We are constantly reminded of the urgency to act as we witness the impact of climate-related events on peoples’ lives and their communities around the world.
The signing of the Paris Climate Agreement in 2016 was a watershed moment as the world committed to transition to a low carbon economy limiting the increase of global average temperature to 2°C.
Supported by academic research that shows doing good does not entail a trade-off to do well, a growing number of investors are acknowledging the long-term impact of climate change on their investment performance and therefore are integrating climate change aspects in their investment analysis and decision making processes. Investors are now turning their attention to boardrooms for effective management oversight on these issues.
Before the Paris Climate Agreement’s ink was dry, CalPERS, the largest U.S. public pension fund with over $350 billion in assets, revised its Global Governance Principles to add climate change risk expertise to the desired board skills. Other global investors are moving in the same direction as initiatives such as the Task Force on Climate-related Financial Disclosure (TCFD) and the EU Action Plan on Sustainable Finance bring more investors and companies into the fold.
The EU Action Plan could be a game-changer: It requires investors to disclose how they integrate Environmental, Social, and Governance (ESG) factors in their risk and investment decision-making processes, and—for the first time—considers demanding that boards develop and disclose a company sustainability strategy with measurable targets for management.
Tying company sustainability strategy and boardroom oversight to investor disclosure is a logical step to get investors to focus on the long term. Who better than directors elected by shareholders to ensure that management integrates climate change and sustainability in a company’s long-term strategy and places it on the board’s agenda for discussion and a vote?
These developments trigger investor demand for meaningful discussions with board directors on climate change and sustainability and present a radical change for boards. Of those that authorize directors to engage with investors, discussions rarely include climate change and sustainability but do generally cover executive pay and governance matters.
Though PwC surveyed directors of companies only in the United States, its 2017 Annual Corporate Directors Survey illustrates the gap boards need to close to adapt to this new investor paradigm: 42 percent of the directors surveyed felt that environmental concerns would not affect company strategy over the next three years, while 40 percent felt that climate change should have no impact at all.
To accelerate board awareness, LeaderXXchange and Spencer Stuart’s European Board Practices launched their Investor/Director Dialogue on Climate-related Risk Management series in 2016. When awareness-building showed its limits, the Investor/Director ESG Working Group was formed. Comprised of six directors and six investors, the group uses a collaborative and systematic approach to create a roadmap to help boards rapidly adapt to the new normal.
Our working group has made several key findings:
First: Board directors lack a common understanding of climate change and sustainability issues more broadly. Our group found that few companies seek to bridge that gap despite the proliferation of conferences, university programs, and organizations that offer training.
Companies should be encouraged to provide board members with in-house training on climate change and sustainability or offer opportunities to obtain it outside the company.
Second: While sustainability appears more frequently on the agenda of board committees that deal with corporate social responsibility, risk, and compensation, it is rarely on the agenda of the full board.
Committees can dive deeply into these topics, but putting them on the board’s agenda demonstrates their strategic importance to management.
Third: Climate-change risk management and sustainability issues are driven from the top. We found that CEOs and heads of sustainability most frequently raised climate change and sustainability matters with the board, while CFOs and investor relations discussed it least.
As the financial gatekeepers of a company, CFOs and investor relations officers need to address climate change and sustainability issues or risk signaling to the board and investors that management does not see the strategic importance of those matters or grasp their financial impact. Instead, sustainability is handled as a mere marketing exercise. Taking into account the increased importance investors place on integrated thinking and reporting by their portfolio companies, CFOs need to step up.
The working group’s upcoming roadmap aims to help investors and directors work together to leverage the new regulatory environment, unprecedented environmental and social challenges, and disruptive technological innovation to strengthen business models and to improve performance. This is critical for investors who manage the savings and pensions of citizens around the world and for directors who serve on boards of companies with new risks to control and opportunities to grow.
 https://www.pwc.com/us/en/services/governance-insights-center/library/annual-corporate-directors-survey.html. The survey is based on views of public company directors from across the United States. 886 directors participated in the survey (84 percent men and 16 percent women).
This post comes to us from Sophie L’Helias, a senior fellow at The Conference Board and Governance Center and the founder and president of LeaderXXchange, and from Nina Hodzic, a member of the LeaderXXchange advisory board.