Agility essential in building sustainable value chains, experts say
Creating agile plans requires foresight and strategy—skills that CPAs are known for (Getty Images/10’000 Hours)
Last year, Western Canada made headlines as record heat waves, flooding and fires swept over parts of the provinces. Faced with factory closures and washed-out roads, communities struggled to produce and ship items, increasing rates of spoilage and consumer dissatisfaction.
“Unfortunately, climate events such as these have become more and more frequent,” says Jeanette Hill, CPA, director responsible for professional development at CPA Canada. “And, beyond the devastation they create for communities, wildlife and nature in general, they also have enormous impacts on supply chains. That’s why it’s imperative for businesses to create agile strategies to cope with a climate change-affected world.”
UNDERSTANDING VALUE CHAINS
“Your value chain is really the value creation within your company,” says CPA Roopa Davé, partner in KPMG’s sustainability services practice and panelist at CPA Canada’s recent ESG Symposium. “It starts with sourcing inputs such as raw materials and extends all the way through to processing and distribution to end-users.”
As Hill points out, value chains are intricate structures with many interconnected parts. “We really need to be thinking about how we protect our value chains and infrastructure because we’ve seen during COVID how delicate these systems are,” she says.
Hill adds that sustainability is not about quick fixes, but about rebuilding systems to sustain anticipated interruptions. “It’s important for us to keep our lens on the long-term risks and also opportunities that sustainability presents,” she says. “And CPAs can have an impact in a positive way through risk assessment and coming up with reasonable practical solutions.”
WHY AGILITY MATTERS
If businesses are to become adaptable, they first need to understand their exposure to climate risk s, explains Davé. “Many businesses are unaware of where their largest climate exposures are,” she says.
There are many types of climate related risks and opportunities that can affect value chains. But when it comes to risks, Davé says physical risk is “probably the most prominent.” Acute physical risks, she explains, are serious climate events that cause major infrastructure damage. Then there are chronic physical risks, which may be less immediate but are larger in scale. “The slow rise of sea levels or changing weather patterns might impact farmers’ ability to grow certain crops in certain geographies,” she says.
Transition risk is another major disruptor, says Davé. This can be something as simple as changing consumer trends (for example, unlike their previous generations, members of Gen Z are willing to pay a premium for companies that are willing to manage supply chains in more effective ways). Changing carbon prices are another example. “These will impact your raw material prices,” she says.
To map out their impacts, businesses should identify the areas where they face the highest risk and have the greatest opportunities. For example, they might receive inputs from a factory located in an area with high-rising sea levels. Once these risks have been identified, they can work to put alternative plans in place, such as sourcing inputs from a less-affected region.
“It’s a matter of considering when you think those transition risks will begin and then coming up with a plan to mitigate them,” she says. This might include building dams to surround ports in order to offset some of the challenges caused by rising sea levels.
THE ROLE OF CPAs
Creating resilient plans requires planning, foresight and strategy skills that CPAs are known for, and that complement the risk management , internal control assessments and other analyses they need to perform to create practical solutions to ongoing climate-change challenges, Hill says.
Already, CPAs have exhibited positive influence in preparing businesses to adapt to climate change. Examples include the Global Reporting Initiative (GRI), the Task Force on Climate-Related Financial Disclosures (TCFD), as well as the creation of the International Sustainability Standards Board (ISSB) and the recent publication of two exposure drafts on climate-related disclosures—IFRS S1 AND IFRS S2.
“Good governance is a huge piece of ensuring companies are held accountable to the goals that they’re setting, like the net-zero goals,” says Hill. “The same applies to any other metrics they set, whether they be related to other environmental issues, such as biodiversity or air pollution, or social issues, such as health and social equality. CPAs have always played a critical role in good governance. In fact, one of the key value-adds they can offer is their great experience.”
LEARN MORE ABOUT CLIMATE CHANGE
Discover additional resources on climate change and get up to speed on sustainable reporting developments. Learn how a circular economy is the way to corporate longevity and how ESG is critical to business survival.
Plus, find out more about the role of sustainable finance in achieving net-zero emissions and how CPAs can help organizations communicate their transition to net zero targets.