Category: Investor Relations

Understanding Climate Resilience Is Requisite for Climate Competence

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Underlying the growing pressures for climate-competent boards is this fundamental question: how resilient is the organization to the impacts of climate change?

Few organizations or boards are capable of answering this question with any degree of certainty. Yet, the question is being raised with greater frequency and urgency due to actions by investors, regulators, customers, supply-chain partners, and competitors.

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Across every industry the increased focus on climate change is accelerating other megatrends such as disruptive technologies, digitization, urbanization, and evolving demographics. Underpinning these megatrends are a combination of technological leaps and upheavals in global society and the environment that will reshape economies, businesses, and lifestyles. For example, over $1 trillion worth of new markets for manufacturers are expected to develop over the next decade as industries transform. This shifting landscape creates many uncertainties, risks, and opportunities for new products, services, supply-chain structures, and improvements in resource management, among many others.

Taken as a whole, these pressures are driving companies to better assess, define, and enact strategies to increase their climate resilience. In their strategic oversight role, boards need better insights on the direct impacts of climate change on the organization as well as the indirect risks and opportunities associated with transitioning to a lower-carbon economy.

Yet, recent NACD corporate governance survey data suggests that many boards need a rethink on this issue. Six percent of respondents indicated that climate change would have the greatest impact on their businesses over the next year. The previous year’s report found that over 90 percent of public company directors believe that climate change would have negligible impact over the next five years.

Companies that focus primarily on climate change’s projected physical impacts expected to play out over the coming decades will have “blind spots” to the indirect risks associated with the transition to a lower-carbon economy. Companies must to go on the offensive to build climate resilience in order to gain competitive advantage.

Climate resilience has the capacity to adapt and succeed in the face of direct and indirect impacts of climate change. In addition to addressing and managing risks, it encompasses the ability to capitalize on the strategic opportunities presented by the shift to a lower-carbon and resource-constrained economy.

To provide boards with a line of sight into its organization’s climate resiliency, management teams can undertake one or more of the following actions:

  • assess climate vulnerability of operations and facilities;
  • embed climate impacts into enterprise risk management programs; or
  • undertake scenario analysis to enhance decision making around risks and opportunities.

As a start, companies can model the risk of physical assets to identify location-level risk exposure and the vulnerability of properties and assets to evolving weather events and climate change. A geographic portfolio review can also help map demographic and infrastructure vulnerabilities to natural hazards to better understand how supply chains may be impacted by weather events.

Existing enterprise risk management (ERM) and risk assessment processes can be used to increase awareness of climate risks and better assess resilience across the organization. Leading organizations are using their ERM processes to identify how direct and indirect climate impacts—including regulatory and technology developments—serve to accelerate or otherwise change the velocity of other trends and risk events. Framing climate as a risk driver helps to align the timeframe of the risk and opportunity assessment to that of most corporate planning cycles.

Scenario analysis is recommended by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures as a technique to assess climate impacts. Modeling different environmental scenarios (such as warming by a margin of 2 degrees Celsius and associated changes) gives form to the amorphous problem of climate change and provides mechanisms to discuss potential future states of operation. In selecting and devising scenarios, companies should consider the appropriate trade-offs in quantification, but also avoid excess complexity and optionality. When assessing for operational climate-risk resilience, it is critical to include a minimum of one favorable and unfavorable scenario respectively. This empowers organizations to make informed decisions regarding their longer-term strategies.

Overall, it is clear that the dialogue on climate change within boardrooms and among C-suites of companies across all sectors must evolve to a focus on how climate change will impact their businesses. The real measure of a climate-competent board is one that can address this critical question: how climate-resilient is the organization?

Lucy Nottingham is a director in Marsh & McLennan Companies’ Global Risk Center and leads research programs on governance and climate resilience. All thoughts expressed here are her own. 

Why You Should Care About Climate-Competent Boards

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Vanguard Group CEO William F. McNabb III just tipped the list. The world’s top three asset managers—Blackrock, Vanguard, and State Street Corp.—are now calling the companies that they invest in to adopt climate risk disclosure.

Veena Ramani

In a recent open letter to corporate directors across the globe, McNabb explained that Vanguard, the $4.5 trillion mutual-fund management firm, expects businesses to embrace materiality-driven disclosures to shine more light on sustainability risks.

Summing up the challenge of climate risk, McNabb wrote that it’s the kind of risk that tests the strength of a board’s oversight and risk governance. That’s the crux of the challenge for directors. As investors ratchet up the pressure on companies to analyze their exposure to the impacts of a warming planet, they’re calling on boards to be knowledgeable about material climate risk and capable of preparing for its impacts and capitalizing on its opportunities.

As we heard in Karen Horn’s opening keynote of NACD’s 2017 Global Board Leaders’ Summit, directors can no longer ignore the inherent impact of these issues on the long-term value creation of the corporate world —ranging from climate risk, natural resource capital, and implications of the Paris Climate Agreement.

This growing scrutiny has directors’ attention—especially after a high-profile vote in May by nearly two-thirds of Exxon Mobil Corp.’s shareholders demanding an analysis of climate risks. The number of directors who think that disclosure of sustainability risk is important to understanding a company’s business jumped to 54 percent  in 2017 from 24 percent last year, according to a survey of 130 board members by the accounting firm BDO USA.

Board-level competence around climate change and other sustainability risks is the way forward. Through an understanding of what climate change means, why it matters to their business, and what their organizations are capable of changing, directors can successfully make climate risk part of their governance systems.

In a new report by Ceres called Lead from the Top, we outline ways that companies and boards can build up that competence.

But rather than settling with bringing on a director who is competent in sustainability, our report explains why companies must work to build an entire board that is competent to oversee these risks. By engaging thoughtfully on material sustainability risks as one cohesive body, this kind of board is able to ask the right questions of its management, support or challenge senior management as needed, and ultimately make informed and thoughtful decisions affecting corporate strategy and risk.

We identified three key principles that companies and boards can use as they work to build a sustainability-competent board:

1. Sustainability needs to be integrated into the director nomination process. Finding directors who can apply their knowledge about climate and other sustainability risk to relevant board deliberations is a good first step. Companies can get the right people on board by approaching this systematically as a part of the board nominations process, specifically identifying experience in material environmental, social, and governance (ESG) risks in the board skills matrix and by casting a wide net to consider candidates with diverse backgrounds and skills.

2. The whole board needs to be educated on sustainability issues that impact their company. For sustainability to become part of the fabric of board oversight and integrated into decision-making on strategy, risk, and compensation, all directors on the corporate board need to be well informed on material sustainability issues so they can lead thoughtful deliberations and make strategic decisions. Companies can do this through focused, ongoing training programs that bring in experts from outside the company and by educating the board on the connections between climate change and material impacts and the connections to risk and strategy. Embedding ESG into the existing board materials so it does not become one additional issue topic to vie for directors’ attention is essential. Sustainability managers embedded within companies can play a key role in driving this integration.

3. Boards should directly engage a diverse array of stakeholders, including investors, on sustainability issues impacting their company. With more investors paying attention to climate change and other sustainability issues, shareholders increasingly expect boards to engage directly with them on critical issues. One of the goals of McNabb’s letter was to nudge directors to engage directly with shareholders. Given this growing focus, material environmental and social factors should be made a part of any dialogue between directors and investors.

It all comes down to the bottom line. Risk and opportunity define business. Corporate boards will have a difficult time performing their fiduciary duty to the companies they lead and the shareholders that they represent without understanding the risks and opportunities created by climate change. Our report lays out practical steps directors can take as they consider how to make their board competent in addressing climate change and other environmental, social, and governance issues.

 

Veena Ramani is the program director of Capital Market Systems at Ceres. Ceres is a sustainability nonprofit organization working with the most influential investors and companies to build leadership and drive solutions throughout the economy.

Kullman: Tactics for Winning a Proxy Fight

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Former DuPont CEO Ellen Kullman spoke with National Association of Corporate Directors’ (NACD) President and CEO Peter R. Gleason at the 2017 Global Board Leaders’ Summit. Kullman—known for leading the DuPont management to victory in the 2015 proxy battle against Trian Fund Management’s Nelson Peltz—shared insights into oversight of long-term value creation and tactics for succeeding in a proxy battle. 

Before discussing the finer points of DuPont’s proxy battle, Kullman addressed the company’s relationship with its stakeholders. Kullman once said that DuPont adheres to stakeholder theory by focusing on four areas: engaging employees, satisfying customers, supporting the community and, in turn, providing success for shareholders. “As a company that operated all around the world, many times our manufacturing plants were the biggest employer in the area,” Kullman said. “If we wanted to be successful, we had to support the citizen.”

Gleason compared DuPont’s relationship with Wilmington, Delaware, to Corning and the company’s headquarters in his own hometown of Corning, New York. “Attracting the right talent is an investment by the company,” Gleason said. “Corning had a philharmonic orchestra in a town of ten thousand people. However, investments in the community may have been seen as low-hanging fruit to shareholders more interested in seeing direct returns.”

In the case of DuPont, its small hotel and golf course in Wilmington became activist targets despite the sense of community they created with the citizens of the town. “Young people today have a choice about where they work,” Kullman said. “If you want to attract the best and brightest, you have to make the community something they want to be a part of. Why does Google have free food and good infrastructure? It’s not a historic appendage, it’s to keep employees working hard. The question is how much [do you want to invest to retain talent] because you can never calculate a return on it.”

Tell Investors Your Story

Kullman shared a number of tactics that helped DuPont emerge victorious in its proxy fight.

1. Keep Telling Your Story to Investors: “We understood our investors and our strategy, and I don’t think [Trian] did. A board member that had been [with DuPont] for three years did a better job explaining our strategy [to investors] than I did. He kept it to the points that were important and was helpful in making the connection as a shareholder.” 

2. Get Ahead of the Activist by Communicating Early and Often with Regulators: Kullman pointed out that activists’ communications tactics have a time advantage over their target companies because public companies must file shareholder communications first with the Securities and Exchange Commission (SEC). I constantly rewrote letters to the SEC and filed responses [in order to be able to communicate with shareholders in line with the SEC rules for solicitation]. Going to CNBC would have been a no-win situation. That’s how we got that transparent information out to the investor and news community to make sure it wasn’t a one-sided innuendo from the activist.”

3. Trust the Management Team to Run the Business: “You have to have a top team. The CFO, regional vice presidents, vice presidents, and general managers of our businesses had to focus on running the company, while we took a small group of people to focus on the fight. I had to have a foot in both camps: I ran the fight during the day and the company on nights and weekends.”

4. Maintain Constant Board-CEO Communication: “You need to spend a lot of time with your board and you need to know where each board member is individually. Whenever I had an interaction with the activist, I would summarize it to the board right away. Say you want help and ideas from your board members because they have a lot of experience. At that point [in our proxy fight with Trian] there were no bad ideas.

5. Engage Retail Investors: “Proxy advisory firms came in to talk to the board and me about what we needed to do to protect ourselves. They said that retail investors vote for management, but they don’t vote. So we identified shareholders that owned more than $1 million in stock. I called them personally and some of them actually called me back.”

6. Use Social Media: “I was new to social media, but I had to learn quickly. With such a large retail base, we couldn’t assume they were all retired investors—and they weren’t. We had to use as many vehicles as possible to get our story out there.”

Learn more about the 2018 NACD Global Board Leaders’ Summit and register here.