing climate change risk: Every part of an organisation needs to act

Ari Sharp: Welcome to NousCast Shorts, a podcast that brings short and sharp insights from the team at Nous Group, an international management consultancy. I’m your host, Ari Sharp, and today on NousCast Shorts, we’re talking to Simon Guttmann, a Nous Principal who specialises in business strategy for organisations in both the public and private sectors. With a PhD in economics, Simon works with organisations to craft strategies that identify bold objectives and works out practical ways to get there. Lately, Simon has been thinking a lot about climate change and the way that organisations can take a strategic approach to it. Along with colleague Marie Wilson, he recently wrote an article for the Nous website about how managing climate change risk needs every part of an organisation to act. Let’s find out more.

Ari Sharp: Simon Guttmann, welcome to NousCast Shorts.

Simon Guttmann: Thanks, Ari. It’s great to have a chat.

Ari Sharp: Simon, you’ve written for Nous about the risks to organisations posed by climate change. Tell us more about the key insight of your article.

Simon Guttmann: Thanks, Ari. Let me use an analogy to draw out what I think the key insight is. I’m an economist by training and please, no one hold that against me, but anyway, one of the key concepts in economics is the difference between the micro and the macro or potentially the partial and the general. So by way of example, a policy change or a business decision may have a very positive impact in one part of the economy, but may have flown effects that are less positive or even negative in other parts of the economy. So considering that policy change overall, if you consider the broad economy-wide perspective, you might say, “Oh, hang on a minute. That’s not such a good idea,” even though it was quite positive for a particular sector or a particular organisation.

Simon Guttmann: Using that by way of analogy. The main message of the article, I think, is that organisations need to think very broadly about their response to climate change and think very carefully about the flow and implications of decisions they make. So, a decision that is very favorable for one aspect of the organisation’s performance, when considered more broadly, may actually be quite detrimental to the organisation’s success.

Ari Sharp: And tell us Simon about the risks that organisations face when they look at climate change.

Simon Guttmann: So, these risks are broad and they’re multifaceted. So, there are risks to the continuation of the organisation. So due to climate change, production processes, business processes may be no longer feasible for the organisation in the future. One example, there are clearly financial risks that many organisations will face potentially as they face the cost of natural disasters, potentially as the cost of utilities or other resources increase a set of financial risks. There’s also sort of reputational risks. Many organisations across a variety of industries… we’ve seen it in mining. We’ve seen it in financial services. We’ve seen it in other sectors. If there’s very substantial reputational risks about decisions, they have or perhaps decisions they haven’t made for how their organisation best responds to climate change. So again, a broad range of risks that organisations face if they don’t get their climate change response right.

Ari Sharp: Simon, typically risk might be allocated to say the chief operating officer or the chief risk officer as their responsibility, but you argue that’s not appropriate in this case. How do you think it should be handled?

Simon Guttmann: Climate change is such a fundamental change for organisations… will have such fundamental implications for organisations. It’s not something that can just be allocated to a single person, the chief risk officer or so. And it’s something that needs consideration across the breadth of the executive. Something that needs consideration across the breadth of the board and the broad organisation more generally. What one of the tools that Nous uses by way of intellectual property is what we call our Nous organisational architecture framework, and I think that serves to make this point quite neatly. So, our organisational architecture framework sets out what we see is all the elements that support or underpin organisation success. So vision and mission, strategy, financial performance, business processes, risk and assurance, key people and business enablers, as well. And in that context, thinking about climate change very broadly, it’s not sufficient just to think about the financial implications, just to think about the risk implications, just to think about the strategic implications. You need to think about climate change across all aspects of an organisation’s business and operating model. And we’ve had much success using our organisational architecture framework to help organisations do that.

Ari Sharp: Can you tell us a little bit more about those examples of experience you’ve had working with clients and some of those challenges?

Simon Guttmann: So, one specific example, I’m very happy to share. Nous has done a wide range of work with UK higher education providers. One of the specific projects that we’ve done with them… set out the broad range of initiatives institutions can implement to improve their sustainability and those initiatives per the… our organisational architecture framework that I sketched out earlier, speak to all aspects of those higher education providers operations. Importantly, the initiatives that we’ve specified are mutually reinforcing. So in the context of an education provider, the sorts of things that they were doing, teaching, learning, and research… as one example, highly complementary about the sorts of initiatives they would introduce perhaps in leadership and governance. Once again, making the broad point that responding to climate change is not something that can be focused on a particular part of the organisation. It’s something that needs to be considered across all aspects of the organisation’s performance.

Ari Sharp: Simon, given what you’ve told us about the risks of climate change, what does action look like for organisations? Can you take us through a few examples?

Simon Guttmann: So as everyone would be aware, many organisations have made decisions to purchase carbon credits to deal with the impact that their organisation has on the climate. And from a financial perspective, that might be a highly cost-effective way for an organisation to respond to climate change and to reduce their net carbon admissions. So, thinking about the purchase of carbon credits more broadly, it may well on its own terms be a financially effective way to proceed, but thinking about financial value more broadly, if the purchase of carbon credits as a key mechanism to reduce an organisation’s carbon footprint leads to reputational damage, which leads to a reduction in shareholder value, then taking the very broad financial perspective, the purchase of carbon credits may well be self-defeating.

Taking the analogy a little bit further, the purchase of carbon credits may actually disempower staff from recommending and pursuing environmentally friendly approaches, which may well have the benefit of not only reducing an organisation’s carbon footprint, but may well bring broader process or customer experience benefits for the organisation. So come back to the theme that I raised at the start of our discussion, the response to climate change requires an organisation-wide plan with consideration of all aspects of its business and operating model, rather than a pace mill consideration.

Ari Sharp: And Simon, we’ve seen organisations cope with the massive disruption of COVID last year. What does that tell you about their ability to cope with a disruption like climate change?

Simon Guttmann: From this perspective, COVID is such a wonderfully informative experience. Because for all organisations, COVID raised a substantial challenge, which people were able to coalesce around. Think about how do we as an organisation respond effectively, respond effectively in a way that works for our people, in a way that works for our customers, in a way that works for our stakeholders. So, in the context of responding to climate change, the example there, through the course of the past 12 to 18 months organisations have shown, they can effectively coalesce around a key issue, around such a fundamental issue as is climate change and determine a response that works for the organisation broadly… its people, its customers, its stakeholders, and so on, rather than just focus in a particular area.

Ari Sharp: And finally, can you tell us about the consequences of getting this right, but also the consequences of organisations that really get it wrong?

Simon Guttmann: Organisations that get this right… we just spoke about reputational risk earlier. From a reputational perspective, there is substantial upside… the perspective with which you’re seen by customers, by stakeholders, regulators is obviously a crucial one for many organisations, especially in financial services, and so reputationally, and also for an organisation’s people as well. With climate change, such a key driver for how many… for how so many people within organisations view the world and what they say is important to them. Again, the upside is so substantial.

For organisations that get it wrong. Obviously, we’ve seen examples. And this is not just in the past couple of years. Obviously, many of us can recall examples across the past decade where organisations may have made extremely poor environmental decisions, oil spills, the results, and the like. And the consequences of those for organisations, as we all know have been done have been massive. And so, failing to respond to climate change effectively… organisations unfortunately can expect… fortunately, unfortunately, or perhaps fortunately can expect to see the significant negative effects that others have seen in the past.

Ari Sharp: It seems like climate change is a huge issue and it’s worth organisations taking the time to get it right. Simon Guttman, thanks so much for talking to NousCast Shorts.

Simon Guttmann: Thanks Ari. It was great to chat. Cheers.

Ari Sharp: That was Simon Guttman, a principal of Nous Group. You can find Simon’s article, ‘Managing climate change risk needs every part of an organisation to act’, on the Nous website. You can also contact him directly via email and LinkedIn. We’ll provide links in the episode notes. Before we go some information on us at Nous Group. For more than 20 years, Nous has offered a broad consulting capability that allows us to solve our client’s most complex strategic challenges and partner with them through transformational change. Our commitment to clients in Australia, the United Kingdom, and Canada is that we will think further by going beyond conventional wisdom to find the best answer, create together by listening carefully and working in the spirit of genuine co-production, realize your agenda by helping you perform and succeed in terms that you define, and achieve substantial, positive influence by delivering outstanding outcomes for customers, citizens, and communities. You can find out more about Nous, meet our people, and read our insights at our website. That’s www.NousGroup.com.

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