A practical guide to help boards become more climate-competent

This is the final article in a three-part series about increasing climate competency on corporate boards. On the heels of the second installment, which took a deeper look at specific climate issues and concerns boards could address, the author suggests key ways that corporate secretaries can help their board members get up to speed on climate-related issues.

Corporate secretaries’ ever-evolving corporate governance responsibilities will now likely include staying abreast of climate-related compliance issues as they rise to the board level. Boards need to understand and be prepared to amend aspects of financial risk management and business strategy that may call for a new approach as a result of new regulation that countries may pass to reduce carbon emissions in accordance with the Paris COP21 climate agreement. Here are 10 ways corporate secretaries can support boards to increase their climate competency:

1. Help directors understand how important climate-related issues are to a company’sinstitutional investors. These investors hold directors accountable for risk management and business strategies, which are the purview of the board, and now often explicitly identify climate change oversight as a board-level responsibility. Providing assistance to independent directors, who are not part of the company’s managerial structure and therefore more in need of information and access to well-informed sources, may be particularly important. Advice to directors on best practices could include benchmarking against peer groups and introducing incisive economic analysis of carbon impacts such as stress-testing various business strategies against the 2 degree Celsius limit imposed by COP21.

2. Work with the board chair to ensure the board agenda includes climate-related issues relevant to board-level decisions. Help design meeting agendas that make room for climate impact discussions and that create opportunities for senior management responsible for sustainability practices to make board presentations, with time allotted for follow-up discussion and debate.

3. Stay up to date on how climate-related commitments emerging from COP21 and governmental regulations may have an impact on the company, and be prepared to communicate changes in these areas to the board chair and other directors. As examples: in the utility sector, the Environment Protection Agency’s Climate Power Plan affects the strategies of large carbon emitters; for real estate assets, as sea levels rise and weather-related catastrophes increase, state insurance regulators may impose new requirements; and states such as California with large economies are moving toward new climate compacts that will severely limit carbon emissions.

4. Offer support and guidance to the board for robust engagement with institutional shareholders. As corporate secretary, you should discuss with board leaders the importance of focused and productive engagement with long-term shareholders, and not be the foil that prevents access to board members. Advance meetings help prepare directors for those discussions by reviewing climate-related issues related to strategy, risk, compensation and board composition that may be of interest to shareholders. Investors, particularly in the context of proxy access, are also interested in an unfiltered assessment of board views and members, so this is the best opportunity for developing trust and building relationships. Suggest that these meetings are true dialogues with give and take, rather than monologues delivered by the meeting chair. Also, be mindful of Regulation Fair Disclosure and report any material information to investors as may be required, but do not use this as an excuse for limited discussion.

5. Prepare proxy materials that effectively communicate the board’s views on climate and sustainability to shareholders. Proxy statements might include:

• A letter from the board highlighting the value proposition of the company that addresses sustainability and climate issues
• A specific section dedicated to the environment and sustainability
• Summaries of key charter provisions for all committees highlighting those responsible for climate-related issues
• Better information on directors, such as an expanded section on director qualifications and diversity
• A matrix identifying experience, background, skill sets (such as climate risk management) that include key elements for understanding the full diversity of board membership
• Easy-to-read explanations of financials and key data points with highlights displayed in explanatory graphics
• Integration of climate-related issues in relevant sections, such as financials, risk disclosure, CD&A and audit committee oversight
• Finally, to the extent that board-shareholder engagements have specific agreed-upon outcomes, the engagement process and progress toward implementation could be described in the proxy.

6. Promote clear and comprehensive disclosures in the 8K, Regulation SK reporting, CD&A and other relevant filings about material impact of climate on business planning and operations. Consider integrated reporting especially regarding climate issues, which have leaped from environmental and social impacts to the financial bottom line. One important resource is the Task Force on Climate-related Financial Disclosures (TFCFD), chaired by Michael Bloomberg, which is drafting a voluntary framework for key climate-related items that could be incorporated into financial reporting. Together with the Sustainability Accounting Standards Board (SASB), which examines sustainability issues by industrial sectors, the TFCFD provides specific, industry-vetted guidance on reporting. Summary disclosure documents written in plain English, combined with layered electronic disclosures linked to underlying data sources, and the use of interactive data protocols (such as XBRL) allow for streamlined and efficient disclosure materials that are both simple and contain data relevant to specific investor interests.

7. Keep attuned to new guidance and regulatory requirements from the SEC, as well as stock exchange market listing standards. In July the SEC finished soliciting comments on its concept release on SK disclosures and ESG reporting matters. Next year, a new set of SEC commissioners will be under pressure from investors to greatly enhance and mandate certain climate-related information. In addition, late last year the World Federation of Exchanges approved formal guidance for sustainability disclosures that are designed to be implemented by member exchanges on a voluntary basis. As part of the UN’s Sustainable Stock Exchanges effort, many experts expect adoption of disclosure guidance at the individual exchange level in the coming period.

8. Make effective use of annual meetings, which usually offer the only opportunity for the board to interact with general shareholders. Annual meeting agendas could include a report on the company’s climate goals and progress toward meeting the potential mandates that could be created as COP21 is implemented. Shareholders attending the meeting who present resolutions should be given the time to explain the rationale for their actions, and time for questions should be programmed into the meeting. Corporate secretaries could also arrange for shareholders to be introduced to directors and committee chairs either before or after the formal meeting. Electronic platforms for annual meetings can also create opportunities for delivery of all types of investor-requested data, including data regarding carbon footprints and emissions.

9. Assist the chair or presiding director with board development and education programs. The National Association of Corporate Directors has produced a handbook on sustainability for directors and the Conference Board increasingly devotes resources to benchmarking and evaluating corporate sustainability practices at the board level. Third-party director evaluations should be more broadly used to measure climate-related awareness and competency.

10. Stay up to date on best practices by participating in programs that examine board climate competency and sustainability initiatives. The International Corporate Governance Network and the Council of Institutional Investors, as well as Ceres and SASB, increasingly offer educational opportunities and focus programming on climate issues relevant to directors.

Richard Ferlauto is a governing board member of the 50/50 Climate Project, which is working to improve the climate competency of boards and directors. He has been a deputy director in the office of education and advocacy at the SEC. He also serves on the advisory board of the Weinberg Center for Corporate Governance at the University of Delaware, which is organizing a forum on director climate competency for October 6, 2016.

For more information on the forum, please click here.