Climate governance is emerging as a crucial aspect of corporate strategy, driven by the increasing urgency to address climate change. This article delves into the essence of climate governance, explores the risks associated with climate change, and outlines how boards can build effective climate governance frameworks to ensure their organisations remain resilient and forward-thinking.

What is Climate Governance?

Climate governance refers to the practices and policies a corporation implements to manage the financial risks and opportunities arising from climate change. This involves setting up effective systems to monitor and mitigate the impacts on global climate systems. Despite the importance, communicating complex scientific data about climate systems to the public and policymakers remains a significant challenge due to the evolving nature of climate science.

Climate Change Risk and Its Implications

Addressing climate change is not only a matter of ethical responsibility but also a business imperative. Investors, consumers, and employees are increasingly demanding that companies and their boards enhance their transparency and climate-related disclosures. Companies must proactively engage in climate governance to strengthen their resilience and reporting mechanisms.

Climate risk can be categorised into two main types:

• Physical Risks: These include direct impacts on a company’s assets from extreme weather events or rising sea levels, as well as indirect effects such as disruptions in supply chains or changes in consumer behaviour due to climate change.
• Transition Risks: These arise from the shift towards a low-carbon, circular economy. Companies must navigate legislative and market changes driven by global efforts to reduce carbon emissions and adopt clean energy solutions.

The Role of the Board in Climate Governance

Climate change represents a strategic risk that boards must address with the same diligence as other critical risks. Directors have a fiduciary duty to act with due care and skill, ensuring the company’s long-term success. Boards are responsible for recognizing, assessing, and managing major climate risks. Failure to adequately address these risks can lead to legal repercussions and affect the company’s overall performance.

In industries particularly exposed to climate risks, such as energy, transportation, and agriculture, boards must integrate climate considerations into their strategic planning. They should focus on enhancing their capabilities to handle emerging risks, technological disruptions, and environmental responsibilities.

The Task Force on Climate-related Financial Disclosures (TCFD) underscores the importance of climate change as a threat to global financial stability, urging companies to disclose climate-related financial risks. This aligns with the growing shareholder demand for transparency regarding climate risks and strategies.

Building an Effective Climate Governance Framework

To effectively manage climate risks and opportunities, boards must embed climate considerations into their corporate strategy. Here are four key strategies for building robust climate governance:

1. Education and Knowledge Enhancement

Directors need a solid understanding of climate science and related technologies. Continuous education through climate-related courses and certifications can help board members stay informed. Resources from climate commissions and organisations can provide valuable insights into managing climate-related issues.

2. Promoting Diversity

A diverse board can offer varied perspectives on climate and sustainability challenges. Having members with expertise in environmental sustainability and climate change is crucial, especially for companies reevaluating their long-term objectives in light of climate risks.

3. Leveraging Advisory Boards

Advisory boards can offer specialised advice on environmental, social, and governance (ESG) matters. They help boards understand the implications of climate change on business models and guide the development of long-term strategies.

4. Establishing Climate and ESG Risk Committees

Dedicated committees focused on climate and ESG issues can provide the necessary scrutiny and bring these topics to the forefront of board discussions. This ensures that climate-related risks and opportunities are systematically assessed and addressed.

Conclusion

As businesses face mounting pressures to align with global climate goals, effective climate governance becomes essential. Companies must integrate climate risks and opportunities into their strategic framework to remain competitive and resilient. By educating board members, fostering diversity, utilising advisory boards, and establishing dedicated committees, organisations can build a robust climate governance framework that supports long-term sustainability and growth.

For businesses seeking guidance on climate governance and sustainability reporting, Oren’s expert panel is ready to assist with tailored solutions for your industry. Contact us today to learn more about how we can support your ESG journey.