Climate change is clearly climbing the Board agenda and public awareness is dramatically increasing. This challenge will only become more pressing.
When Fidelio conducted research just last year on how leading Chairs were preparing their Boards for disruption, climate change was not explicitly referenced as a major source of disruption. We explored how effective Boards were at interpreting weak signals and while changing social norms and #MeToo were firmly on the radar, climate change was much less urgent.
In 2019 the world looks very different as investors, consumers and regulators all move up several gears in their expectations of corporates in response to climate change.
Climate change has become a certainty but one that generates complexity and ambiguity for Boards.
In this Overture, Fidelio reviews the Board impact we are seeing among clients and in the market more broadly, as well as the implications of climate change for Independent Directors. In particular we look at:
- Audit Committee & business model risk
- Investor expectations for climate change competence
- Consumer fickleness
- Waiting for Godot and a regulatory framework
- Board accountability and climate change
- Ambiguity and the Boardroom
Audit Committees & Business Model Risk
Fidelio recently hosted a Roundtable for FTSE and international Audit Committee Chairs. Climate change was identified as one of four key challenges for the Audit Committee and, given the scale and complexity that climate change represents, also the most difficult challenge to get a handle on. The Audit Committee also has oversight of reporting of climate change impact. The Task Force on Climate-Related Financial Disclosures (TCFD) encourages companies to develop risk disclosures accounting for their level of resilience to climate change. A highly experienced Audit Committee Chair argued the modelling and reporting were well within the realm of the possible; the results, however, rapidly highlighted business model risk and created substantial ambiguity for the CFO, Audit Committee Chair and the Board.
Investors – Ramping Up Expectations For Climate Change Competence
At the same time institutional investors are gearing up on climate change. The fear of stranded assets and the risk of regulatory and litigation costs and an overwhelming R&D burden have prompted substantial investor activism in certain sectors including oil and gas, mining and automotive. This is now spreading to sectors previously considered to have low climate change exposure. Financial Services companies, for example, now need robust systems to understand climate change risk across their entire credit/investment/insurance portfolio. As pension funds and end investors increasingly favour green stocks and pressure investment managers to divest from climate change offenders, Non-Executive Directors face additional scrutiny. Leading global investors with a strong governance focus such as Schroders, CalPERS, Legal & General and Hermes, are also beginning to monitor climate change competence including at Board-level.
While investor focus on climate change grows, it is far from uniform and corporates and Boards are expected to respond to a myriad of questionnaires, surveys and rankings. Fidelio recently chaired an IR Society – ChapterZero UK Roundtable for IR Directors and Non-Executive Directors. IR Directors complained that the plethora of questionnaires coming from investors is not helping Boards to focus. Boards would, however, respond if the IR Director could make an unequivocal statement that ignoring climate change would exclude the company from access to $ x billion of capital. Once again we find companies looking for certainty where ambiguity is to be found.
The Fickleness of Consumers
Boards are only too aware that consumers may publicly espouse green credentials but at the same time be unwilling to reach into their pockets to pay for the incremental cost of greener technologies or products. But evidence is increasing that the consumer voice will readily lend itself to single issue campaigns and will certainly favour products that coincide with core values. And the younger consumer is most outspoken, for example on university campuses. Here too Boards must be alert to increasingly vocal consumer demands regarding climate change, even if those same consumers are far from consistent in how they translate their purchasing power into action.
Waiting for Godot
Frequently we hear Boards and Directors argue that whatever an individual company undertakes this is at best a drop in the ocean. A sector wide response is required across geographies and even then, unless government and regulators intervene, business alone cannot be expected to mitigate climate change risk.
Can we realistically expect government to take the steps that are needed to ensure Net Carbon Zero by 2050? As politics grapples with populism, Fidelio finds a dawning recognition in Boardrooms and Executive Committees that the days of predictable government are probably behind us at least in the short term. And the short term matters in tackling climate change.
Yes the Paris Agreement of 2015 was a major breakthrough, but its repudiation by the Trump administration surely increases the onus on corporates and Boards to be bolder in their approach to climate change.
Boards, Accountability and Climate Change
While much of the technical expertise regarding climate change resides at the executive level, Boards too are increasingly held accountable:
- Climate change litigation driven by investors and/or NGOs is likely to increase in particular in sectors already subject to regulation. The automotive and oil and gas sectors are prime examples.
- The World Economic Forum Climate Governance Initiative spells out the governance implications of climate change including the requirement for climate change competence at Board level:
Principle 2 – Command of the (climate) subject: The board should ensure that its composition is sufficiently diverse in knowledge, skills, experience and background to effectively debate and take decisions informed by an awareness and understanding of climate-related threats and opportunities.
- Investors too are beginning to assess Boards on their climate change competence with one global investor speaking openly of a nascent ranking of Board capability.
- Individual Directors may also be held to account for their personal carbon footprint. Following Remuneration could this be a new frontline between Boards and their activist investors?
Ambiguity and the Boardroom
It is evident that Boards across all sectors are exposed to climate change risk and will increasingly be held to account for their response to surely the greatest of emergent risks.
And while Board Members may crave greater certainty, this will not be forthcoming. Successful Boards will need to become comfortable with an even higher degree of ambiguity.
Independent Board Members, in particular, need to ensure that they are educated on the risks and opportunities arising from climate change. Equally the narrative that a company builds around its response to climate change may begin with the executive, but it should be challenged and ultimately endorsed by the Board.
Fidelio has a track record in enabling Boards to deal with complexity and we are committed to supporting Boards in their response to climate change through Evaluation, Search and Development. To learn more please contact Gillian Karran-Cumberlege.