Welcome to the second edition of Actionable Insights, our new regular series of articles! Here, we take you behind the scenes of our Competent Boards education sessions to bring you exclusive corporate tips and tricks. We share with you some of the valuable knowledge from our faculty speakers, a global pool of board directors, and industry experts. 

In our March sessions, we examined ways of assessing and managing climate change-related risks and opportunities for businesses. Our faculty speakers addressed a variety of climate-related topics, including how businesses can prepare for climate challenges and manage climate risks throughout the value chain (including Scope 3 emissions). We also looked at board accountability for environmental, social, and governance (ESG) and climate-related concerns, the growing pressure from investors and regulators to address climate-related issues, and the importance of transparency and accountability in climate disclosures.

Here are five key takeaways and talking points:

Climate risk is financial risk

Climate change poses significant risks to businesses that cannot be ignored. Anticipating its impact is crucial, as it will have physical and financial repercussions. Organizations may face infrastructure damage due to extreme weather events, supply chain interruptions, and legal and regulatory changes. Moreover, stakeholders and consumers are likely to exert increasing pressure for more adequate climate action, thus increasing the risks of increasing costs. Businesses must take proactive measures to mitigate these risks and ensure their long-term sustainability. 

“Climate risk is financial risk. We have a fiduciary duty to manage risks, and climate risks are increasingly becoming a concern for us as investors,”said Peter Sandahl, head of sustainability at Nordea, while sharing his views on the subject. 

“Boards and executives must plan for the fact that investors and banks will be increasingly reluctant to provide capital to companies that are not adequately adjusting their businesses to meet elevated transition and physical climate risks,” he added.

Incorporating climate risks into a company’s overall business strategy and developing transition plans that account for climate-related risks and opportunities, regulatory changes, customer preferences, as well as their own business capabilities and limitations is crucial. Firms that have not yet taken this step should prioritize doing so.

Climate change and the supply chain

Historically, companies have prioritized reducing emissions resulting from their manufacturing and energy usage, referred to as Scope 1 and 2 emissions. However, this approach fails to address the emissions generated by their supply chains, including raw material acquisition, transportation, and disposal, known as Scope 3 emissions. These emissions account for the majority of total corporate emissions, making it imperative to measure and decrease them. Nonetheless, measuring and reducing Scope 3 emissions can pose significant challenges. 

Peter Sandahl, also a member of the Expert Advisory Group at the Science-Based Targets Initiative for Financial Institutions, suggests that addressing system-wide risks, such as industry-wide Scope 3 emissions, will require a systemic response that prioritizes collaboration.

“Investors need to focus more on engaging and collaborating with whole sectors and across value-chains and increase their engagement with policymakers and standard-setters in order to create a level-playing field and an orderly transition for the protection of asset values.”

Evolving board responsibilities

In the current business landscape, ESG issues simply cannot be ignored by company boards. This is especially true given the top priority status that climate change occupies in government policies, corporate transition plans, and civil society activism. Boards have a pivotal role to play in identifying climate-related risks, evaluating their impact on business, and fully understanding the overall climate impact of their operations. The ever-changing business environment, mounting regulatory pressure, and urgent calls for decarbonization backed by scientific evidence mandate that boards encourage management to adopt a more sustainable, forward-looking business approach which takes into account emerging risks and opportunities.

Georg Kell, chair of Arabesque and founding director of the United Nations Global Compact, acknowledges that the upcoming transformation will not be a simple task. Companies tend to only make significant changes when it becomes absolutely necessary, typically when a crisis is looming. 

“Corporate climate transformation is a rough game… I think we will face more crisis situations where old business models simply don’t stand the test anymore to be future-fit… So that is a new category of issues that will increase, and it may apply to any company in any sector that sticks to old methods and old processes and does not adapt to a more responsible, sustainable future-fit outlook.”

Investor activism

Investors wield considerable influence when it comes to driving decarbonization and nature-positive transformation initiatives in companies. The increasing global attention on climate change and biodiversity-related risks has led to a surge in investor activism. Moreover, with more governments enforcing climate responsibility laws, investor participation has become all the more crucial. 

Georg Kell expects pressure on corporate boards from stakeholders, including investors, to intensify with time. “In the context of the current proxy season, for example, we’re seeing more lawsuits coming up… and that is bound to intensify because progress overall [on the climate front] is too slow [and] societies are not moving fast enough.” 

Investors and shareholders have important roles in accelerating the climate transition by using their influence to drive policy and corporate action. As experts, investors can help bring about change by lobbying responsibly and establishing connections with governments to strengthen policy frameworks. Shareholders also have a vital role in promoting climate action, using their influence to encourage company boards to take decisive action on climate-related issues. By working together, investors and shareholders can transform the business landscape and drive sustainable progress.

Transparency and accountability

As the threat climate change poses becomes increasingly apparent, more companies are taking notice. However, it is important to consider how effectively they are addressing it. Open communication and transparent disclosure are key to building trust and maintaining strong relationships with stakeholders. 

Upkar Arora, CEO of Rally Assets Inc., believes trust lies at the heart of a company’s relationship with its stakeholders. “We are trying to build trust with one or more of our stakeholders. [And what builds this trust]? Trust relies on commitment, care, consistency, and competence. And I would especially add [to this mix] transparency, authenticity, continuous improvement, and learning.”

Having a comprehensive grasp and application of ESG disclosures is imperative for businesses to navigate the ever-evolving regulatory environment. That said, this can prove to be a daunting task due to differing frameworks that may present inconsistencies and hinder smooth reporting.

This year, the European Union implemented the Corporate Sustainability Reporting Directive to strengthen the disclosure requirements for companies’ ESG performance. However, this new directive may differ from the existing Sustainability Accounting Standards Board, making reporting more challenging for companies. 

Tim Mohin, partner and director of climate and sustainability at BCG, notes it is important to establish a global common language that would enable companies to report their sustainability efforts more easily. “It’s encouraging that the two major ESG standards, the European and the International Sustainability Standards Board, are working on interoperability.” Without harmonization, companies are left with the burden of meeting multiple reporting requirements, which also makes the data harder to compare. Despite these challenges, Mohin sees a growing push toward consolidating disclosure frameworks, which would ultimately simplify the reporting process for companies.

These takeaways come from Session 4 (Impacts of Climate Change and Accountability for Boards) and Session 5 (How to Build ESG Oversight and Foresight) of our most recent sold-out ESG Designation Program, which started in February, and from Session 3 (Responding to Stakeholder Expectations for Responsible Investment and Insurance) of our new Climate and Biodiversity Designation Program, which launched in March. We have more cohorts rolling out this year and in 2024, so book your place today to be a part of a fascinating community of knowledge-sharing!

Elvin Madamba is Program Manager, and Maria Shamim is Research Analyst at Competent Boards. Follow Competent Boards on LinkedIn.

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