Tag Archive: institutional investors

Building Board Climate Competence to Drive Corporate Climate Performance

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Veena Ramani

Investors are on to a definite theme these days—and Kinder Morgan and Anadarko Petroleum Corp. are the latest companies to experience it.

Earlier this month, investors in the energy infrastructure giant backed shareholder resolutions calling for more transparency and reporting on how Kinder Morgan is addressing the impacts of climate change and mitigating the risks. A similar resolution at Anadarko also received a majority vote this month.

This is a trend that has picked up steam during recent proxy seasons, with shareholders just last year voting in favor of climate change resolutions at major firms, including Exxon Mobil Corp., PPL Corp., and Occidental Petroleum Corp.

As I wrote in a recent NACD blog, one consequence of this growing focus on climate risks is that investors, led by major money managers such as BlackRock and State Street, are increasingly emphasizing the role of corporate boards in driving company responses.

And now Systems Rule, a new report from Ceres, shows that investors are right to push for strong governance systems for sustainability.

Our analysis of board governance practices and performance data of large global companies found that businesses that integrate sustainability priorities such as climate change into board mandates, director expertise, and executive compensation also demonstrate strong performance on sustainability issues.

The report provides important insights for boards to pay attention to as they consider how to oversee climate-change-related risks and strategy.

But here’s the issue: Most large companies aren’t among these performers because they still have fragmented systems of board governance, especially when it comes to sustainability oversight.

This is partially true because many directors and company leaders still do not understand the material impacts associated with environmental and social issues, like climate change. In fact, Systems Rule noted that only 17 percent of corporate directors have demonstrated expertise in sustainability issues.

For companies to get moving and establish governance systems that can deliver commitments and performance on climate change, the whole board needs to start by establishing some baseline fluency that will help them understand when these issues could in fact be material.

That’s where a new Ceres primer, Getting Climate Smart, can help.

Developed specifically to increase board fluency in climate change, the report provides an overview of the different ways that climate change can impact an enterprise and how boards can integrate climate change oversight into their responsibilities in the boardroom.

It’s designed to be a valuable tool for corporate directors who want to educate themselves on what this issue means to their business and what they can do about it.

So how practically can directors build climate competency into their board?

  • Formally include oversight of climate-change-related issues in the board structure. Formalizing climate change’s importance to business by including it in board committees’ mandates ensures the topic is regularly discussed. Citigroup, Ford Motor Co., and Nike are just a few of the companies that do this.
  • Recruit climate-competent directors. Committees should cast a wide net through the nominating process so they can consider candidates with diverse backgrounds and expertise in addressing climate change.
  • Integrate climate change into strategic planning and risk oversight. Directors should ensure that management takes the business impacts of climate change into account at every level of the company. Businesses including BHP Billiton and Shell conduct scenario analyses to assess the impacts of climate change on their portfolio of assets and business policies.
  • Tie executive compensation to actions that mitigate climate change. To encourage action, executive compensation can be tied to a company’s progress on addressing and opportunities, such as cutting greenhouse gas emissions. Xcel Energy links 30 percent of its executive compensation to carbon emission reduction goals.
  • Promote climate change disclosure. Without robust disclosure, investors cannot accurately analyze how a company is responding to climate change. Companies including Aviva, Unilever, and Zurich Insurance committed to updating their disclosures based on new Task Force on Climate-related Financial Disclosure (TCFD) guidelines.

The takeaway from our research is clear. It pays for companies and boards to adopt strong board oversight systems for climate change. But as a first step, boards should first develop climate fluency to understand the material risks their company may face. Fluency with the issues and strong, holistic governance systems will lead to the performance impacts that investors and other stakeholders want to see.

Veena Ramani is program director of capital market systems programs 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.