·      Nowadays, we can clearly see linkage between “climate change” and “business operations”.  Any business decision could become significant “accelerator” or “decelerator” for the phenomenon.   Meanwhile, climate change also brings about risks and opportunities for businesses. 

·      Social and economic phenomena that occurred throughout the world recently are like “red flags”, periodically warning the Board that climate change is so critical issue that the organization cannot “turn the blind eyes” anymore.  For examples;

             Several consumer goods giants have been prosecuted on cases concerning emission and environmental damage caused by their production processes. 

              Shareholder activism is calling for public companies to lay concrete measures to address climate change caused by their operations. 

            The 26^th UN Climate Change Conference of the Parties (COP26) was held in Glasgow, Scotland in late 2021. Attended by leaders of 196 countries to discuss climate change, the summit set ultimate goal to reach carbon neutrality by 2050 and keep global warming below +1.5 °C.  It also seeks collaboration with the private sector and civil society in joining the public sector to tackle climate change. 

            Social members, particularly the new generation, tend to recognize more about climate change than the old generations. Their values and attitudes reflected clearly through daily consumption behaviors, such as choosing to consume environmental-friendly products only. 

·      The evolution and variation of such values / attitudes led to new social norms. Ironically, there has been prediction that “in the future, investing in a company that does not disclose information about its environmental impact is like investing in a company that does not disclose balance sheet in its annual report.”  Eventually, these norms will be used as framework in drafting new rules, regulations, or standards concerning emission / environment that will take effect on all businesses in the future.

·     The question today is not “Should climate change be included in the long-term goal or business strategy?” but more of “How will the organization form mechanism or initiative to address climate change?”.  The phenomenon is driving the Board to pay serious attention on the issue and ensure that business risks related to climate change are managed properly, timely, and effectively.

·      Talking about “risk”, I would like to take this opportunity to inform all directors that the Thai Institute of Directors (IOD) has recently published the “Guideline on Board’s oversight role in risk management”. You may download the guideline free of charge at https://forms.gle/r4FHT3PJytVJMDbk9 . We do hope this publication will support climate change risk management at your organization to a certain extent.

·      Considering climate change as one of the business risks could be new issues that many directors may not be familiar with. To paint a clearer picture, this article will elaborate three key business risks that come with climate change including physical risk, transitional risk, and liability risks.

   Physical Risk refers to natural disasters in various forms (e.g., flood, storm, wildfire, draught, turbulence, etc.) that cause damage to life, property, or explicitly disrupt business operations. Among industries highly exposed to such risk are agricultural and tourism. 

   Transition Risk refers to risk that resulted from imposition of new policies, rules, and regulations to address climate change as well as changing technology and consumers’ sentiment (recognizing social and environmental aspects as part of business ethics).  These transitions could eventually cause a shift in asset values or higher costs of doing business of certain industries. For instances, the energy sector is facing pressures from all fronts to adjust production process to accommodate “clean energy” trend and gear toward “net-zero emission” while the mining sector is substantially affected by the change in carbon tax collection of certain countries.

    Liability Risk refers to risk that the company cannot fully comply with new policies, rules, and regulations concerning climate change. This risk derived from social evolution, legal disputes, and objectives of both “regulators” and investors” worldwide that turned to emphasize on climate change and called for companies to take the matter into account when making business decisions.

·      This phenomenon led to an extension of “governance” field, commonly known as Climate Governance. However, this is not “simple” matter for the Board as it is rather new, complicated, and requires integration of various knowledge such as science, economics, and political science.  Besides, it also contains high uncertainty, difficult to predict, and has long time span (probably, a decade or longer) to demonstrate impact.

·      Despite long time span, many believes Climate Governance is an urgent matter that cannot wait because adverse effect of climate change has evidently occurred.  This means the Board must take Climate Governance into account in all time span (short-, medium-, and long-term).

·      Two vital elements of Governance are 1) Policy that is developed as management framework / guidance and; 2) Board Structure & Composition that are designed to ensure sufficient potential to govern and make decision on the matter effectively. 

·      Almost all companies, particularly major or listed firms, probably have these two essential elements of governance in place already. However, these elements may not be designed to address climate change issue effectively. Although the business world become more alert and emphasize more about climate change, numerous Boards still struggle to fully understand this matter and unable to accurately and comprehensively identify risks (and opportunities) that come along with climate change. This problem may be result of various causes including:

   Too much burden vs too little time – The Board has roles and responsibilities in governing a number of “strategic issues” (such as industry dynamics, technological change, entrance of competitor with new business model, economic fluctuation, cyber-attack, etc.) which are all important and have business implications both in the short and long run (no lesser than climate change). Therefore, the Board may not be able to dedicate sufficient time to perform “in-depth” governance roles in all aforementioned issues.

   Too many variables vs too few information - Climate change is systemic issue that is complicated and difficult to comprehend.  It is also accompanied with diverse form of risks (as mentioned earlier), full of uncertainties, and may not be explicit in certain industries.  Since the issue involves with various variables (such as technology, rules and regulations, etc.), it is rather difficult and challenging to predict and manage.

   Long-term problem vs short-term perspective – The Board may not have adopted “long” and “far” enough perspective.  It may have focused on dealing with short-term pressure / annual review of business plan to respond to investors’ expectations about the company’s performance and forget to pay enough attention to climate change because doing so requires long-term perspective while impact may not be explicit in the near future.

·      This is probably the reason why the World Economic Forum (WEF) initiated Climate Governance Initiative (CGI). The CGI’s objectives are to raise awareness of global Boards and encourage their active roles in addressing climate change via the governance of strategy, risk management, and disclosure. The CGI has developed and distributed eight key Climate Governance Principles for the Boards to consider applying as deem appropriate.

·      Stay tune for details of the eight principles in Climate Governance: What Now (and What Next) for Directors? (Part 2) that will follow soon.   

Apilarp Phaopinyo
CG Supervisor – Research & Development
Thai Institute of Directors

Source:

· Bringing Climate Change to The Composition and Structure of Boards of Directors, INSEAD Corporate Governance Centre, 2020

· Climate crisis requires boards to put climate transition at the heart of corporate strategy, says international network of board directors, Australian Institute of Company Directors (AICD), 2021

· How to Set Up Effective Climate Governance on Corporate Boards Guiding principles and questions, World Economic Forum, 2019

· Here’s How Climate Change Will Impact Businesses Everywhere – And What Can Be Done, Zurich, 2021