We are facing increasing number of natural disasters whether they are droughts, floods and storms. These weather-induced hazards happen more frequently in several parts of the world, affecting natural resources and our ways of living. The impact of climate change on changing average temperature, humidity, rainwater and snow for a longer period of time or several decades is evident. Ever since the Industrial Revolution in 1880 extreme hot and cold weather has become more severe than ever. 

           Source: Global Climate Report - January 2020

            Following a climate statistic in January 2020, temperature of the earth surface and the ocean’s is at its highest in 141 years. The average temperature is increased by 1.14 ° C (2.05 ° F), higher than the average temperature in the 20th century at 0.02 ° C (0.04 ° F). A slight increase in temperature can lead to a huge impact on living creatures on earth.

Factors that cause climate change can be divided into two categories - those related to natural processes and those related to human activity. Natural processes include solar energy, the earth’s rotation. Greenhouse gas emissions due to human activity, for example combustion of fossil fuels, coal, oil, and natural gas, to produce electricity, deforestation and grazing cause severe greenhouse effect on temperature of the earth’s surface also known as global warming.

After the Industrial Revolution, business activities have been largely consuming energy and natural resources, causing air and water pollution as well as industrial waste that needs decomposition. According to Carbon Majors Report 2017, only about 100 companies have been responsible for up to 71% of the entire world's industrial greenhouse gas emissions since 1988. Hence, it is the responsibility of corporate companies to ensure that their business activities will cause the least impact on the environment. Climate change is the issue of concern not only among the board of directors overseeing business activities but also the market. Risk relating to climate change that the board should consider are as follow:

·       Reputational Risk: any company having heavy carbon-use activities may be at risk of having license revoked and public criticism.     

·   Asset Risk: any company having business models depending on carbon-use activities may be at risk of unexpected asset loss caused by environmental risk. 

·       Physical Risk: floods, storms and wildfires are among samples of climate change-related risks which may cause risk to agricultural and tourism sectors.    

·       Lawsuit Risk: any company operating activities that affect the environment could possibly face lawsuit. The Volkswagen case is an evident sample. The company has to pay up to $127 million in Australia to settle a case over the 2015 diesel emissions scandal. 

·       Law and Regulation Risk:  new legislation which requires strict law-abiding action may cause economic burden to a company.   

It can be seen that the above risks could cause severe damages to a company. The board should also prioritize these issues. To provide directors a regulatory guideline for issues relating to climate change. World Economic Forum (WEF) in cooperation with PricewaterhouseCoopers (PWC) present the guiding principle of climate governance as follow:    

Principle 1 – Climate accountability on boards: the board should be accountable for the company’s long-term resilience to climate change risk. 

Principle 2 – Command of the (climate) subject: the board should be equipped with sufficient information about climate-related threats and opportunities, so that they can effectively take decisions.  

Principle 3 Board structure: the board should determine the most effective way to integrate climate considerations into its structure and committees.

Principle 4 – Material risk and opportunity assessment: the board should ensure that the management assesses the short-, medium- and long-term materiality of climate-related risks and opportunities for the company. The board should also further ensure the organization’s proper actions following the given risk assessment.

 Principle 5 – Strategic and organizational integration: the board should ensure that climate systemically informs strategic investment planning and decision-making processes and is embedded across the organization.

Principle 6 – Incentivization: the board should ensure that executive incentives are aligned to promote the long-term prosperity of the company including climate-related goal.  

Principle 7 – Reporting and disclosure: the board should ensure that material climate-related risks, opportunities and strategic decisions are consistently and transparently disclosed to all stakeholders, particularly to investors and regulators. These details should be reflected in financial reports.

 Principle 8 – Exchange: the board should maintain regular exchanges and dialogues with peers, policy-makers, investors and other stakeholders to encourage the sharing of methodologies and to stay informed about the latest climate-relevant risks, regulatory requirements etc.

It is essential that every sector should get involved in seeking a solution to climate change. Everyone should be responsible for his/her action. For private sector, directors play a key role in taking leadership in determining how to integrate climate change solution into business strategic plan and regulatory for integration across the organization. So it will minimize the short-term impact and enable the board to seek a long-term solution relating to business operation.