If US corporate boards weren’t taking climate change seriously, the Securities and Exchange Commission recently urged them to act.
In a proposed rule change last March, the SEC called on public companies to make mandatory climate-related disclosures to investors. This information includes climate risks that have a reasonable chance of materially affecting their activities, as well as greenhouse gas emissions. The SEC expects to finalize its new rule this fall.
“This rule has elevated climate risk to a significant financial risk, which is part of the duty of a fiduciary, a board member,” says Mindy Lubber, CEO and Chairman of Ceresa Boston-based nonprofit that works with capital market players to address sustainability issues.
Lubber caught wind of the impact in April, when she spoke at the Women Corporate Directors S&P 500 Directors Summit At New York. “All the board members there – and they were all corporate board members – said the climate had increased at their board level because of the SEC rule. .”
Climate change may be a priority for them, but boards admit they could do more to address the huge potential risks. As they seek to understand these dangers and embed climate into corporate strategy, directors are feeling pressure from investors.
Some companies are at the forefront of climate change and other ESG topics, but many more still have a ways to go, says Rich Lesser, Global President of Boston Consulting Group (BCG). “Boards are on a learning curve with this issue probably not that different from how they were on a digital learning curve five or eight years ago.”
This education starts with a general awareness of climate science and extends to regulatory reporting, says Steve Varley, London-based global vice president of sustainability, with Ernest and Young (EY). “There are basic principles that I see happening in boardrooms about educating non-executives, so they can get to the level of climate change to challenge both strategy and execution. of the management team.”
New York-based Lesser points to a recent global survey of 122 directors by the BCG and the French business school INSEAD. “In this, 91% of directors think their board should devote more time to strategic aspects of ESG, and 53% said they do not focus enough on integrating sustainability into their long-term plans.”
For respondents, carbon emissions are a top ESG concern. However, among companies with net zero engagement, only 55% of directors surveyed said their organization had prepared and published a plan to achieve this goal.
Meanwhile, shareholders are mounting the pressure. For example, last year activist investors concerned about climate change added three new administrators to ExxonMobil’s 12-member board, including one with climate expertise. “It was a shot heard around the world,” Lubber says. “Every board now says, Am I next?”
Lubber also cites Climate Action 100+, a group of 700 investors controlling a total of $68 trillion in assets that is pushing the world’s largest greenhouse gas emitters to action. “With them and with others, there were about 190 shareholder resolutions last year, and about 175 the year before, dealing with climate risk.”
Board members hear from the biggest owners of their companies, adds Lubber. “They say to companies, we want you to approach climate risk as a matter of good management.”
There is no precise way to predict the magnitude of climate-related risks, notes Carol Liao, associate professor at the University of British Columbia. Peter A. Allard School of Law, where she directs the Center for Business Law. “Climate change differs because of systemic and interconnected risks that can act as a risk multiplier.” But climate risk has a significant financial impact on 93% of U.S. public companies, according to a 2016 report speak Sustainability Accounting Standards Board.
Companies and their boards also need to understand the legal risks, Liao says. “There are currently more than 1,000 climate-related lawsuits before the courts in 28 countries,” she says. “Thus, directors of public companies should be aware that disclosure is a legal requirement and that there is potential civil liability for non-disclosure of climate-related financial risks.”
Less savvy boards are fairly well prepared to handle climate change regulatory and compliance requirements. “The toughest risk is that markets move faster and technology moves faster than companies realize,” he said. “They are missing opportunities to think about how to embed climate at the heart of their offering and how to create a competitive advantage or, in some cases, eliminate a competitive disadvantage.”
Then there’s reputational risk, which can trap not just climate-insensitive companies, but also those that engage in greenwashing, Varley observes. “Boards should be careful not to make external announcements that cannot be supported by data and evidence.”
For boards concerned about being left behind in the face of climate change, education is a good place to start. Liao is co-principal investigator with the Canadian Climate Law Initiative (CCLI), whose mandate is to help Canadian companies consider, manage and disclose climate risks. The CCLI is halfway to its goal of making 250 free and confidential presentations to the board by June 2023.
Climate change also creates business opportunities, Liao points out. She sees a chance “for companies to access new markets nationally and internationally with the development of technological innovations such as battery storage, artificial intelligence, smart meters and new products and services. low emissions”.
What other steps can boards take to show they are serious about climate risk? Businesses can choose from many built-in assessment models of climate change, says Liao. “Companies are now using scenario analysis as a tool to test their strategic resilience to different climate outcomes.”
Liao also recommends asking five questions:
- Does the company have a climate plan?
- Does the board exercise effective oversight of its climate strategy, including identifying climate-related risks that are emerging or gaining materiality for the business?
- Has the board identified strategic opportunities for the company in the short, medium and long term?
- Who in the company is responsible for climate-related risks and responsible for implementing the company’s strategy?
- Does the board approve disclosure of the company’s efforts to manage climate change to investors and stakeholders, including incorporating disclosure into its financial reports?
During Ceres’ frequent climate change trainings with boards, one question Lubber hears is whether directors should add an environmentalist to their ranks. “That’s not the answer,” she argues. “Yes, have someone with credentials who understands climate risk. But what we don’t want to see is a special green rep who only deals with climate. The board needs to look at risk climate-related as it would any other risk the business faces.”
Lubber is also often asked how climate change fits into board committees. “I don’t think there’s a need for a special climate or ESG committee,” she says. “Whoever committee is looking at the risk, that’s what should be, so it’s not seen as a special, cute project, but it’s an essential part.”
Smaller companies could add a manager who is a sustainability expert, Lesser says. “This is unlikely to work for a larger, more complicated business where [sustainability] affects many aspects of business, but it can help a small organization that doesn’t want to lose sight of that. »
Varley sees an opportunity for major boards to engage with climate activists, who are typically in their 20s and 30s. “By putting them in the mix with a board that might be a bit older, I saw that worked really well for forging a new level of understanding,” he says. “Maybe not okay, but at least mutual respect between the two parties.”
Regarding board expectations of management, Lubber says directors should receive a progress report on short-, medium-, and long-term climate-related goals. And if climate change is material to the business, boards should link it to CEO compensation. “Let that water fall throughout the company,” Lubber says. “If you say it’s a priority, make it a priority.”