Investors push for climate-competent boards
This is the first article in a three-part series about increasing the climate competency on corporate boards. Part one provides some context about investor expectations around board climate competency and the role corporate secretaries can play. The second installment will take a deeper dive into specific climate issues and concerns boards could address, and the final article will consist of responses and views of directors and governance professionals regarding next steps in this effort.
Large institutional investors concerned with carbon risk in their portfolios are calling for climate-competent boards – and individual directors – as part of increased shareholder activity emerging from the Paris Climate Accord signed earlier this year. At the same time, shareholders are consolidating new proxy access rights for director elections, giving them a greater ability to persuade corporate boards to increase their climate competency. Corporate secretaries can assist boards by ensuring directors have the information they need for decision-making on risk, opportunities and long-term strategy related to climate and sustainability issues. Director education programs on the latest climate science findings, technical innovations and risk-management metrics should be high on the to-do list of governance professionals.
Now that investors are pushing for climate-related issues to be elevated to the board level, business sustainability questions should become board or committee agenda items. Charters should detail whether these responsibilities reside with the board or in one of its specific committees. Climate issues provide an important context for decision-making and therefore should not be consigned to a silo created by how the board categorizes agenda items. Rather than being viewed narrowly in an environmental or CSR context, the COP21 Accord should be discussed by the whole board due to its implications for business strategic planning over the long term.
As large institutional investors increasingly seek to communicate with boards on sustainability issues, corporate secretaries can play a key role in supporting these interactions. The trend toward board-investor dialogue on climate issues will continue to accelerate. Earlier this year Calpers amended its corporate governance principles to require its portfolio companies to recruit board members with climate competence. The new principles explicitly identify experience and expertise in climate risk management. State Street Global Advisors has published a Climate Change Risk Oversight Framework for Directors as guidance for board members on overseeing climate risk in their portfolio companies. BlackRock CEO Larry Fink, in a recent letter to chief executives, writes: ‘Generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors facing companies today. These issues offer both risks and opportunities but, for too long, companies have not considered them core to their business – even when the world’s political leaders are increasingly focused on them, as demonstrated by the Paris Climate Accord.’
How boards manage material climate disclosure, understand business risks and opportunities, structure compensation incentives for sustainable strategies, and endorse financial support for lobbying and litigation aimed at keeping COP21 goals from being fulfilled will be questions investors put to boards. Directors should be knowledgeable and independent enough to engage management in thoughtful discussions regarding scenario analyses of reduced demand for carbon-based fuels, energy efficiency of housing, transportation and industry, and substitutes for carbon-intensive energy sources based on the constraints imposed by the COP21 agreement. Boards must have the information and agenda time to ask tough questions about carbon asset risk in their company business models and incorporate risk analysis into strategic planning. An important function for corporate secretaries could be to provide ongoing climate-risk education on the latest data and trends.
Long-term investors are thinking about how to evaluate gaps in board expertise, persuade nominating committees to recruit for these new skills and discern board refreshment plans when boards fall behind in best practices in diversity, governance and disclosure. Corporate secretaries might support director self-assessments and third-party board evaluations that help measure climate competency as a way forward. Sophie L’Hélias, CEO of LeaderXXchange says that ‘as climate-related risks are priced into their shares, companies will have to identify new channels to recruit directors with the requisite climate expertise.’
The National Association of Corporate Directors’ Oversight of Sustainability Activities Handbook states: ‘Value creation, long-term business resiliency, strategic risk management and experience to fill gaps and find new, non-traditional candidates and stewardship represent the essence of the board’s role in overseeing corporate sustainability activities.’
Karina Litvack, a director on Italian oil giant Eni’s board, believes bringing climate competence onto boards starts with adding individuals who have an awareness of climate science, an ability to grasp its business implications and a willingness to think independently and question traditional ideas. Speaking not as a member of Eni’s board, she says, ‘In order to avoid this expertise again becoming marginalized and turning into yet another window-dressing exercise, it also means ensuring such an outlook swiftly gains the buy-in of the whole board, thus becoming part and parcel of the board’s culture, knowledge base and approach to [integrated], long-term thinking. For this to happen, a climate-competent director must have the skill to work in close partnership with the chairman and CEO, whose leadership of the board and the executive team is essential to translate vision into execution.’
Corporate secretaries should be equipped to provide boards with the information and resources they need to prepare for the challenges of climate risk. They can provide access to resources on the latest thinking on the climate impacts on business, and help boards acquire the tools needed to achieve climate competency.
Richard Ferlauto is the former deputy director of the SEC's Office of Investor Education and Advocacy and a member of the governing board of the 50/50 Climate Project, an investor project pushing boards to respond more aggressively to deal with the risk of climate change