Climate risk governance | Grant Thorton

An actionable imperative for advice

Boards of directors have an important role to play as companies take action to address the physical and economic transition risks induced by climate change. Public and private companies face increasing demands for information and progress on climate issues from a wide range of stakeholders, including not only investors, but also customers, employees and communities. . It is imperative to understand the macroeconomic issues related to the financial exposure of organizations to climate change. As the board’s oversight responsibility extends to the governance of climate-related risks and opportunities, it is critical that directors ensure they are well positioned to meet these new challenges.

On March 21, 2022, the SECOND proposed disclosure requirements for public companies. Among other requirements, the proposed rule asks companies to disclose more information about climate change governance, strategy and risk management. Given the importance of the board’s role in these disclosure matters, it is necessary to consider the board’s oversight role with respect to the risks and opportunities posed by climate change.

The role of the board

In recent years, enterprise risk has become more complex and interrelated. Climate change is an emerging critical risk for many businesses. Boards of directors must understand and fully assume their fiduciary responsibilities with respect to the oversight of climate-related risks. Therefore, each director should have a common understanding of their individual, committee, and board-wide responsibility for climate risk oversight.

Proper board governance may require additional training for directors or the recruitment of members with the knowledge and skills required to provide strong management oversight as the business identifies and responds to related risks and opportunities. to the climate. Boards have assigned governance responsibilities in different ways: some boards have formed specific environmental, social and governance (ESG) committees, others have assigned responsibilities to existing committees, while others have left the responsibilities to the entire board of directors.

As boards navigate their approach to climate risk governance, questions to consider may include:

  • How does the board oversee overall enterprise risk management?
  • How does the board monitor risks and opportunities related to climate change? in particular, how does the board ensure that all members are aware of and understand climate risk?
  • How does the board integrate climate change risks and opportunities into overall enterprise risk management?
  • Are there any particular risks or opportunities related to climate change that require special attention from the board?
  • Do external stakeholder expectations, such as investor mandates or changing client preferences, warrant special board attention?

Oversight of management response to climate risks and opportunities

While the board is responsible for governance of climate-related risks and opportunities, management is responsible for designing, implementing and executing the organization’s response. To assess the appropriateness of management’s approach, directors can ask questions such as:

  • How is climate risk integrated into the organization’s enterprise risk management program?
  • What climate-related demands have emerged from investors and other stakeholders?
  • What are the risks and opportunities along the organization’s value chain? For example, are major suppliers at risk? Are there opportunities to increase market share related to investment in renewable technologies? Are key customers looking for more sustainable options?
  • How does the workforce perceive the company’s commitment to environmental sustainability?

As stakeholder sentiment and expectations are rapidly changing, it is important to periodically review these topics with management and communicate this intent to management.

The board may also need to consider the effectiveness of the company’s actions and its performance against climate-related goals. In cases where the company has not made as much progress as expected, the board needs to understand the cause. In cases where there may be a lack of organizational commitment or buy-in, the board may consider what support it can provide to management to facilitate progress. For example, to boost organizational commitment, some companies are now including sustainability goals in executive compensation plans. If the board is not yet ready to implement sustainability in executive compensation, it can still express to management its expectations for periodic updates against company plans and data points. specific that he would like to see.

Guide external disclosures

Companies have become more aware of the relevance of climate change, as evidenced by increased voluntary disclosures on climate risks and related opportunities. Disclosure of climate change has grown rapidly in recent years; in their 2020 sustainability statements, 397 companies in the Russell 1000 Index indicated that they had responded to the CDP (formerly Carbon Disclosure Project) and, of the 92% of companies in the Russell 1000 Index that produce a sustainability report, 38% referred to the Task Force on Climate-Related Financial Disclosure (TCFD). Directors and management of private companies face increased attention on sustainability and climate risk from private equity firms, lenders and clients. While SEC disclosure rules may not apply to private companies, the expectation to develop, execute, and report on corporate climate strategy and related progress remains.

Since the start of 2021, the SEC has reported increased attention to climate change disclosures, reminding registrants of their existing disclosure obligations under current SEC principles-based disclosure requirements and also highlighting comment areas in SEC filing reviews. These initiatives, coupled with the recently released proposed rule, respond to investor outcry for consistent and comparable climate disclosure. The SEC rule will bring both increased scrutiny of climate change risk disclosures and clarity to investors and other stakeholders seeking to understand and compare risk exposure across companies.

Whether disclosure is voluntary or mandatory, boards should provide appropriate oversight of external disclosures and be aware of the potential legal risks of sharing materially incomplete or misleading information. To promote fair and balanced disclosure, boards should encourage the use of accepted disclosure frameworks and standards. In the case of a voluntary disclosure, boards may ask management how the various disclosure options were evaluated. In all situations, the board should understand how management has ensured that the information provided fairly reflects the company’s environmental footprint, strategy and progress, and how management has conducted appropriate review of external information.

Boards can also encourage management to consider climate-related data and disclosure as a tool. Proactive companies will reap significant benefits from collecting, analyzing and acting on climate-related information. For example, understanding the main sources of a company’s carbon footprint and finding ways to reduce its overall environmental impact can generate value for customers, employees and local communities. Boards of directors can ask management to consider how climate-related data could influence corporate decision-making or how management-identified metrics and targets help the company manage climate risk.

Increased investor monitoring

With investors focusing on sustainability, and climate risk in particular, directors could come under increased scrutiny in this and future proxy seasons. Directors can be held liable if their organizations fail to address climate change appropriately. Major asset managers, such as BlackRock, State Street and Vanguard, recently shared their 2022 voting policies, which include heightened expectations around climate change disclosure.

Helen D. Jessen