The connection between climate change and business, although still paradoxical, is becoming notoriously transparent. Business strategies will determine the speed of strategy implementation for climate change, which results in potential risks and opportunities for companies. Consequently, board directors must increasingly handle the risk-reward game of climate-related initiatives with care. Nevertheless, limited practical and technical-backed guidance is available to assist board directors in understanding their role while exploring these challenges.
Conversely, effective governance should inherently include proper climate governance. Thus, climate change is a critical topic that may promote financial risks and opportunities, which boards naturally have the duty to manage with the high governance rigor required. In contrast, climate change is a relatively new and complex issue comprising distinct social, scientific, economic, and regulatory uncertainties across comprehensive time scales. In light of this scenario, the current general governance design is inadequate for effectual board governance of climate issues.
This short article discusses various critical aspects to propel the development of practical board principles while addressing climate governance. In addition, some documents, such as the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) [1] and the International Corporate Governance Network’s (ICGN) Global Governance Principles [2], were used to enhance this discussion.
Here are seven key proposed climate governance codes to drive effective board decisions related to environmental topics. There is no specific order for their implementation as they may be mixed and matched depending on the theme context, although they follow an analytical flow for a complimentary discussion.
- Code 1: Subject mastership
When dealing with climate items, the Board must guarantee that its arrangement is properly manifold in technical experts and experienced professionals covering topics such as green transition, circular economy, global warming, water scarcity, resources deployment, etc. This diverse leadership pool covering various experiences is necessary to discuss and make decisions based on sound awareness and knowledge of the ever-changing global climate scenario.
- Code 2: Climate change responsibility
The Board is ultimately liable for the long-term stewardship of the company to the shareholders. Hence, the Board has to answer for the long-term corporate resilience concerning conceivable transformations affecting the company’s competitive landscape due to climate change. Accordingly, poor accountability and oversight of these climate-impacted challenges characterize an infringement of the Board’s duties.
- Code 3: Proper risk-reward assessment
An effective board has to guarantee that leadership continuously evaluates the short to long-term bearings of climate-driven threats and prospects for the company. This inspection includes, but is not limited to, the appraisal of eventual trade-offs regarding growth, new business models relevance, and potential liabilities, among other factors. In addition, the Board also has to guarantee that the organization’s actions and responses to climate are proportionate to the magnitude of the business impact it may generate on the company.
- Code 4: Strategic investment planning
A compelling corporate board must regularly consider climate-related items in justifying strategic investment for sustainable finance planning. These robust economic plans should back ey decision-making processes to effectively maneuver rising risks and leverage all opportunities across the organization.
- Code 5: Systemic incentives building
Sustainable executive incentives must converse with the strategy to promote the company’s long-term prosperity. Therefore, specific climate KPIs and targets become essential items in the Board’s priority agenda when assessing their potential incentive schemes. Additionally, the Board can regard a similar approach in markets where the offer of variable inducements galvanizes non-executive directors.
- Code 6: Sustainable reporting and disclosure
The Board must monitor that the business risk reviews comprise all climate-derived risks and opportunities and their findings must be the framework to define the company’s strategic directions. The Board is also in charge of transparently communicating the disclosure of these prospects to all stakeholders. Investors, partners, and regulators are typical stakeholders that may benefit from proper reporting. Annual reports must similarly disclose pre-established climate KPIs and investments likewise done for financial reporting governance [3].
- Code 7: Regular ecosystem updates
The Board must secure systemic interactions and exchanges with critical policy-makers, technical advisors, environmentalists, and investors to foster methodologies sharing, knowledge building, and strategy updates. It is pivotal for the longevity of the business continuity plan that the Board constantly remains up to speed on the latest climate risks, regulatory requirements, technical impacts, and reputational liabilities, among other topics.
These codes outline the functional Board’s actions for proper climate governance. Nonetheless, they are prescriptive of the specific needs of all corporations, nor directly apply to every industrial sector. Instead, this set of codes is a toolbox to heighten the strategic climate discussion and steer effective decision-making by thoroughly pondering the bridge between business and climate change.
Sustainable business leaders must promote complete clarity and transparency around climate-driven initiatives. A united effort around climate governance and properly disclosing its targets is a must-have for any effective Board to foster critical partnerships across sectors and regions.
As the world quickly evolves to a more science-driven scenario and this transformation is backed by technology, effective boards have better access to the information required to foster improved sustainable innovation to manage climate governance. For instance, digital transformation is augmenting data gathering and analyses, allowing a more nuanced strategic planning by the Board for tangible decisions aiming company’s prosperity.
While the usefulness of technological progress is pivotal to driving this change, corporations should not lose sight of purposeful leadership with human value at its core [4]. Boards must be declared stewards for profit, people, and the planet as they are accountable for paving the way to navigate climate change. Responsible corporate governance for climate change items is key to building trust with internal and external stakeholders, overseeing the climate risks and benefits compellingly for investors, employees, and consumers [5].
References
[1] Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD), FSB-TCFD webpage accessed in September 2022.
[2] International Corporate Governance Network’s (ICGN), ”Global Governance Principles”, ICGN webpage accessed in September 2022.
[3] ESG Ratings: Measuring a company’s resilience to long-term, financially relevant ESG risks, MSCI webpage accessed in August 2022.
[4] Leadership for the decade of action, The United Nations Global Compact and Russell Reynolds Associates — “Study on the characteristics of sustainable business leaders” (2020).
[5] Deloitte Global climate survey – “Climate Check: Business’ Views on Environmental Sustainability” (2021).
