Climate Governance: What Now, What Next… for Directors? (Part 2/2)
· As mentioned at the end of the first part of this article series (available at http://www.thai-iod.com/en/publications-detail.asp?id=868&type=3), the World Economic Forum’s attempt to raise awareness of corporate boards worldwide and encourage their active roles in tackling climate change via the governance of strategy, risk, and disclosure. Such “attempt” appeared to be made at the right place and at the right time. In 2021, Deloitte, a leading international consulting firm, launched an article “The Audit Committee Frontier: Addressing Climate Change”. The article revealed worrisome information that “more than 42% of audit committee members (worldwide) believed measures to cope with climate change at their organizations are not as swift and robust as they should be.”
· The World Economic Forum’s attempts boiled down to eight Climate Governance Principles for the Boards to consider applying as deem appropriate. In this article, we will go into details of each principle.
· The eight Climate Governance Principles are meant to integrate climate change into the Board’s procedures to promote well-rounded discussion and decision-making that cover both short- and long-term prospects.
o Principle 1: Climate Accountability on Boards. The Board should have direct accountability to shareholders in governing the organization toward long-term goals with flexibility and ability to adapt to changing business environment resulted from climate change.
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Question for Board As a director, do you understand and see connection / linkage between your “roles” in accordance with Fiduciary Duty principles and business “risks / opportunities” arising from climate change, and how?
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o Principle 2: Command of the (Climate) Subject. The Board should ensure that Board composition has adequate diversity in knowledge, skill, and experience to comprehend, debate, and decide on issues concerning risks / opportunities arising from climate change effectively.
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Question for Board Has your Board conducted an assessment of knowledge, skill, and expertise of its members to identify competency gap regarding climate change?
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o Principle 3: Board Structure. The Board should jointly determine direction in integrating climate change issues into the Board’s structure and function.
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Question for Board Have the oversight roles and responsibilities concerning climate change issues been clearly and concretely assigned to a dedicated committee or other existing committee, and how?
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o Principle 4: Material Risk and Opportunity Assessment. The Board should ensure the management has consistently assessed materiality of risks / opportunities arising from climate change in the short, medium, and long run. It should also ensure that responses to those risks / opportunities match with the materiality assessed.
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Question for Board Have climate change issues been integrated into the agenda when assessing material risks / opportunities of the organization in the short, medium, and long run? What process does the Board have to ensure the organization responded appropriately and in alignment with materiality of such risks / opportunities?
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o Principle 5: Strategic and Organizational Integration. The Board should ensure that climate-related issues are used as an input in strategic planning, decision-making, and business risks / opportunities management.
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Question for Board Have climate considerations been integrated into corporate strategy development, revision of business model, financial planning as well as decision-making of key incidents, and how?
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o Principle 6: Incentivization. The Board should ensure that management compensation and other incentives are determined to promote long-term growth of the organization. The Board may stipulate that “climate-related indicator” is used as one criteria in determining compensation as deem appropriate.
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Question for Board What are performance indicators or targets (concerning climate change issues) that the Board have included as criteria in determining management compensation / incentives? Are those indicators / targets consistent with other stipulated targets and how?
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o Principle 7: Reporting and Disclosure. The Board should ensure that information about climate-related risks / opportunities and strategic decisions responding to such risks / opportunities are consistently and fairly disclosed to all stakeholders (particularly investors and regulators) through various forms of reports, such as financial statement, annual report, etc. Such disclosure should be strictly governed by the Board in similar manner with financial reporting.
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Question for Board Does the organization report or disclose information concerning risks / opportunities arising from climate change as well as progress of climate-related implementation to stakeholders?
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Speaking of “governing organization to ensure that disclosure of information and financial reports are accurate, timely, and in compliance with relevant regulations” reminds me of Audit Committee’s roles. In this regard, I would like to inform all directors that the Thai Institute of Directors (IOD) has recently launched the “Guideline on Board’s Oversight Role in Audit” which is considered a manual that “all directors” (not just audit committee members) should read. The publication can be downloaded free of charge at https://forms.gle/tw5i55DepR8ejUze7.
o Principle 8: Exchange. The Board should encourage the organization to engage in knowledge sharing through regular network building and collaboration with stakeholders, such as industry peers, policy makers or regulators, investors, etc. to keep up with latest climate-related frameworks, processes, risks, or regulations.
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Question for Board Has the Board arranged for a mechanism to accommodate adequate communication, information exchange, or discussion about business risks and opportunities arising from climate change with customers, regulators, investors, academics, and other stakeholders?
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· The eight principles above are not ranked by priority but by “sequence of thoughts” and rationale to make directors understand and get a clearer picture. Principle 1-4 are the basis for compliance with Principle 5, while Principle 6-8 are components that organization should be built to facilitate climate governance and sustain its momentum in the long run.
· Above all, the eight principles are essentially meant to make the Boards of both large and small companies aware of “the connection between climate change impact and business sustainability” enough to put it into Board discussion. This is meant to promote a decision-making process with more prudent and holistic view, which will effectively extend the Board’s roles in accordance with Fiduciary Duty.
· After all, does your organization “ready” to cope with climate change yet?
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
· The Audit Committee Frontier—Addressing Climate Change, Deloitte, 2021
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