The board’s role in climate oversight

Directors need to understand climate change and the impact it has on their organizations.

NANCY FORAN, PRESIDENT & FOUNDER, ESG PARTNERS INC.

The global pandemic highlighted many social issues that were buried for years. The “S” in ESG (environmental, social, and governance) took center stage and forced organizations to deeply consider issues like diversity, equity and inclusion, compensation practices, and health priorities.

The last half of 2021 caused climate to again top our agendas, as summer wildfires ravaged our West Coast and drought impacted the Prairies, only to be followed by devastating floods in British Columbia and Atlantic Canada in November. Livelihoods and industries are being decimated and insured losses are hitting unprecedented levels.

The August report from the Intergovernmental Panel on Climate Change sent a strong message that our time to act is running out. This urgent warning call places great pressure on our global leaders for decisive action, yet we know governments cannot solve these issues alone. Support is needed from every sector, industry, and organization around the world.

This new world bears little resemblance to the past. As our planet continues to warm, organizations face increased levels of uncertainty. Boards of directors and business leaders must look beyond traditional strategies in order to create greater resiliency and embrace new opportunities.

Business as usual is no longer a viable strategy

Certain industries have been at the forefront of climate issues for some time, especially those within the natural resource sector. Others are only now realizing the risks and opportunities facing them. We see this in the agricultural sector, real estate, ocean tech, life sciences, manufacturing, retail, financial services — the list goes on.

Organizations are setting “net zero” targets with commitments to limiting emissions by 2050, but these commitments must come with well-defined plans for action and clear interim targets. Climate change is impacting businesses in profound ways and investors, regulators, and customers are expecting organizations to take responsibility for addressing climate impacts through an integrated, strategic approach.

Boards have a fiduciary duty to act in good faith and in the best long-term interests of the company. To carry out their oversight responsibilities, directors need to understand climate change and the impact it has on their organizations.

Climate risk includes both physical risk (think physical damage and supply chain disruptions) and transition risk (policy, legal, technology, market, and reputation). Boards need to understand and consider how these risks will impact strategy and create new opportunities, ensure an appropriate governance structure, and be confident in their ability to discharge their oversight responsibilities.

How to get started

First, ensure the right skills and structure exist at the board and committee levels. Oversight for strategy, risk, reporting, and messaging should remain at the board level. The audit committee is well-suited to focus on climate disclosures, processes, controls, and assurance. The compensation committee should evaluate when and how to imbed climate metrics into executive compensation plans. And the nominating and governance committee needs to focus on attracting the right expertise to the board and support directors in their orientation and ongoing education around climate and broader ESG issues.

Boards need to identify, understand, and assess the climate issues that will have a material impact on the organization. They must consider the time frame, impact, and likelihood of their occurrence and be comfortable working with imperfect data at first, as there is limited historical information to help us move forward in this new era.

Finally, establish clear metrics and targets around these issues and be rigorous in the disclosure process. Apply the same rigour for the management and reporting of climate and other ESG issues that you would for financial metrics and performance.

Change does not happen overnight and there is no “one size fits all” approach. The best advice is to simply start moving forward along your journey toward climate integration. ■

Nancy Foran, FCPA, FCMA, C. Dir. is President & Founder of ESG Partners Inc., helping clients become more competitive, resilient, and create long-term value through purposeful alignment with ESG strategies. For further information, contact info@esgpartners.ca or visit: esgpartners.ca