29 June 2017 – Well-run companies stand to benefit from the additional attention investors and their regulators are paying to climate change risk management. Boards must understand the strategic nature of the issue and not delegate it to environmental specialists, says Lindsay Hooper, Executive Director, Education, University of Cambridge Institute for Sustainability Leadership.
The expectations on companies, and their management, to manage and disclose their exposure and governance relating to climate change related risk were raised today with the publication of recommendations from the industry-led taskforce on climate-related financial disclosure (TCFD). The Taskforce was commissioned by the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system.
The recommendations are that companies disclose and articulate their approach to managing climate risk (and opportunity) alongside other material risks; specifically on their approach to governance, strategy, risk management, metrics and target-setting.
Managers and Board Chairs can therefore expect more, and more sophisticated, scrutiny from institutional investors and other stakeholders on the climate-readiness of their business strategy and operations.
"Over the course of 2017 we intend to engage companies most exposed to climate risk to understand their views on the recommendations from the TCFD and to encourage such companies to consider reporting against those recommendations."
BlackRock, 2017
Many companies have formally expressed their support for the new voluntary guidelines. This is because well-run companies stand to benefit from this increased scrutiny of companies’ governance and strategy in this area. They have already assessed and analysed the commercial implications of climate change for their business. They have considered the potential impact on input costs, physical disruptions, business model disruption, stranded assets, legal risks, brand and reputation. They have begun to integrate this insight into their strategy, governance and operations. When it comes to investor scrutiny or new regulatory requirements, they are on the front foot and able to deliver an authentic and credible message, and even secure competitive advantage.
Leading companies have not waited for government regulation or investor pressure. They are setting targets for 100 per cent renewable electricity use, investing in energy efficiency and renewable energy, setting ambitious CO2 reduction targets and reporting their progress.
But investors and central banks are now taking a close interest. Investors are concerned about the value at risk in their portfolios and central banks and regulators are concerned about potential risks or rapid repricing of carbon intensive assets to the stability of the financial system. This is leading to pressure on business and financial institutions to disclose how they are assessing and managing these risks.
Shareholders at the Exxon Mobil AGM in June this year backed a resolution requiring the oil major to publish an annual assessment of the impact of climate policies on its business. In May, Occidental Petroleum shareholders passed a similar motion. Although the strongest investor pressure today is felt by fossil fuel companies, this should be seen in the context of a wider trend of ‘major investors putting industry on notice that climate change matters’. Shareholder sophistication and resolve to understand the risks will affect all industries. Executives in our network are telling us that investor questions on climate change risk are increasingly common.
"For directors of companies in sectors that are significantly exposed to climate risk, the expectation will be for the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk."
BlackRock, 2017
Although climate change is the current hot topic, businesses should anticipate scrutiny for issues such as their water-related risks, their impact on waste and pollution levels, and their progress in addressing social inequality as investors and regulators increasingly recognise the commercial implications of the fundamental unsustainability of our economies.
Companies that fail to anticipate the scale or pace of change are vulnerable. Volkswagen’s systematic gaming of vehicle emissions tests is likely to cost the company tens of billions of Euros in fines and the Chief Executive is being investigated over the timing of disclosure to investors (£). This raises questions around governance but also about the level of preparedness and commitment the company showed to megatrends – in this case climate change and emissions reduction – affecting an industry centred on the production of combustion engines. The German energy companies that missed the trend towards renewable energy have faced record losses. RWE’s Chief Executive blamed their lateness into the renewables market for a €2.8bn loss in 2013 alone.
Management of these risks cannot simply be relegated to technical experts in the sustainability department. This is an issue of fiduciary responsibility linked to the long term value of the business. That puts Board members who hold personal responsibility for acting in the best interests of the company, for exercising due diligence, and for complying with disclosure requirements in the hot seat. The world’s largest asset manager BlackRock has not only urged companies to be ready to discuss their use of climate-risk disclosure practices but has warned it will consider voting against the re-election of directors who do not have demonstrable fluency in how climate risk is understood and managed.
Individual Board directors need to take responsibility for ensuring they have the insight they need to discharge their responsibilities to ensure that sustainability considerations are integrated into governance processes. Competent Boards should be in a position to challenge and support the executive, whilst engaging effectively and confidently with investors and regulators.
The good news for Board directors is that sustainability opens up new possibilities for thinking about the future, and for aligning business responsibilities with wider societal interests in ways which generate business profits and put humanity on a sustainable economic path at the same time.
