The links between climate change and business are becoming increasingly evident and inextricable. Business decisions and actions will slow or accelerate climate change, and climate change will drive risks and opportunities for business. Increasingly, board directors are expected to ensure that climate-related risks and opportunities are appropriately addressed. However, limited practical guidance is available to help board directors understand their role in addressing these risks and opportunities.
On the one hand, good governance should intrinsically include effective climate governance. To this point, climate change is simply another issue that drives financial risk and opportunity, which boards inherently have the duty to address with the same rigour as any other board topic. On the other hand, climate change is a new and complex issue for many boards that entails grappling with scientific, macroeconomic and policy uncertainties across broad time scales and beyond board terms. In this regard, general governance guidance is not necessarily sufficiently detailed or nuanced for effective board governance of climate issues.
This work seeks to provide useful guidance to boards, acknowledging that climate governance is both integral to basic good governance and fraught with complexity. The result is a set of principles and questions to guide the development of good climate governance – designed to help the reader practically assess and debate their organization’s approach to climate governance and frame their thinking about how the latter could be made more robust.
The principles and guidance build on existing corporate governance frameworks, such as the International Corporate Governance Network’s (ICGN) Global Governance Principles, as well as other climate risk and resilience guidelines, such as the recommendations of the Financial Stability Board’s Task Force on Climate- Related Financial Disclosures (TCFD). The drafting process involved extensive consultation with over 50 executive and non-executive board directors, as well as important organizational decision-makers, including chief executives, and financial and risk officers. Input was also gained from experts from professional and not-for profit organizations. This consultation took place through a series of face-toface and phone interviews over the course of four months, helping to shape and test the principles and guiding questions.
This paper opens with details on the global climate context, addressing changing regulations and increasing expectations of boards in the climate arena. The bulk of the paper presents the eight climate governance principles and their associated guidance. The eight principles are not presented in order of priority or in a fixed sequence, but do follow a logical flow and build upon each other. For example, principles 1–4 lay the foundation for Principle 5, and principles 6–8 help facilitate the endurance of attention to climate-change issues in the long term. To make these principles practical and applicable, each principle is accompanied by a set of guiding questions that will help a company identify and fill potential gaps in its current approach to governing climate. The paper is also supported by chapters that provide additional technical legal and investor context in the Appendix.
*A translation by Chapter Zero Brazil
1. Climate Accountability
The board should take responsibility for ensuring the company’s long-term resilience to climate risks.
2. Subject Command
The board should be properly informed about climate-related risks and opportunities and able to make relevant decisions.
3. Board Structure
The board should implement the right board and committee structures to ensure that climate risks and opportunities are understood, managed and reported.
4. Materiality Assessment
The board should ensure that management fully identifies climate-related risks in the short, medium and long-term, assess their materiality, and takes appropriate action according to the materiality of the risks.
5. Strategic Integration
The board should ensure that management factors material climate-related risks and opportunities into the company’s strategy, risk management process and investment decisions.
The board should align executives’ incentives with the long-term success of the business. This may include climate-related targets in executive incentive schemes.
7. Reporting and Disclosure
The board should ensure that the company discloses its material climate-related risks, opportunities and strategic decisions to all stakeholders – especially investors and regulators. These disclosures should be included in financial reporting.
This initiative sought to make these principles both broadly applicable and practically useful for organizations. However, these principles should not be taken as universally applicable to all companies across sectors and jurisdictions. Moreover, they do not intend to be specifically prescriptive in any way. Rather, the hope is that they will serve as tools to help elevate the strategic climate debate and drive holistic decision-making that includes careful consideration of the links between climate change and business.