If U.S. company boards weren’t taking local weather change critically, the Securities and Exchange Commission not too long ago prodded them to behave.
In a proposed rule change this previous March, the SEC referred to as for public corporations to make necessary climate-related disclosures to traders. That data contains local weather dangers with an affordable likelihood of materially affecting their enterprise, in addition to greenhouse gasoline emissions. The SEC expects to finalize its new rule this fall.
“That rule elevated climate risk to a material financial risk, which is part of the duty of a fiduciary, of a corporate board member,” says Mindy Lubber, CEO and president of Ceres, a Boston-based nonprofit that works with capital markets gamers to unravel sustainability challenges.
Lubber acquired wind of the influence in April, when she spoke on the Women Corporate Directors S&P 500 Directors’ Summit in New York. “Every single board member there—and they were all corporate board members—said climate has risen to their board level due to the SEC rule.”
Climate change could also be excessive on their agenda, however boards admit they may do extra to confront the massive potential dangers. As they search to know these risks and make local weather a part of firm technique, administrators are feeling the warmth from traders.
Some corporations occupy the forefront on local weather change and different ESG matters, however many others have a methods to go, says Rich Lesser, world chair of Boston Consulting Group (BCG). “Boards are on a learning curve with this issue probably not so different than the way they were on a learning curve on digital five or eight years ago.”
That schooling begins with common local weather science consciousness and extends to regulatory reporting, says Steve Varley, London-based world vice chair, sustainability, with Ernst & Young (EY). “There’s some basics that I see happening in boardrooms around education of the non-executives, so they can get to the level on climate change of challenging both the strategy and execution of the management team.”
New York–primarily based Lesser factors to a recent global survey of 122 board members by BCG and French enterprise college INSEAD. “In that, 91% of directors think that their boards should devote more time to the strategic aspects of ESG, and 53% said that they’re not effectively focused on embedding sustainability into their long-term plans sufficiently.”
For respondents, carbon emissions are a high ESG concern. However, amongst corporations with a net-zero dedication, solely 55% of administrators polled mentioned their group has ready and printed a plan to hit that concentrate on.
Meanwhile, shareholders are ratcheting up the stress. For instance, final yr activist traders involved about local weather change added three new directors to ExxonMobil’s 12-member board, together with one with local weather experience. “It was a shot heard around the world,” Lubber says. “Every corporate board now is saying, Am I next?”
Lubber additionally cites Climate Action 100+, a bunch of 700 traders controlling a mixed $68 trillion in belongings that’s pushing the planet’s greatest greenhouse gasoline emitters to take motion. “With them and with others, there are about 190 shareholder resolutions this past year, and about 175 the prior year, dealing with climate risk.”
Board members are listening to from their corporations’ largest house owners, Lubber provides. “They’re saying to the companies, We want you to address climate risk as a matter of good management.”
There’s no exact technique to predict the magnitude of climate-related danger, notes Carol Liao, an affiliate professor on the University of British Columbia’s Peter A. Allard School of Law, the place she directs the Centre for Business Law. “Climate change differs because of the systemic and interconnected risks that can act as a risk multiplier.” But local weather danger has a fabric monetary influence on 93% of U.S. public corporations, in keeping with a 2016 report by the Sustainability Accounting Standards Board.
Companies and their boards additionally want to know the authorized dangers, Liao explains. “There are currently more than 1,000 climate-related lawsuits in court in 28 countries,” she says. “So directors of public companies should be aware that disclosure is a legal obligation and there is potential civil liability for failure to disclose climate-related financial risk.”
Lesser thinks boards are pretty nicely ready to deal with the regulatory and compliance necessities round local weather change. “The more challenging risk is that the markets are moving faster, and technology is moving faster, than companies realize,” he says. “They’re missing opportunities to think about how to embed climate into the core of what they offer and into how to build competitive advantage—or, in some cases, eliminate a competitive disadvantage.”
Then there’s reputational danger, which may ensnare not solely corporations inattentive to local weather but additionally those who interact in greenwashing, Varley observes. “Boards need to be careful not to make external announcements that can’t be backed up by data and by evidence.”
For boards nervous about being local weather laggards, schooling is sweet place to start out. Liao is a principal co-investigator with the Canada Climate Law Initiative (CCLI), whose mandate is to assist Canadian companies contemplate, handle and disclose local weather dangers. The CCLI is midway towards its purpose of constructing 250 free, confidential board shows by June 2023.
Climate change creates enterprise alternatives, too, Liao emphasizes. She sees an opportunity “for companies to access new markets nationally and internationally with the development of technological innovations such as battery storage, artificial intelligence, smart metering, and new, lower-emissions products and services.”
What different steps can boards take to point out they’re critical about local weather danger? Businesses can select from many integrated assessment models of local weather change, Liao says. “Companies are now using scenario analysis as a tool to test their strategic resilience to different climate outcomes.”
Liao additionally recommends asking 5 questions:
- Does the corporate have a local weather plan?
- Does the board have efficient oversight of its local weather technique, together with figuring out climate-related dangers which are rising or rising in significance for the corporate?
- Has the board recognized strategic alternatives for the enterprise over the brief, medium and long run?
- Who within the firm is accountable for climate-related danger and accountable for implementing the corporate technique?
- Is the board approving the disclosure of the corporate’s efforts to handle local weather change to traders and stakeholders, together with integrating disclosure in its monetary reporting?
During Ceres’ frequent local weather change coaching with boards, one query that Lubber hears is whether or not administrators ought to add an environmentalist to their ranks. “That’s not the answer,” she maintains. “Yes, have somebody with credentials who understands climate risk. But what we don’t want to see is one special green representative that only deals with climate. The board needs to look at the risk from climate as they would any other risk facing the company.”
Lubber additionally typically will get requested the place local weather change belongs in board committees. “I don’t know that there needs to be a special climate or ESG committee,” she says. “Whichever committee is looking at risk, that’s what should do so, so it’s not seen as a special, cute project but it is an essential part.”
Smaller companies might add a director who’s a sustainability professional, Lesser says. “That’s unlikely to work for a bigger and complicated company where [sustainability] touches many aspects of the business, but that can help a smaller organization that doesn’t want to lose sight of this.”
Varley sees a chance for main boards to interact with local weather activists, who are usually of their 20s and 30s. “Putting them in the mix with a board who might be quite a bit older, I’ve seen that work really well to forge a new level of understanding,” he says. “Maybe not agreement, but at least mutual respect between both parties.”
As for board expectations of administration, Lubber says administrators ought to get a progress report on short-, medium- and long-term targets associated to local weather. And if local weather change is necessary to the corporate, boards ought to hyperlink it to CEO compensation. “Let that water fall down throughout the enterprise,” Lubber says. “If you say it’s a priority, make it a priority.”