Leaders, Do You Have a “Climate Capable” Mindset?

The world was once on track to warm about four degrees Celsius above pre-Industrial levels by the end of the century. Thanks to rapid increases in clean energy, it is now on pace to warm about three degrees Celsius instead.

“I guess it’s an improvement, but it’s not where we want to head, either,” says Meghan Busse, an associate professor of strategy at Kellogg. “Scientists are increasingly realizing that in order to keep a world that resembles the one we know, we need to keep the temperature increase to no more than one and a half degrees.”

To achieve this, however, emissions would need to fall to net zero in the next thirty years. Hitting such an ambitious target will require massive changes to how we produce and store power, manufacture goods, grow food, and heat buildings. For companies, this means finding new ways of doing just about everything—and quickly. “We are going to have to be as transformative as the Industrial Revolution,” says Busse, “but we have 30 years to do it rather than 150.”

Change won’t come cheap. But there are also plenty of opportunities for companies willing to act decisively. Taking advantage of them will require what Busse calls a “climate-capable leadership mindset.” Here’s what that entails.

1. Leaders must perceive the situation accurately

Climate change is not a problem for the distant future. It’s already a problem today, and it will be an even bigger problem tomorrow, as natural disasters, resource constraints, and new diseases upend the best-laid plans.

“I sometimes tell audiences, ‘If you liked managing during Covid, you will love climate change,’” says Busse. Yet unlike the disruptive power of Covid which decreased as the population grew immune, the disruption from climate change will only increase in intensity over time. “There’s no ‘managing through it’ for a few years,” Busse says.

2. Leaders must be prepared to mobilize a response

There’s understanding the situation—and then there’s acting on it.

From the vantage point of 2024, it is easy to roll our eyes at the 1770s mill owner who shrugged at steam power or the 1970s Silicon Valley executive who failed to hop on the semiconductor wagon. But today’s executives who neglect to act on climate change are guilty of the same hubris, says Busse.

The successful businesses of tomorrow will be those that adapt to the threats posed by climate change and take advantage of the opportunities. “We’re going to have to build and buy and invent and install so much stuff as we make this transformation that there will be big opportunities for anybody who can provide parts of that solution,” she says.

3. Leaders must move sustainability out of the silo

Forget hiring a chief sustainability officer and calling it a day. Given the changes that will be necessary to reduce emissions—and to deal with the fallout of the warming already baked in—sustainability know-how needs to be distributed throughout an organization.

Financial and operations teams will need to calculate risk differently. R&D teams will need to innovate differently. Teams looking to enter new markets will need to strategize differently. “Business leaders in every function will need to understand this in order to lead their organizations,” says Busse.

4. Leaders need to advocate for policies that promote longer-term thinking

Today’s leaders are in a bind. On the one hand, a poorer and more volatile world isn’t exactly appealing to business leaders. Many genuinely want to make the kinds of transformational investments that would benefit them in the future.

So these leaders do have an incentive to change—a strong one. But they also have a legal fiduciary obligation to do what is good for a firm’s shareholders, many of whom make decisions based on a much shorter time horizon. And in the short run, these necessary changes tend to cost more without adding much additional value. “Green cement isn’t better, green steel isn’t better, green electricity doesn’t shine brighter, but in many cases it’s more expensive,” says Busse. “We put CEOs in this untenable situation.”

Busse wants to see leaders start advocating for public policy that “either subsidizes the clean or taxes the dirty” to better align firms’ short-term profitability incentives with their long-term ones.

5. Leaders need to make the case that climate investments are high risk, high reward

Even in the absence of public-policy changes, however, leaders and investors alike are fundamentally undervaluing climate investments, Busse argues.

Deciding whether to invest in a new plant? A conventional valuation strategy might require estimating how much it will cost you and generate for you over the next three decades. If the second number is sufficiently larger than the first, you would decide to move forward.

Using this approach, investing in green cement or green steel may not seem lucrative. But suppose instead that the plant is testing a groundbreaking new technology. If it fails, you scrap the whole endeavor. But if it succeeds, you now have options to expand.

“To just base my decision on what this plant is going to do over the next thirty years ignores the fact that if I do this and it works, it gives me the option to now build 10 more plants,” says Busse.

Plenty of industries already think along these lines. Pharmaceutical companies regularly make decisions on a long-term horizon, fully aware that some investments will be abandoned and others expanded. Venture capitalists cast bets on startups, expecting many to fail but a few to pan out. Oil and gas companies dig exploratory wells in new fields. It’s past time to start thinking about climate investments in the same way.

“Everybody understands that’s the only way you can produce the information,” says Busse. “They’re investing for the upside.”