The business case to fight climate change

Assoc Prof Lawrence Loh from NUS Business argues that sustainability efforts can be beneficial to a company, boosting core business metrics such as operational performance and stock prices

Amid the global climate crisis, an ongoing challenge is in convincing businesses to undertake sustainability efforts.

The support of business is essential given that they are responsible for the majority of human economic activity, which in turn is a major contributor to climate change.

Sustainability is however not high on the priority list for most companies. To them, it is basic survival that matters first. It is difficult to conceive that business leaders will commit to fight climate change fully and immediately.

In this regard, Associate Professor Lawrence Loh from the Department of Strategy and Policy at NUS Business argues that sustainability efforts can be beneficial to a company, boosting core business metrics such as operational performance and stock prices.

The traditional lens of responsibility and risks

Businesses have traditionally focused on “responsibility” and “risks” to build their case for climate change.

“Responsibility” refers to the duty owed to the community by not degrading the environment. It is something good for companies to do socially, and relies on corporate altruism to place society above profit.

In the second angle, consideration of climate change takes the form of “risk”. Two types of risk may come about from climate change — direct risk and derived risk.

Direct risk refers to physical impact which may actually damage the company’s products and markets, including the supply chains, through severe weather patterns such as floods and hurricanes.

Derived risk comes from new demands by consumers and investors for the company to adopt climate change actions. These may have implications for sales revenues and capital costs. The risk may also emanate from changes in regulation that require the company to pursue climate-related actions.

Boosting operational performance and share price

Assoc Prof Loh, who is also director of the Centre for Governance, Institutions and Organisations, argues that for businesses to fully accept climate change, a third angle to complete the triangle is needed — that of “rationale”.

Companies must see that it is in their own self-interest to take on climate change. This will entail assessing implications of climate change actions against financial bottom lines.

On the benefit to business, there has been clear evidence of the financial impact of sustainability as a broader whole. In a recent study of Singapore-listed companies conducted at Assoc Prof Loh’s research centre with the Asean CSR Network, it found a significant positive relationship between sustainability reporting and firm value.

In a summative analysis conducted by the University of Oxford and Arabesque Partners of more than 200 studies, it was found that 88 per cent show that good sustainability practices result in better operational performance. Moreover, 80 per cent indicate that such good practices give rise to better stock price performance.

Self-interest — or business benefit — is the crucial third angle to be triangulated with the angles of responsibility and risk. Only then will companies voluntarily embrace the battle of climate change.

Read Assoc Prof Loh’s full commentary here. The issue of employing marketplace solutions to combat climate change was also discussed at the inaugural Festival of Ideas, organised by the Lee Kuan Yew School of Public Policy — click here to see coverage of the discussion.