The Problem of How to Frame Risks & Opportunities Related to Climate Governance
The issue of climate governance is on the radar for most board directors, and they're interested in raising awareness of the issue. What they continue to struggle with is how to frame the risks and opportunities that are associated with it. In general, companies are still trying to figure out how to transition some sort of climate governance strategy into their existing business models. As if there weren't already enough pressure, investors are increasingly requesting some sort of principles or guidelines to serve as a standard on climate governance.
The World Economic Forum joined forces with Pricewaterhouse Coopers in the first attempt at establishing any sort of climate governance principles. The groups started with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The new principles are designed to help boards and senior management to think about the quality of climate governance at their organizations and to look for areas in which they can develop it further. The hope is that the principles will improve climate governance practices and their TCFD disclosure guidelines, which are already supported by more than half of investors across the globe who hold almost $100 trillion of assets under management.
The principles of climate governance are:
- Climate accountability
- Subject command
- Board structure
- Material assessment
- Strategic integration
- Incentivization
- Reporting and disclosure
- Exchange
How Are Boards Responding to Implementing Principles?
Non-executive directors have taken the lead in many companies to set up national board networks or chapters so they can begin deciding how to start rolling out these principles and begin testing them. Companies are also sharing good governance principles and challenges with others in their industries and in their geographical areas. Boards are also seeking additional guidance from subject matter experts to enhance their own understanding of climate governance.
The first board director network that emphasized climate changes was held in Italy. It was hosted by the National Association of Directors (NACD) and the NED Community. The group sets up regular seminars, webinars and conferences. They also work very closely with Fondazione Eni Enrico Mattei (FEEM) on research matters.
The Institute of Corporate Directors of Malaysia, which is supported by the Securities Commission Malaysia, hosts the climate-dedicated director network in Malaysia. A network of almost 200 board directors, which is called Chapter Zero, meets in the United Kingdom. The group is hosted by Hughes Hall at the University of Cambridge. This group offers monthly conferences and workshops. They also offer a Directors' Toolkit that members can use for self-assessment to assist their boards in addressing the issue of climate governance. Non-executive directors in the Americas, Europe and Australasia are working together to try to advance the agenda for climate governance, and they're getting some of their national director associations involved as well.
What Is the Next Step Toward Guidance for Corporations on Corporate Climate Governance?
It appears that further guidance will be forthcoming around the issue of corporate climate governance. Corporate directors around the world are voicing their need for concrete guidance. The World Economic Forum will be concentrating its efforts further in the coming years.
In September, the World Economic Forum discussed in depth how to put good climate governance into practice at the Sustainable Development Impact Summit in New York. One of the things that rang clear from the Summit is that climate change should be part of the regular governance and stewardship responsibilities of corporate leaders, and it should be prioritized accordingly.
Putting good climate governance into practice is sure to bring some challenges. The world's largest corporations represent $17 trillion in market capitalization. Some of these companies are concerned that climate change could cost them over a trillion dollars. They would face much of this cost over five years and they could potentially write off $250 billion of stranded assets. They would hope to net $2.1 trillion in climate opportunities.
In the financial realm, companies would hope to realize $1.2 trillion from low-emissions products and services. The main challenge is that it would bring them 80% of the total financial impact, which would mean they'd have to shift their investments into lower-carbon projects.
Other industries project revenues around the following:
- Manufacturers: $338 billion
- Services sector: $149 billion
- Fossil fuels: $141 billion
- Food, beverage and agriculture: $106 billion
Nicolette Bartlett, Director of Climate Change at CDP, says that their analysis shows that the parameters for climate action are clearer than ever. She explains that climate change poses a multitude of risks, including weakened assets, changes in the market and physical damage from climate impact, as well as the tangible impacts on the companies' bottom lines. CDP questioned 215 global corporations about their climate-related financial risks and found that over four-fifths of the companies expect to be affected by climate impacts like extreme weather patterns and rising global temperatures that lead to higher penalties for greenhouse gas emissions. They also anticipate higher operating costs connected to legal and policy changes, which could reach $500 billion.
A governance structure alone will not be able to effectively control climate change. A holistic corporate governance structure is needed for a systemic approach to climate risks and opportunities. The significance of the topic of climate change requires boards to be knowledgeable and up-to-date with the latest data and information around climate change. Governance Intel by Diligent Corporation was designed to aggregate over 70,000 open-web news sources, subscription news and proprietary data and tailor the sources, volume, frequency and modes of consumption directly to corporate leaders. Leaders can easily access the latest trends and information using any mobile device.
