Five(ish) questions boards should ask on climate action

Banks, investors and consumers globally are driving changes in capital flows so that climate change and broader sustainability concerns (across environmental, social and economic factors) are more fully integrated into financial decisions.

Boards have a vital role in ensuring that every governance decision takes these emerging opportunities and risks fully into account.

We believe there are five key questions for every board to consider. 

1.

At the strategic level, are we appropriately balancing immediate financial issues with long-term value creation?

Commonly referred to as the “tragedy of the horizon”, we typically tend to focus too heavily on short-term financial impacts, potentially to the detriment of the longer-term health of our organisations.

To properly discharge the board’s role as guardian/kaitiaki of our investment and to meet the expectations of our long-term investors, our strategies and asset allocation decisions must increasingly align with multi-period environmental and societal goals. Are we adequately assessing the multigenerational impacts and dependencies of our organisation on our society and on the environment?

2.

Are we fully evaluating the multi-factor risks – physical, regulatory, reputational and legal – which arise from our environmental, social and governance (ESG) exposures? How are these sets of risks being integrated into the organisation’s overall risk management framework?

In 2019, Chapman Tripp published a legal opinion on directors’ duties to raise material climate-related risk at the board table. The opinion noted that directors must assess and manage climate risk as they would any other financial risk and included practical advice covering key issues for directors, baselines for identification and management of climate risk, and minimum questions that boards should consider.

Questions for directors to ask in assessing multi-factor risks include: Have we properly evaluated the inherent climate and ESG risks throughout our supply chain and considered management/mitigation strategies accordingly; What are the current and future financial implications of emissions pricing on our organisation; How will ESG and climate change issues impact our access to capital and insurance now and in the future; What are the financial implications of physical climate change impacts, including more frequent or more intense severe weather events, on our organisation; Do we have appropriate metrics and targets that the board monitors and reviews?

In addition to climate exposures, pressure is increasing globally as banks, consumers and investors set more demanding standards for management of our natural and social capitals overall and exert leverage on companies to meet these new higher standards.

3.

What mindset change is necessary to meet our objectives? What are our stakeholder expectations, internal and external? Are we carefully evaluating how we will communicate and disclose our sustainability journey to our multiple stakeholders?

Leadership and endorsement of climate and ESG objectives by the chair and board, CEO and senior leadership team is critical in making priorities and timeframes transparent, and in driving organisational change. Embedding climate and ESG metrics within organisations (such as occurs with the issuance of green bonds and the publication of sustainability reports, objectives and targets) will change expectations and mindsets, both within and without the company, and make organisational priorities abundantly clear.

Once priorities and timeframes are clear, internal teams, customers and suppliers can be engaged to help meet climate and ESG goals.

On the regulatory front, the need for directors to identify and assess material climate and ESG-related risks and then to disclose such risks is becoming more urgent, most recently due to the introduction of the Financial Sector (Climate-related Disclosure and Other Matters) Amendment Bill.

Outside the regulatory frameworks, many important stakeholders, such as our customers and our employees, have a vital interest in, firstly, understanding the progress of our companies towards meeting long-term climate and ESG goals and, then, in rewarding and supporting those companies who set pro-active, bold and achievable aspirations for the future.

4.

Does our organisation have the knowledge and skillsets on the board and within our management teams to meet emerging ESG and climate-related risks and opportunities?

We have found numerous organisations having to respond rapidly to the lack of capability in this area by recruiting experienced practitioners and consultants, and by seeking access to specialised education and capability programmes. Organisations also need to ensure that performance management and remuneration structures incentivise and promote their long-term sustainability objectives.

5. 

Finally, many organisations have identified significant growth opportunities arising from current and pending ESG changes. How is our organisation responding?

Have we crafted our strategy in light of this new reality, ready to seize opportunities as these changes take place? Are we investigating or utilising innovation and technology-related ESG and climate solutions? Are we scanning the global environment for innovative ideas and approaches that we might adapt? Are we fully leveraging our emerging market opportunities at the expense of our less responsive competitors?

ESG factors present immediate material financial risks, and opportunities, that directors are accountable for.

A more detailed understanding of these risks and opportunities at board level will help inform company strategy and culture, and impact company stakeholder management, risk assessment and reporting.

This will ultimately result in directors making more-informed capital allocation decisions, thereby helping ensure achievement of the company’s sustainability objectives over time.