Topics:   Corporate Governance,ESG,Legislative & Regulatory,Regulations & Legislation,Risk Management,Strategy

Topics:   Corporate Governance,ESG,Legislative & Regulatory,Regulations & Legislation,Risk Management,Strategy

October 14, 2022

Three Climate Lessons From NACD Summit 2022

October 14, 2022

There have been myriad climate crises in 2022, from floods, record-breaking heat, and drought to storms and wildfires and the question “Is your board climate ready?” should be front of mind for board members in all industries.

At NACD Summit 2022, Matt DiGuiseppe, managing director; Governance Insights Center, PwC; Roy Dunbar, director, Duke Energy Corp., Johnson Controls, SiteOne Landscape Supply, and McKesson Corp.; and Richard Zelichov, partner, Katten Muchin Rosenman, discussed answers to this question, moderated by Desiré Carroll, director, Professional Practice, Center for Audit Quality.

Though there is no one size fits all approach, there were three critical lessons learned from the discussion on how directors can rise to the challenges surrounding climate issues.

1. Changes to US Securities and Exchange Commission Rules Are Coming

In March, the US Securities and Exchange Commission (SEC) proposed rules to “enhance and standardize climate-related disclosures for investors,” with the intent to get consistent, comparable, and reliable climate impact disclosures from public companies. Zelichov noted the SEC’s proposed climate rules are a departure from its previous approach, moving away from historical principle and materiality-based rules to rules that require a more prescriptive approach. The rules are proposed to have qualitative, quantitative, and what he referred to as “the ifs” disclosures. 

“If you’ve adopted a Climate Transition Plan, you need to disclose it. If you have goals, you need to disclose them. And if you conduct scenario analysis, then you need to [disclose] that,” he said.

2. Every Company Needs to Worry About Climate Issues

Even if companies are not in the energy space or appear to be directly impacted by climate issues, companies in a variety of industries have to look at where they put their facilities, the risks around climate, and what their carbon footprints are as Dunbar noted.

The European Union (EU)’s the Corporate Sustainability Reporting Directive, which is expected to be adopted this month, doesn’t apply just to companies in the EU. They will also apply to “non-EU companies with debt securities listed in the EU, EU subsidiaries of non-EU companies that have reached a certain threshold in terms of revenue, and then also non-EU companies as a whole that have sort of a higher level of revenue and at least a subsidiary in the EU that generates a certain level of revenue,” Zelichov noted.

Unlike the SEC’s proposed rules which will ask for the impact of climates on the corporation, the EU rules will ask for the impact of the corporation on the environment as well, also known as double materiality.

3. ESG and Climate Are Full Board Issues

One of the items in the SEC’s proposed rules is disclosing if any board member has climate expertise. Zelichov disagreed with the item and believes that it would be better for boards to have directors that make sense for the company that can ask probing questions about Environmental, Social, and Governance (ESG) and climate issues.

DiGuiseppe highlighted that ESG, and even climate specifically, is too broad of an issue to be handled by one board committee because it impacts companies in too many ways. He pointed out that audit committees are leaning in because climate issues require understanding processing controls and taking ownership of the accuracy of data. The nominating and governance committee can take ownership of the strategy around the issue and how the company is communicating to the marketplace.

He highlighted that full boards need to be involved in the climate strategy discussions because the issues are more than compliance and instead about having dialogue within the context of the core strategy of the company.

“[You have to] make sure you’re getting the return on the investment and let’s be clear, this is an investment that’s going on [in the] organization. And increasingly, [compensation] committees are getting involved because you get what you expect. And if you’re setting broad goals, and if it’s not showing up in executive compensation … I know that that’s something you’re going to start hearing about.”

These lessons highlight action and viewpoint shifts needed to ensure boards are climate ready. With climate, particularly with the regulatory changes on the horizon, it is never too early to begin to prepare for what lies ahead.

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