Category: Business Ethics

Five Key Steps for Building a Climate-Competent Board

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veenaramani

Veena Ramani

Last month, Exxon Mobil Corp. appointed a leading climate scientist to its board. Exxon’s move underscores the growing pressure shareholders are exerting on the issue of climate-competent boards.

Climate competency of boards—and broader corporate attention to escalating climate change risks—isn’t just a hot topic for one set of shareholders and one oil company. It is a key investor imperative for all sectors of the economy.

Look no further than the new guidelines from the G20’s Task Force on Climate-related Financial Disclosure to understand how profoundly expectations are shifting. The task force, chaired by Michael R. Bloomberg, was created by the Financial Stability Board at the request of the G20 ministers to help companies identify and disclose which climate risks have a financially relevant impact on their business. The task force’s very first recommendation focuses on the governance practices of companies for climate change, including deeper board engagement on the topic.

So what does it mean for boards to be climate competent? Climate competency means much more than just getting one person with expertise on a corporate board. So while we applaud the important step that Exxon has taken, it’s only a first step.

At the end of the day, a climate-competent board is one that can make thoughtful decisions on climate risks and opportunities that a company is facing. When trying to set up a climate-competent board, companies should think holistically about what needs to be done for boards to achieve competent, informed decision-making on this issue.

Based on a recent Ceres report I wrote on this topic, View from The Top: How Corporate Boards can Engage on Sustainability Performance, here are a few key steps boards should take.

1.) Put board systems in place for climate change oversight. Boards need to have a committee that is assigned formal responsibility to oversee climate change. By doing so, companies can ensure that boards oversee how climate risks are integrated into operations and decision-making on an ongoing basis. Numerous companies have dedicated board sustainability or environment committees that can be leveraged for this purpose. Companies like Citigroup, Ford, and PG&E have specifically identified climate change as a key focus area in the charters of their board public affairs or sustainability committees. Having the issue identified in such an explicit manner ensures it will be discussed systematically in committee meetings.

2.) Include directors with expertise in climate change on boards. When climate change is a material risk to a company, boards should recruit directors with expertise on that material issue. Such companies should also explicitly identify climate change expertise as a board qualification. This means making it a part of board skill matrices. It’s worth noting that two of the country’s largest pension funds, CalPERS and CalSTRS, recently amended their global governance guidelines to ask portfolio companies to recruit directors with climate change expertise.

3.) Train the full board on climate change. Boards and management should provide climate-related training opportunities to all board members, or, at a minimum, to relevant committee members. Organizations like The Co-operators have detailed systems in place to train its board on sustainability issues that are crucial to their businesses, including leveraging external experts for this purpose. Certain groups offer education curriculums where issues like climate and sustainability are addressed.

4.) Consult stakeholders and shareholders to inform directors’ understanding of climate change. Internal training sessions are key, but it’s just as important that directors reach out to external stakeholders, including investors, to share firsthand the company’s different approaches to climate change learn from voices outside of management. Investors in particular are critical groups to engage. Having this broader multi-stakeholder perspective can help directors make better-informed decisions. In 2016, shareholders filed a record 172 shareholder resolutions on climate change and sustainability. Given that directors are fiduciaries to investors, director-investor dialogues on climate trends will provide an important context to board discussions on this issue.

5.) Be more transparent. Finally, and perhaps most importantly, we need more transparency on climate-related board decisions. We need to know whether boards are prioritizing climate change as a material issue. Companies have to do a better job of disclosing how climate trends are affecting corporate strategies and risks that are relevant to investors.

Market and shareholder scrutiny of board engagement on climate issues is only going to grow sharper with time. While companies will be impacted differently by these risks, few industries are immune. Climate change affects 72 out of 79 industries and 93 percent of the capital markets, according to SASB’s Technical Bulletin on Climate Risk.

The key for board members now is to ensure that they’re well positioned to exercise informed oversight so that they can make thoughtful decisions on this escalating issue.


Veena Ramani is program director, Capital Market Systems, at Ceres.

Living in a Material World

Published by
veenaramani

Veena Ramani

It is clearer than ever before that sustainability practices can affect corporate value. That was the main thread of a panel that I led at the National Association of Corporate Directors’ 2016 Global Board Leaders’ Summit in Washington, D.C. My co-panelists Christianna Wood, director at H&R Block, and Seth Goldman, founder of Honest Tea, and I discussed the potential risks and opportunities that environmental and social issues pose to companies.

Sustainability is a broad term, and not every environmental or social issue belongs on the board agenda. But when an environmental or social issue has the potential to affect corporate revenue and earnings in the short and long term, sustainability absolutely should be on the table.

At the end of the day, it all comes down to materiality, and this is where corporate directors have a critical role to play.

Materiality is about determining a company’s priorities. As fiduciaries responsible for overseeing a company so that it not only survives but also thrives in the long term, directors have a responsibility to assess whether a company is making the right choices.

But the much harder question is: When does an environmental or social issue rise to the level of being material?

Here are some steps directors can take to drive discussions about whether sustainability issues are material to the companies that they oversee.

1.) Understand how sustainability is being integrated into your company’s efforts as a way to identify material issues.

There are a few ways to do this. Directors could point management towards the Sustainability Accounting Standards Board’s Company Implementation Guide, which provides a great starting point for companies to assess whether certain sustainability factors could be considered material for the purposes of the company’s financial filings. Directors could also integrate themselves more meaningfully into corporate efforts aimed at identifying material sustainability issues. They could provide perspectives on the connections between sustainability factors, corporate strategy, risk, and revenue.

2.) Include key issues being raised by critical stakeholders in the materiality exercise. 

While a broader range of stakeholders is raising a variety of issues these days, the financial community is a particularly critical constituency to direct attention towards. As we discussed in our panel, the U.S. investor community is starting to make the connections between sustainability and the financial value of companies in their portfolios. During the 2016 proxy season, close to 400 shareholder resolutions on climate change and other sustainability issues were filed. Large investors including CalPERS, CalSTRS and State Street Global Advisors are asking their portfolio companies to put directors with climate expertise on their boards.

In addition to tracking broad sustainability trends that investors are paying attention to, prudent directors could consider opportunities to engage directly with key shareholders to get a sense of issues specific to the company and the industry. Directors could also track and engage with the broader activist and advocacy community as a risk management exercise.

3.) Weigh in on the time frame over which issues are considered to be material.

Since the board in particular is responsible for long-term corporate performance, directors play an important role in examining whether their company’s materiality process focuses on considering issues over the long or short term.

Overall, momentum is building to adopt a more long-term view to encourage companies and boards to think more broadly about sustainability and materiality. The recently released Commonsense Corporate Governance Principles, which are backed by major U.S. companies including JPMorgan Chase & Co., Berkshire Hathaway, and Blackrock, support the move to long-term thinking. And more companies including Unilever, Coca Cola, and National Grid are moving away from the practice of issuing quarterly guidance specifically to encourage investors and other stakeholders to adopt long-term thinking.

4.) Disclose details on what you consider to be your company’s material priorities.

Noting that determinations of materiality depend on whom the company considers to be its most significant stakeholders, governance experts are starting to call on corporate boards to release a statement noting critical audiences that the company is oriented towards and issues that the corporation is prioritizing. Companies like the Dutch insurance company Aegon have started to issue such statements.

The process of helping to identify the right issues is just a first step in a director’s responsibility on materiality. Directors have an important role to play in ensuring that material issues, when identified are integrated into board deliberations on strategy, risk, revenue and accountability systems. However, getting to the right issues lays an important foundation for the company and its key stakeholders to build on.


Veena Ramani is a senior director at the sustainability nonprofit Ceres. She runs the organization’s program on corporate governance. She recently authored the report View From the Top: How Corporate Boards Engage on Sustainability Performance.