In depth

Committing to climate change requires good governance

Following COP26, private sector participation and initiative will be even more critical to meeting society’s net-zero ambitions. The business community has an important supporting role to play, both as sustainable investors or stewards and as carbon market participants. To play these roles successfully, strong leadership in setting a clear purpose, a strategic roadmap, supported by lived values and an embedded culture, and an effective stakeholder governance framework will be essential. Within the business’s stakeholder group, boards will need to assess what role the environment and climate change in particular play. Then, when addressing the impact of that role on purpose and strategy, for example, by planning to commit to reduced emissions, a crucial aspect will be to develop and implement the appropriate management systems to integrate climate considerations, and ensure appropriate board oversight and governance.

Climate risk and opportunity: assessing the financial implications

Recognition of climate change as a financial risk to business has gained pace since the Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board in 2015. The TCFD has developed voluntary, consistent climate-related financial disclosures that would be useful to investors, lenders and insurance underwriters in understanding material risks. The TCFD’s recommendations categorize climate risks into transition risks (risks that arise from the transition to a low-carbon economy, such as policy shifts) and physical risks (risks that arise from the physical impacts of a changing climate, such as increased extreme weather events).

In terms of opportunities, the TCFD recommends that companies consider the following in their efforts to build climate resilience: resource efficiency, energy source, developing new low-emission products and services, and seeking new markets where there are opportunities (such as state funding). The TCFD structured its recommendations around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets. The recommendations also set out specific recommended disclosures that organizations should include in their financial filings to provide decision-useful information. The disclosure recommendations are quickly becoming mandatory across the world as the recognized standard for reporting climate risk and opportunity. Governance is a key aspect of the TCFD process, in particular as good governance is essential to being able to report successfully against that standard.

Board oversight of climate risk and opportunity: getting governance right

The board is ultimately accountable to shareholders for the long-term stewardship of the company. In this context, in its oversight role, the board should ensure that the company has the necessary governance in place to address potential shifts in the business landscape that may result from climate change, i.e., that it has climate resilience. Failure to do so may constitute a breach of directors’ duties. Boards and the executive will need to take action to ensure there is a governance framework that will facilitate good decision making, particularly in light of forthcoming climate-related regulatory changes, heightened litigation risk and increasing stakeholder activism. Key actions include: integrating climate risk into the company’s strategy and purpose; creating processes to address, monitor and manage identified climate risk and opportunity; setting climate targets and metrics; establishing clear roles and responsibilities for the delivery of climate targets; and keeping abreast of changing regulation and incorporating new regulation into compliance programs. A number of institutions such as Chapter Zero, the World Business Council for Sustainable Development and the World Economic Forum have published board-level recommendations to assist boards in preparing their businesses to address the risks and opportunities presented by climate change and the global efforts toward net zero by 2050.