The board’s role in climate change governance

The board’s role in climate change governance: A thorough guide to help you better understand your role as a director in this area. 

Climate change challenges companies in many aspects. Modern boards face questions over climate policy, climate strategy, and the company’s impact on the local environment. There are many conflicting stakeholders to please.

Nowadays, we are seeing a big enough shift towards a low-carbon economy that most industries will become involved in the effort, whether they want it or not. This requires most company boards to step up and take a proactive approach to climate strategies. 

Let’s take a closer look at what this means:

Climate change governance in business? It’s all about the rules, processes, and structures companies use to handle the financial ups and downs caused by climate change. It’s primarily proactive – doing the right thing now to future-proof your business and its stakeholders. 

The board is responsible for ensuring proper climate governance. Like any other element of governance, this means spotting risks, sizing them up, managing them, and being upfront about them with stakeholders. In the meantime, the board must also set goals and monitor progress for accurate reporting.

Wherever risk occurs, it’s the board’s duty to look after the company’s best interests. Ignoring these risks could mean legal headaches and a hit to the bottom line. Key ingredients for effective climate governance include board involvement, linking executive pay to climate performance, and ensuring the top dogs have the necessary climate know-how.

The board needs a solid structure and the right expertise to handle climate-related risk. It needs to set clear goals and integrate them into the company’s strategy. Knowing how much risk the company can stomach is also key.

Climate-related risk can come in multiple forms:

• There’s the physical risk that comes from the company’s vulnerability to climate fluctuations (e.g. if premises are in a flood zone, hurricane-prone regions, or areas susceptible to drought). 
• There’s the reputational risk that comes from the company’s position on climate change. These days, it’s a big decision to be pro, anti, or silent on climate change. Any of them could land you in trouble if it doesn’t please a group of stakeholders. 
• And then there’s the legal risk around climate change, coming from the company’s compliance performance. Your ability to issue adequate climate reporting in time and with the right details is a crucial metric for your business success.

One of the biggest responsibilities around climate governance is complying with the rules. Things have shifted massively in the space over the last decade. In general, laws are stricter and demand more reporting, which the board is responsible for overseeing. 

The International Sustainability Standards Board (ISSB) is setting the bar with global standards for sustainability disclosures. They’re building on the Task Force on Climate-related Financial Disclosures (TCFD), which recognises climate change as a threat to the whole financial system. The ISSB is now monitoring climate-related disclosures, taking over from the TCFD.

The Securities and Exchange Commission (SEC) had drawn up new climate disclosure rules in the US, but things began to stall when Donald Trump won the presidency. His agenda is very much anti-ESG and anti-red tape, but this can create climate governance problems in itself. 

Over in the European Union, it’s a different story. The bloc is going all in with the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS). The CSRD brings in beefed-up reporting for loads of companies in the EU. It’s based on “double materiality” – reporting how sustainability affects the business, and how the business affects people and the planet. The CSRD will apply to many EU and non-EU companies as long as their presence inside the bloc is big enough.

Boards that integrate climate governance into strategy are vital in setting ambitious carbon emissions reduction goals and checking on progress. They need to set credible net-zero targets and weave transition plans into the business strategy. 

More companies are adopting science-based targets, which need to be bold, have clear milestones, and be transparent.

Keeping tabs on progress needs a thorough carbon audit. Boards must ensure structures are in place to oversee the climate transition plan and monitor performance against targets. The Abatement Capacity Assessment Framework can help measure how much emissions can be cut. Boards should get third parties to verify emissions data.

• Enhance Board Expertise: Get the board climate-savvy through training and expert input.
• Formalise Accountability: Assign roles for climate change governance at the board level.
• Integrate Climate into Strategy and Risk: Make climate part of the business and risk strategy.
• Set Ambitious Targets: Set science-based targets for cutting greenhouse gas emissions.
• Monitor Progress Rigorously: Check progress against climate targets regularly.
• Ensure Transparent Disclosure: Be open about climate info and follow regulations.
• Engage Stakeholders Actively: Listen to stakeholders on climate action.
• Embrace Sustainable Opportunities: Jump on sustainable business and innovation chances.
• Promote Circularity: Adopt a circular economy approach.
• Align Incentives: Link executive pay to hitting climate goals.

The board’s role in climate change governance – The Corporate Governance Institute