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E-MailMaria Castañón Moats is Leader and Mira Best is Technology Impact Leader at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here); and Corporate Purpose and Corporate Competition by Mark J. Roe (discussed on the Forum here).
Corporate boards are experiencing the impact of climate change on multiple fronts. Mounting pressure from regulators, investors, shareholders, consumers, and their workforce is forcing companies to rethink their carbon emissions. Worsening droughts, fires, floods, and storms have prioritized the need to focus on the health of our communities and ecosystems. Beyond social responsibility, there’s also economic cost tied to each of these challenges.
Studies have repeatedly shown that companies that take climate change risks seriously report better financial results and post stronger stock market performance than their peers that do not. As a newer focus area, shareholders are increasingly probing the integration of climate-related risks into strategy and operations, and are allocating capital to help companies increase the sustainability of their supply chains. Regulators and lawmakers are similarly responding to this sentiment with plans to bolster disclosure requirements.
Hundreds of companies worldwide have made “net zero” pledges to balance their greenhouse gas emissions with the amount they remove from the atmosphere. However, such pledges may not be taking into account the emerging issue of emissions from company supply chains. Greenhouse gas emissions from a company’s supply chain can be 5.5 times higher than from its enterprise operations, according to the Climate Disclosure Project. Although difficult to track, focusing comprehensively on the end-to-end supply chain should be a priority for companies that truly want to mitigate their climate impact.
Fortunately, advanced technologies are emerging to help companies address their carbon footprint. Blockchain and artificial intelligence technologies are powerful tools for companies that want to tackle not just their own climate impact but those caused by suppliers, transportation networks, and warehouses. It’s important for board directors to understand how these technologies work in order to best fulfill their role in overseeing corporate strategy—particularly as it pertains to climate risk.
This is especially important as regulatory pressure continues to evolve. While climate change-related disclosures have long been voluntary for US companies, that’s about to change. The SEC has proposed rules that would require standardized reporting of direct emissions from operations and indirect emissions stemming from the electricity, heating, and cooling companies use. The rules would also require disclosure of emissions in a company’s value chain (upstream and downstream) that are material or included in emissions targets the company has set. These Scope 3 emissions frequently comprise the majority of a company’s carbon footprint and are a focus of many institutional investors. As a significant component of Scope 3 emissions, companies facing increasing demands to act on climate change will need to take a hard look at their supply chains.
While some of the technology investments necessary to achieve a net zero supply chain may take some time to develop and implement, the cost of delay—or worse, doing nothing—will be higher in the long run. The intersection of climate change and the emerging technologies used as part of a strategy to fight it will continue to push the boundaries of board governance and director acumen. To rise to the challenge posed by climate change, businesses need to engage their boards and directors need to recognize the important role they play. Upskilling directors on ESG and technology will help them fulfill their responsibility to provide oversight, asking the right questions and challenging management when appropriate.
There are two main areas where technology can have a significant impact:
- It can create the trust and transparency needed in the supply chain so companies can establish goals for their footprint, measure each step of the way, and then accurately report their results.
- It can create efficiencies and sustainable structures to reduce carbon emission.
Curious what this will mean in practice? Here are examples of real-world challenges and the emerging technologies that can help solve them.
Using blockchain to gain visibility into the supply chain
Supply chains suffer from lack of transparency, which leads to difficulty when it comes to monitoring them. This not only makes it difficult to track goods throughout the entirety of the supply chain, but it makes it almost impossible to understand the climate impact of material sourcing, manufacturing, packaging, and transportation decisions. Visibility into the entirety of the supply chain is crucial for companies that want to reduce the impact that supply chain emissions play in their overall greenhouse gas footprint. To obtain this level of visibility, some businesses are turning to blockchain technologies.
Blockchain may be a familiar technology from its role powering cryptocurrencies like Bitcoin. It’s a digital ledger of transactions that is duplicated and distributed across a network of computer systems. Because every computer system in the network has an identical copy of the blockchain ledger, it’s virtually impossible to change data recorded on it or hack the system. The end result is data that’s accurate, synchronized, and verifiable. Transactions on a blockchain don’t have to be financial—they simply represent a change in state for whichever data point the blockchain’s stakeholders want to track.
To promote transparency and sustainability in supply chains, blockchain technology can be used to track greenhouse gas emissions associated with each step in a product’s journey to market. For instance, the World Economic Forum’s Mining and Metals Blockchain Initiative, a collaboration with seven large global mining companies, has successfully completed a proof of concept for a platform that uses distributed ledger technology to track greenhouse gas emissions and create “mine to market” visibility and accounting. This would allow for greater visibility into emissions generated to extract ore and refine, store, and transport it before it’s sold to a manufacturing, construction, or engineering firm.
Automakers are also using blockchain to help achieve net zero supply chains. A luxury European automaker has partnered with a blockchain startup to not only track emissions in its electric vehicle (EV) supply chain but to verify supplier compliance with its ethical sourcing requirements. Another automaker is pursuing a similar project to help its new electric vehicle brand build a climate-neutral car by 2030.
Artificial intelligence as an efficiency enabler
Having too much or too little inventory on hand, or having products too far away from customers who want to buy them, can contribute to supply chain inefficiency and increase greenhouse gas emissions. Artificial intelligence (AI) can help companies improve forecasting, respond to shifts in demand, and automate repetitive tasks—not only reducing their greenhouse emissions, but improving financial performance as well.
The potential of AI and related technologies to help improve efficiency throughout the supply chain is one of the reasons so many companies say they’re planning to build their capabilities in this area going forward. Through 2024, 50% of supply chain organizations plan to invest in applications that support artificial intelligence and advanced analytics capabilities, according to Gartner.
AI tools can assist with analyzing large amounts of data to identify suppliers that meet sustainability criteria, providing real-time visibility into the climate impact of sourcing decisions. They can also help companies track variables such as seasonal demand fluctuations, weather forecasts, and inventory levels to help optimize transportation routes and adjust factory output.
Retailers are among the companies already seizing on AI’s potential to help reduce supplier emissions. A major retailer announced that it has invested in AI systems that will allow it to do a better job of monitoring and managing its climate impact across its value chain as part of its pledge to achieve net zero by 2040.
The board’s role—what directors should be thinking about
Climate risk oversight will assume an increasingly prominent place on boards’ agendas in the coming years, particularly if the proposed SEC climate disclosure rules become final. Asking the right questions about the intersection of climate impact and technology will only become more important for directors as stakeholder focus intensifies.
Here are some considerations for boards navigating these issues:
Practice effective climate-risk oversight. Make sure to ask deliberate questions about corporate purpose, integration of climate risk into enterprise risk management processes, messaging to the market, data accessibility and quality, and last but not least, disclosure. No technology provides a shortcut around robust climate risk management and oversight.
Understand which emerging technologies can help the company meet its climate change goals. When technology investments are on the table, questions directors can pose to management teams include:
- How does this technology help us meet our commitments, or do even more?
- How do we know this technology is fit for purpose, and what is the risk if it is not?
- Who else has implemented technology like this successfully? How can we tap into those successful experiences?
- How will we measure our ROI on this investment? Through a strictly economic lens, or through a social impact lens as well?
Consider the implications for third-party and cybersecurity risk. Most companies looking to use AI, blockchain, or other emerging technologies to reduce the climate impact of their supply chains will need to partner with a highly specialized vendor to achieve the desired results. Boards will want to understand how that relationship is managed and whether it has any impact on the risk of a cyberattack or data breach.
Probe what competitors are doing. Strong performance on environmental, social, and governance matters can be an important differentiator when it comes to attracting investors and talent. It behooves boards to understand how their company stacks up against its peers. What industry- specific best practices are taking shape? Is the company in the vanguard, or lagging behind?
Think about the risk of inaction. Implementing emerging technologies can be complicated and expensive. Yet if they can help reduce the company’s climate risk, the long-term cost of doing too little—or nothing at all—may be higher still. How would the business fare in a scenario where greenhouse gas emissions become even more costly from a reputational or financial perspective? How does that compare to the technology investments being considered?
Understand that technology is not a magic bullet. Remember that when it comes to measuring and mitigating climate risk, emerging technologies can help but they aren’t a panacea. Appropriate oversight of technology can help ensure a solid foundation on which tech-driven solutions can operate.
Boards of directors have an important role to play as companies increasingly focus on mitigating their climate impact. Emerging technologies are important tools that can help companies with some of the most challenging aspects of that work—including in the supply chain. Corporate directors will need to understand both the climate risks facing their companies and the technologies that can help overcome them to provide effective oversight.
