Topics: Risk Management
Topics: Risk Management
May 11, 2021
May 11, 2021
As climate change continues to pose risks to businesses around the globe, directors have more questions than answers: What does climate change mean for the bottom line and for the industry they serve? Are there opportunities for the company to reposition itself or develop new products or processes? Where do investors and employees stand on issues relating to the environment?
To help cut through the noise and empower directors to make informed decisions on the global transition to a net-zero economy, the NACD Capital Area convened a discussion on April 30 with Peter R. Gleason, CEO of NACD; Mindy Lubber, CEO of Ceres; and Ted Craver, director at both Wells Fargo & Co. and Duke Energy Corp. This followed the recent announcement that NACD has become the US chapter of the Climate Governance Initiative (CGI), hosted by the Hughes Hall Centre for Climate Engagement at the University of Cambridge in collaboration with the World Economic Forum. As part of this initiative, NACD will lead meaningful conversations and deliver guidance and education that enhance climate competence in the American boardroom.
Climate change and environmental, social, and governance (ESG) issues are now dominating board agendas, just as cybersecurity did a decade ago, because boards are beginning to realize just how complex climate change is and how it impacts everything from risk to strategy, explained Gleason during the event. Indeed, a key theme of the discussion was that the time to act is now—climate change is no longer some up-and-coming issue that will unfold in the distant future.
“Consider putting [climate change] on the board agenda in three to six months and maybe faster than that given the urgency,” said Gleason. “Three to six months may [actually] be a little too late given the speed at which a lot of this happening. Put it on the agenda quickly.”
The panelists reinforced that climate change is a financial and systemic risk, and even an enterprise-risk multiplier. “It aggravates many risks already dealt with. Think about business and continuity risk, investor risk as institutional investors integrate climate change into long-term criteria. That will impact the ability to raise capital. There’s compliance and regulatory risk. Then consumers and employees—they can easily leave to go to companies with more of a commitment to climate issues,” noted Gleason.
“There’s also a different level of competition to think about,” he elaborated. The group Together for Sustainability, for example, is a network and initiative of 30 global chemical firms focused on supporting sustainability efforts and adhering to relevant laws and regulations, backed by its own assessment and audit frameworks. “Competitors are collaborating and banding together”
For directors to act in the fiduciary interest of their shareholders—and beyond that, to meet broader stakeholder expectations—they must consider it in their board work.
Every day that a company neglects to act on climate change creates risk exposure, one of the panelists commented. According to CDP’s Global Climate Change Analysis 2018, 215 of the 500 largest companies globally have a collective trillion dollars at risk over the coming decades, with much of this financial risk predicted to begin materializing within the next five years.
The risk of climate change to companies is certainly great, but one speaker stressed that the opportunity for first movers is even greater. “There clearly are risks to first movers and risks to late movers, but I’d rather be associated with the early-mover category,” the speaker commented. “It gives you more time to create strategies for pivoting and more opportunities for adjusting along the way, and it gives the boards more time to come up the learning curve and to refine how they’ll make adjustments.”
For years, climate-risk experts thought that policy surrounding mitigation and the transition to a net-zero economy would be taken up by the more energy-related agencies in Washington, such as the US Department of Energy, the Environmental Protection Agency, or the Department of the Interior. Now, this policy is also increasingly under the purview of the US Department of the Treasury, the Securities and Exchange Commission, the Federal Reserve System, the Commodity Futures Trading Commission, and other governmental agencies. With the recent Biden administration announcement that the United States will reduce 2005-level emissions by 50 to 52 percent by 2030, each of these agencies will be engaged.
The issue remains relatively untouched, however, by Congress, although panelists believe action will come in the next few years. Congress may have to decide between implementing a carbon tax and mandates for companies to use specific amounts of renewable energy in their production processes. And mandates certainly have their drawbacks in the business context, according to one panelist: “They make it difficult when you want to go through and figure out how to allocate resources—inefficiencies get built in.”
But such mandates need not come as a surprise to companies and their boards. Keeping up with movements in Congress can empower any board to preempt these actions and comply with mandates before they’ve even been signed into law, avoiding the inconvenience of scrambling to comply should they wait. This is another example of the opportunity presented to first movers.
To grapple with the risks and opportunities associated with climate change, panelists said, boards’ first step is director education. As Gleason explained, “The reason NACD joined the Climate Governance Initiative is because directors need to be better informed on climate risk. The education component of this is actually huge, when you think about the complexity of climate change. You’ve got the science issues and how we’re seeing that from the policy and regulatory environment. When I think about climate competence and where that competence lies on the board, I think it is few and far between. The aim of NACD in our involvement with CGI is to bring directors up to speed so they can become conversant.”
The next step is creating a road map for how the company can reach net-zero emissions in alignment with the Paris Agreement. Important questions the board should ask include:
Each of the main board committees has a role to play in the transition to a net-zero economy. The audit committee can ensure that climate and emissions standards, disclosures, and data are robust and accurate, for example, and the compensation committee can play a crucial role in tying pay to climate-related targets. The nominating and governance committee can make sure that at least one or two members of the board bring needed climate competency. It is just as critical, however, to ensure that any climate-competent directors are not siloed as “the ESG experts” and are instead valued board members who have generalist skill sets and can also leverage climate-risk expertise in their decision-making—and encourage other directors to do the same.
The panelists emphasized that the transition to a net-zero economy, in light of the climate reality, poses immense risk as well as opportunity for well-positioned firms. Boards have a necessary role to play in this transition.
This NACD Capital Area event is part of NACD’s broader effort to elevate climate change in the boardroom. Get involved in NACD’s US Climate Initiative and check out further resources and future events here.
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