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.
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.
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.
Few institutions represent American ingenuity and innovation more clearly than its space program. With rapt attention, the world watched July 20, 1969, as Mission Commander Neil Armstrong of NASA’s Apollo 11 spacecraft became the first person to walk on the moon.
Ron Garan—retired astronaut and chief pilot for commercial space launch provider World View Enterprises Inc.—was one of those who watched. “My most vivid childhood memory was July 20, 1969,” Garan said. “On some level, I realized that we had just become a different species. A species no longer limited to our planet.”
Garan delivered the opening keynote address to an audience of more than 1,300 on Sunday evening in Washington, D.C., at NACD’s Global Board Leaders’ Summit, the world’s largest gathering for corporate directors.
Four decades later, Garan’s childhood dream became reality. He had trained with NASA to become an astronaut himself. “That first day in space when I got to take a look at our planet, [I] was absolutely breathless.…What I felt was an incredible sense of gratitude. Being physically detached from the world made me feel closer to the people on it—more interconnected.”
Reflecting on his second space mission, Garan remembers similar feelings of gratitude, but that gratitude was coupled this time with internal struggle. The technological advances that make space flight not just possible but routine offer the potential to solve some of the world’s biggest problems. Yet, Garan pointed out, some people on this planet still do not have access to basic resources like clean water.
“These days we’re more connected than ever, and the Internet is the backbone,” said Garan. “The Internet can be our nerve center, enabling us to solve problems in an entirely different way.”
Garan further explored that challenge in his third mission, when the seeds to a solution began to root. The answer? Collaboration. On this space mission, Garan was weightlessly floating about 100 feet over the International Space Station, attached to the craft’s large robotic arm. That station represents the collaborative innovation of 15 nations—including the United States, Canada, Japan, the Russian Federation, and 11 European nations—that have, at times, been at odds with each other politically and ideologically.
“What would it look like for us to have that kind of collaboration here on the [Earth’s] surface?” Garan asked. “Collaboration doesn’t mean we agree on everything. What it does mean is that we find the things we do agree on so we have a platform to work [from in order] to address the things we don’t agree on.”
Risk: Necessary for Innovation
But innovation and collaboration don’t come without risk. As a highly decorated fighter pilot, Garan had run several missions and trainings in which he’d successfully flown and had no mechanical problems in flight. Then one day, while piloting a jet during a routine takeoff, he heard a loud pop that jolted him. He very quickly realized his engines no longer had any usable thrust. Garan tried to land in a wooded area and quickly realized that he had no need to be in the jet at that point. Seconds before impact, he ejected and his life was spared.
That incident, though life-threatening, did not change Garan’s outlook on life or risk. But the very next day, he was in flight and, because of a mechanical malfunction, had to conduct an emergency landing. After having completed thousands of flights, he’d had emergencies two days in a row. The second day is when the idea of what it means to take risks sunk in.
Before ever entering a plane or spacecraft, one must decide if doing so is worth the risk. The same is true for business leaders who want to innovate and collaborate. When NASA is planning a mission, they consider every possible issue that could go wrong and develop a response plan that’s ready and waiting to be activated. Boards should do the same. Similarly, a great idea on the shelf can only provide value if it’s activated. “Ideas are overrated. There’s got to be a streamlined path to action,” Garan shared.
“Any change involves some level of risk,” Garan said. “Any innovative business strategy must involve risk. Collaboration can help mitigate risk and also provide an engine for growth.”
Implications for Businesses
It’s important for businesses to understand that we don’t live on a globe; globes are just abstract lines on a map, Garan shared. We too often think of the world in terms of it being about business and economy supporting a society that sustains a planet, he said. “Instead, we live on a planet that sustains a society that has built an economy.” Understanding that concept is adopting what Garan calls an “orbital” view.
It’s time that enterprises realized that it’s good business to care about issues like sustainability and corporate social responsibility (CSR)—beyond just doing it to boost a brand or reputation, Garan shared. Issues like CSR should be part of a company’s DNA now, not just for future generations, he added.
The retired astronaut described how, on his last space mission, his spacecraft entered back into the Earth’s atmosphere and landed on its side. “Now out of my window, I saw a rock, a flower, and a blade of grass. I was home. In Kazakhstan, nonetheless,” he said. “I wasn’t in Houston, where my family was. But I was home and had a different idea of home.”
Thinking of the planet as “home” may be what’s required to actually make one small step for directors and one giant leap for corporate governance.