· 4 min read
Climate change poses a tangible and imminent threat that can jeopardize the economy, businesses, and the financial system. It is already acknowledged as a systemic risk to financial stability. Climate-related physical risks, such as hurricanes, floods, sea level rise, heat waves, and precipitation, have the potential to directly cause harm to assets or disrupt companies' value chains. Similarly, climate-related transition risks emerge from the shift to a low-carbon economy through changes in policy and technology, which can undermine the performance of greenhouse gas (GHG) emitting industries. However, corporate efforts to mitigate climate change risks currently lack confidence, posing not only a threat to the economy but also to corporations themselves.
Corporate governance structure is a key barrier
In modern enterprises, most of the key decision-making is in the hands of professional managers (agents), who are hired by shareholders/owners (principals) to effectively perform activities in the best interests of principals. However, the contract between the principal and agent does not give agents significant incentives to make the business climate-sensitive – not investing adequately in low-carbon technologies or mitigating climate-related business risks. Creative risk-taking for long-term value creation may also not be rewarded. The incentive structure exerts pressure on agents to increase the company's short-term earnings, which may not necessarily align with the country’s green economic transition, and also exposes the company to climate-related risk. A large chunk of the manager's compensation in the form of a bonus is tied to the profitability and stock price of the firm – many times, the stock market doesn’t reward managers for taking steps to mitigate climate change risk or penalize them for not taking enough measures to mitigate climate change risks. The compensation structure encourages managers to save money in the short term, even if it compromises actions to mitigate climate change risks and leverage green opportunities. All these factors help the firm show reduced costs, increase in profitability, and consequently, stock price in the short term only.
The family business structure is designed for playing the long-term game
Family businesses (FBs) constitute a significant segment of today's global corporate environment. According to a report from PricewaterhouseCoopers, FBs represent approximately 80% of the engineering and construction sectors, 55% of the automotive sector, and 33% of the retail clothing sectors. Additionally, industries such as shipping, banking and capital markets, insurance, metals, and mining are also heavily influenced by sizable FBs. Research conducted by the Boston Consulting Group indicates that around 30% of large companies in advanced economies are FBs, with this figure rising to about 60% in developing nations. Notably, FBs are renowned for their emphasis on resilience and long-term strategic planning, attributes that position them as potential allies in climate action endeavors.
Family businesses are well-positioned to tackle climate change challenges while generating long-term sustainable value
Family firms tend to have permanent owners. Long-term orientation is a common trait of FBs. FBs encourage decision-making to prioritize sustainable value instead of generating only short-term profits. Family firms not only influence the strategic decision-making of their affiliates but also can nudge policymakers for a green economic transition which can be a win-win proposition for the entire economy and themselves. Corporate chronicles illustrate that family-managed companies have helped economic development in late-industrializing economies, and they transformed and evolved with the change in time in these economies. As they are primed to think more long term, they may not be under compulsions to please the whims and fancies of the analysts for every quarter. Moreover, as the cumulative wisdom of successfully running the business passes from one generation to the other, members of the promoter/owner family may make decisions that will allow them to create value in the long term.
Parallelly, climate change or environmental issues were previously considered purely from an ethics-based lens. However, in the present times, they are at the very core of mainstream business strategies for generating sustainable value for shareholders. Interpreting such evolving trends in an integrated manner may work in favour of certain climate solutions that are proven, but do not yet have a track record to show for raising finances from financial institutions. In such cases, climate entrepreneurs can pitch their business propositions to an array of relevant FBs to find a perfect match for their growth partnerships. On the flip side, the fresh perspectives and dynamism from the global net-zero landscape brought in by climate entrepreneurs can be leveraged by FBs as their competitive advantage.
Family businesses can become climate action torchbearers for the corporate world. They can establish novel incentive systems for their employees and partners to aim for sustainability, seizing long-term, environmentally friendly business opportunities. This will foster goodwill and partnerships, collectively mitigating climate change-induced disruptions.
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