Corporate Climate Governance

By Amlan Shome

26th January 2022

To avoid the worst effects of climate change, establish resilient societies and safeguard vulnerable people, urgent policy reforms, investments, and leadership are required. This can only happen if business incentives are aligned with climate action and are backed up by transparent and responsible governance. Establishing rights and norms and having the competence to implement them are all part of strengthening governance. Regardless of the subject's complexity, board members must engage and understand their responsibility to shareholders and the broader stakeholder group.
 

Climate governance

 

Essentially, climate governance is a set of rules and practises that a firm implements to manage its financial risks and possibilities due to climate change. Building efficient collaborative systems to regulate our impacts on the climate system at the global level. On the other hand, it poses unique obstacles. One is the difficulty of communicating scientific information about our global climate and planetary systems to the general public and policymakers due to the complexity of the underlying research and the progressive refinement of scientific knowledge about our global climate and planetary systems

 

 

Climate Change Risk

 

Climate change  action involves significant transparency components, in addition to moral and business imperatives. Many of the world's major institutional investors have joined politicians, customers, and employees in calling for firms and their boards of directors to be more proactive about climate and sustainability, as well as enhanced disclosures. This presents a big challenge for businesses, which must now take proactive, transparent actions to strengthen climate change governance and reporting.

Climate risk disclosures are required in many businesses. It threatens to disintermediate some businesses. For example, it threatens the coal sector not because mining coal will become more difficult in a warmer climate but because green technologies have grown more cost-effective than coal. Coal firms are being digitally disintermediated. As a result, they must reinvent themselves, which means their boards must rethink their organisational purpose and make the necessary expenditures to achieve this new purpose.

The interaction of a company's physical assets with the physical manifestations of a warming environment is referred to as physical risk. This could immediately affect the company's asset base, such as infrastructure loss due to extreme weather or rising sea levels. It can also indirectly impact businesses, such as when climate change disrupts supply networks, consumer bases or global economic health in other countries. Transition risk is the second major category, referring to the commercial dangers created by society's change to a low-carbon, circular economy. It will be unable to predict and navigate the legislative and market changes resulting from the worldwide shift to a low-carbon, clean energy economy.

 

 

Climate governance as a board responsibility

 

Climate change is a possible strategic risk for businesses, and it is the board's responsibility to recognise and handle it like any other strategic risk. Directors have a fiduciary duty to promote the company's success and act with due care, skill, and diligence, whether or not the climate is listed as a fiduciary duty under the corporate governance rules. A potential failure of corporate governance is recognizing, assessing, dealing with and reporting major climate hazards. If board members or their corporations fail to detect, respond to, or disclose major climate hazards, they may face legal action. Directors of firms that operate in industries that are particularly exposed to climate risks, such as energy, transportation, agriculture, food
and forest products, materials and buildings, and financial services, face a high risk of exposure. Board members can assist organisations in developing a comprehensive strategy for dealing with climate change risks and possibilities. To be efficient in today's world, boards must add a diverse set of skills to their ranks, including the ability to respond to
emerging enterprise risks, business complexity, technological disruptions, and social and environmental responsibilities.

The TCFD has identified climate change as a threat to the global financial system's stability and seeks to improve corporations' disclosure of climate-related financial risks to investors,
lenders, and insurers. Shareholder motions and efforts to push firms to disclose their climate risks and strategies to maintain resilience and protect long-term shareholder value are also
rising.

An effective climate governance framework is essential for a company's correct assessment of climate-related risks and opportunities, strategic decisions on managing such risks and
opportunities, and the setting and reporting relevant goals and targets. If governance is not in place, a corporation will be ill-equipped to deal with risks or respond appropriately to shareholders.
 

 

Building effective climate governance

 

Boards must include climate change into their strategy, aligning their company's policies and financial aims with global climate goals. On the other hand, many directors lack the understanding of climate science and the technology, stakeholders, and economic models that have arisen to avoid widespread global calamity. The following are four strategies for establishing successful climate governance.

 

  1. Education:

One of the World Economic Forum's climate governance principles is that directors should have "command of the issue." Directors must be knowledgeable about
climate change. There is a wealth of reading material accessible from climate-related commissions, projects, and organisations, as well as training and certifications.

 

  1. Diversity:

It is vital to have a diverse range of viewpoints. Environmental/sustainability skillsets are essential on a board, especially for organisations that must reconsider their long-term identity and purpose in climate change and disintermediation.

 

  1. Advisory Boards: 

In ESG matters, an advisory board can provide a dynamic perspective, counsel and assistance. Boards and executives must have a thorough grasp of the effects of climate change on the company's business model, product, and assets before implementing long-term strategies and choices. Advisory boards can help with this.

 

  1. Climate and ESG related risk committee:

Climate change should be given the appropriate level of scrutiny by boards. Often, a separate committee will be required to thoroughly examine the material elements and bring climate and other ESG problems to the forefront of the board's agenda.

Companies without strong climate governance structures will find it difficult to make educated strategic decisions about incorporating the risks and possibilities posed by climate change into their long-term strategy.