April 19, 2023
Authors
Key Points
- Boards are facing increased pressure to act on all aspects of sustainability, and especially on climate.
- A changed mindset on climate-related risks and opportunities is integral to a company’s transformation strategy and growth over the short, medium, and long term.
- BSR has identified lessons learned and nine steps to building a climate-competent board.
Recent years have seen an astonishing uptake of ambitious corporate climate goals. And recent weeks have seen an even more dramatic rise in activist action to boards and leadership on the very climate goals set by organizations.
Many companies have adopted climate change as a topic for board oversight—either directly or via climate commitments and reporting. As of early 2023, 2489 companies set Science-Based Targets, and 1748 made net-zero commitments through the Science Based Targets initiative (SBTi). These commitments represent prudent business and vital ambition. They also entail a level of corporate disclosure, risk management, and business transformation that should put net zero-aligned transformation squarely on the agenda for the Board of Directors.
The major challenge for today’s boards and the companies they oversee is how to fulfill these commitments.
Climate Transformation on the Agenda
Boards are facing increased liabilities, lawsuits, resolutions, and elections on all aspects of sustainability, especially climate. This is driven by various increasingly well-known factors, including:
- Rising investor interest, especially institutional investors who expect board oversight and fluency on climate.
- Growing regulations such as the Corporate Sustainability Reporting Directive, the Corporate Sustainability Due Diligence Directive, the upcoming requirements from the US Securities and Exchange Commission (SEC), and the release of sustainability-related standards by the International Sustainability Standards Board, which include disclosures related to board oversight, expertise, and sign-off on targets and performance.
- Increased scrutiny on “greenwashing,” with a recent wave of rules across various jurisdictions, including Australia, the US SEC, the EU, and the UK Competition Markets Authority bringing about a zero tolerance on net-zero greenwashing.
These factors combined are rallying for a changed mindset by boards to act on climate-related risks and opportunities, as part of the company’s transformation strategy and growth over the short, medium, and long term.
Lessons Learned from Board Engagement
BSR has worked closely with corporate boards on climate topics. In doing so, three lessons stand out.
First, make climate relevant for the individual business, not just generic training on keywords. We recently conducted a training for a global beverage and agriculture company. After highlighting systemic climate and nature-related risks, BSR led a discussion on how they are relevant to the individual company and its board. The company could then meaningfully consider board oversight of risk management, strategy, and assurance of financial statements.
Second, respect the role of the board vs. management. For instance, BSR recently conducted a training for directors on the boards of private equity-owned companies regarding board oversight of management-led materiality process. It was essential to delineate respective roles, as well as to equip boards with enough knowledge to provide effective oversight.
Third, create shared leadership. In another example, we conducted a joint climate scenario exercise with the executive team and board of a European healthcare company. The exercise demonstrated the importance of getting key parties around the table to build a baseline understanding of climate issues, identify the relevance of climate for business, and agree on a coordinated plan for executive action and board oversight.
Climate Transformation is Not a One-Shot Effort
In March 2023, BSR engaged a small group of cross-industry members from our Transform to Net Zero (TONZ) collaborative initiative who are committed to enabling the business transformation needed to achieve net zero.
We explored the following questions and challenges:
- How are you engaging with your board on climate transformation?
- What steps has your board taken to create support for managing a net-zero transformation?
- Does it engage in related scenario exercises?
- How does your board sign off on climate targets?
- How does it monitor progress?
Member companies shared strategic insights on how they engaged their boards on climate:
- Transformation must be driven by the CEO and board with “tone at the top.”
- ESG and sustainability teams are the fastest growing internally, impelling more cross-company collaboration, continuous training, and upskilling, including for executives and boards.
- Board committee structure is important, with cross-committee terms of reference and focus. For some members, a dedicated sustainability committee provides oversight across the strategy and programs, with continuous reviews from audit and risk committees.
- Scenario analysis is a key tool to test the resilience of business strategy, and it’s important to tailor the conversation to a board audience.
Climate oversight is a continuous leadership journey for chief sustainability officers (CSOs), executives, and boards alike. Some company leaders are engaging in fireside chats with employees and stakeholders to inspire transformative change. It takes heart and humanity, as well as continuous direction.
Nine Key Steps to Building a Climate-Competent Board
From experience with member company executive teams, BSR has identified three strategies to activate boards:
1. Competencies and structure:
- Build capacity through tailored training and education for the company’s specific circumstances.
- Incorporate climate competencies into the board skills matrix.
- Understand which board committees are charged with climate oversight and adapt messaging to their respective purviews.
2. Strategy and risk:
- Emphasize company risks associated with climate change and with failure to meet climate commitments (e.g., litigation risk, public relations risk, regulatory risk).
- Use scenario analysis to build shared understanding of material climate issues, identify business implications and foster joint problem solving.
- Elevate expert/stakeholder perspectives and impacts through briefings, direct engagement, advisory councils, etc.
3. Oversight:
- Anticipate governance risks related to climate oversight (including board elections, proxy votes, shareholder resolutions).
- Encourage rigorous audit committee oversight and verification in disclosures.
- Evaluate executive remunerations tied to climate and integrate with sustainability across social, human rights, and governance.
Since companies have disclosed and committed to board oversight of climate-related risk and targets, now they are on the hook to live up to those commitments.
Moreover, the latest Intergovernmental Panel on Climate Change (IPCC) synthesis report shows that we must speed up the scale and pace of climate action commensurate to the latest science. Business can take effective, credible action to meet the moment. And this includes an important active role for boards on climate and sustainability at large, in a continuously uncertain world where climate-related risks, opportunities, and the associated net-zero aligned business transformation need urgent attention by all, including from the top.
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