COP26: Placing the Spotlight on Boards

  • Carissa Duenas
  • Published: November 11, 2021
COP26: Placing the Spotlight on Boards

“Code red for humanity.”

That’s how UN Secretary General António Guterres described the recent climate projections from the Intergovernmental Panel on Climate Change (IPCC).

It, too, is the prevailing sentiment at the 26th Conference of the Parties or COP26, a summit attended by countries that signed the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC signatories agreed to keep temperatures well below 2 (preferably 1.5) degrees Celsius above pre-industrial levels and to secure net-zero carbon emissions by 2050. It’s the global community’s accepted threshold and standard to avoid potentially catastrophic changes to our planet.

THE ROLE OF BUSINESS IN THE CRISIS

The role of businesses cannot be overlooked in the environmental global crisis. In large part, corporations have gotten us to where we are.

Governments and global market players are beginning to understand that as well. It has become the catalyst for nations to make major pledges such as the following at COP26:

  • Over 100 countries representing more than 85% of the world’s forests committed to halting and reversing deforestation and land degradation by 2030.
  • 105 world leaders signed onto the Global Methane Pledge, a U.S. and EU joint initiative to cut methane emissions by 30% by 2030.
  • The U.S., U.K., France, Germany and EU said they would dedicate $8.5 billion to help South Africa decarbonize its coal-heavy energy system.
  • The U.K. said that at least 23 new countries joined a commitment to phase out and not build or invest in new coal power over the next few decades, bringing the number of signatory countries up to 190.
  • 25 countries have joined an effort that aims to end public financing of overseas oil, gas and coal projects by the end of 2022. Signatories include the U.S., U.K., Denmark, Canada, Italy and the European Investment Bank.

There are inherent repercussions to these pronouncements, and the mounting pressure on companies to act is felt the world over. And it is primarily up to the stewards of these organisations — the board of directors — to respond to the calls for quick, meaningful, and impactful change at this critical inflection point.

This article focuses on what the board can do to address this environmental crisis, and dives into how its related decisions ultimately affect the resiliency of the organisation.

HOW BOARDS CAN DRIVE CHANGE

Collectively, boards of business organisations are in a unique position to effect change. They have the capacity to reorient their organisations to prioritise, or revamp efforts, to address the climate crisis. From incorporating “green initiatives” into their own processes (i.e. paperless meetings, remote technologies to reduce their carbon footprint, etc.) to strategic “climate governance,” boards drive the narrative for environmental consciousness within their own companies.

Here are some approaches to accomplish this:

1. CONSIDER THE RISK MULTIPLIER OF CLIMATE CHANGE

At its 2019 annual meeting in Davos, the World Economic Forum published guidance on “climate governance” for corporations.

Climate governance is defined in this KPMG article as “the structure of rules and processes a company puts in place to manage its responses to the financial risks and opportunities of climate change.”

It goes on to cite two types of climate-related financial risks for businesses:

  • Physical risks – the risk that physical effects of climate change could damage or disrupt the company’s operations and/or supply chain, resulting in a reduced capacity to operate profitability or impact its sustainability. Examples would be hurricanes, floods, droughts and rising sea levels. 
  • Transitional risks– the risk that the company fails to anticipate and navigate the regulatory and market transformations (such as competitive and investor pressures, changing consumer behaviour) brought about by the global transition to a low-carbon, clean energy economy

The consulting firm Oliver Wyman puts these risks in a real-world context:

“Assets may be destroyed and loss of power and damage to transportation infrastructure can interrupt business operations. Even if companies emerge relatively unscathed, they can still be vulnerable to downturns in the local economy.” 

Looking at it through the lens of a risk model, it becomes apparent that climate change risks are not all that different from traditional risks that companies face. To dismiss or frame it merely as another “corporate social responsibility campaign” can potentially be a failure of corporate governance. 

It therefore makes a case for a rightful place in the board meeting agenda.

2. MAKE IT PART OF THE AGENDA

The importance placed on climate change risk by boards becomes concretised and evident only if it is included in the board’s meeting agenda.

Only 45% of directors in PwC’s 2021 Annual Corporate Directors Survey said that ESG (Environmental, Social, and Governance) topics were a regular item on the board’s agenda. It serves to highlight that most boards do not give climate risk the attention it deserves.

By engaging with COP26 and placing business sustainability and environmental impacts on the agenda, it gives the board ample time to focus and evaluate the organisation’s position to confront the challenges that climate change presents.

With its inclusion in the agenda, boards obtain a panoramic perspective to address the issue. 

Reporting

Although ESG reporting standards have yet to be clearly established and widely adopted, reporting on climate change risks faced by the company can already be assigned as a topic to one of the committees. This may make it easier to focus on issues such as overseeing and monitoring climate risk disclosures, as well as engaging with investors and stakeholders for transparency.

Climate change risk reporting provides boards the opportunity to have a clear message on sustainability risks and opportunities and explain how these align with strategic business value.

Strategic Planning

This article states that the impact of COP26 will trickle down to the following areas:

  1. Consumer behaviour and business revenues
    • Businesses have an opportunity to position and differentiate themselves 
    • Trends show that consumers will be willing to pay a premium for sustainable products and services post COVID-19
    • Sustainable consumption will be important
  1. Innovation and new business models
    • The falling cost of green capital investments and the increasing price of carbon emissions will create new opportunities
    • This can lead to the creation of new environmentally-friendly products and services — or entirely new business models.
    • For example: the use of alternatives to concrete such as building materials that use waste glass, plastic, or paper

By including reporting and planning efforts in the meeting agenda, directors are able to provide substance and structure to climate change risk discussions. 

3. EVALUATE BOARD COMPETENCIES AND COMMIT TO EDUCATION

But to fully understand the climate risk implications, boards must have the tools, education, and skillsets to make the best decisions on the issues it brings forth.

In the same PwC 2021 Annual Corporate Directors’ Survey, only 51% of directors say their boards have a strong understanding of how ESG issues like climate change impact the company. And perhaps more alarming, less than half of c-suite executives (47%) polled in 2020 believe their directors have a good grasp of the subject.

In order to maintain their competency to protect shareholder interests and provide appropriate oversight, this NACD article encourages boards to be “open learning systems, not closed systems relying on their eminence and their historical experience of markets that have changed so much from how they functioned before….” 

Climate change risks and issues may be unfamiliar, nor part of the job description for non-executive directors (NEDs) when they were executives. This can potentially render the board lacking in their competency to judge and decide on these matters.

Boards (and Chairs) can close the competency gap by:

  1. Ensuring ongoing education for the board to establish a baseline understanding and language around the issue
    • The climate learning program of Deloitte is a great example of this
    • Initiatives such as these should help directors ask management the right questions about its sustainability efforts and report on it clearly
  1. Engaging with experts when needed to increase the chances of “informed oversight”
  1. Establishing a meeting environment that encourages directors to ask questions

While directors don’t have to be climate-change experts, they are expected to have a foundational knowledge of the subject and an acute understanding of its consequences to the company. 

WHY ACT NOW?

Most boards adopt a “wait and see” attitude.

It’s easy to understand why. It’s difficult to adopt long-term thinking when short-term pressures for immediate positive results abound.

But those who act now to address climate change risks and consider sustainability into all aspects of their company’s operations will be in the best position to meet investor and stakeholder demands, as well as rise above competition in the emerging green global economy.

Understanding its implications is vital. Mitigating risks while reversing damage are key.

CONCLUSION

The pressing concerns and climate change issues presented at COP26 are here to stay. In fact, the hope is that they garner more attention and traction after the summit. 

Many companies are at an inflection point in their understanding of what it means to deliver value. Or at least they should be. It’s slowly being defined to be at the pocket where environmental, societal, and governance issues intersect with business profitability and sustainable growth. Boards who still believe that these are two mutually exclusive concepts will fall considerably behind. 

Never has there been a more opportune time for boards and companies to operate with a social conscience. It’s a unique position to be in. Boards have greater permission to shift and shape the important conversation on collective leadership and purpose — and redefine what those might look like in these critical times.