Seeing climate as a critical business issue for the board

“Climate has moved from a matter of public policy to a critical business issue,” said Susan Angele, KPMG Board Leadership Center (BLC) senior advisor, reflecting on insights and observations from the recently released paper, Boardroom climate competence: Getting ahead of the curve, published by the KPMG BLC in collaboration with Plan C Advisors.

On the September BLC webcast, Angele was joined by Amanda North, founder and CEO of Plan C Advisors, and Shari Friedman, managing director for climate and sustainability at Eurasia Group, to discuss how corporate boards can build climate competence into oversight.

During the webcast, Friedman, North, and Angele emphasized three issues for boards to focus on as they work to understand the long-term impact of climate change for their companies, the economy, and the work of the board.

The impact is clear, but the board needs to do its own level setting. In August, the Intergovernmental Panel on Climate Change (IPCC) issued its sixth assessment report with a dire warning: Global warming is happening faster than previously thought, putting the Earth on track for a 1.5°C average temperature increase by 2040 without significant and coordinated action. Rising temperatures contribute to severe weather, including storms, drought, and fires that not only cause physical damage to business and infrastructure, but also impact agriculture, shipping, health, and well-being. While these physical risks are well observed, so-called transition risk—the impact of government policy, technological innovation, and consumer preferences—is more latent, according to Eurasia’s Friedman. Moreover, banks and insurers are taking steps to quantify and mitigate climate risk in their portfolios, and institutional investors and asset managers are putting greater pressure on boards and management teams for clearer climate-related disclosures and climate-aware business plans. “Addressing climate actions through banks and asset managers is really about protecting the financial system,” said Friedman. For boards, understanding both the macro climate risks and the “greening of the financial system,” according to Friedman, are fundamental to a foundational discussion of climate.

Climate change requires a re-evaluation of both risk and opportunity. Thirty percent of corporate directors surveyed prior to the webcast said that “taking a comprehensive look at climate risks” was the most challenging aspect of climate consideration for their board. For Plan C’s Amanda North, that evaluation of risk is no longer about “seeing it through the lens of a specific group within the company” but about the entirety of the business. Physical risk is the most front and center, “but reputation can be equally or even more impactful for some companies,” said North. How does the company’s enterprise risk management (ERM) program incorporate physical and transition risks that may have longer-term implications than a traditional ERM outlook? Does management understand stakeholder expectations, including investors, business partners, customers, and the community? “Confront existential risks head on,” said North, and “really go back to the core purpose, mission, and values of the company to explore what those assets are and how to think differently about the business.” 

In your opinion, what do you see as the most challenging aspect of climate consideration for your board?*

Composition and coordination are keys to board oversight. Fifty-one percent of corporate directors surveyed prior to the webcast said their boards consider the impact of climate change in their oversight of strategy to a limited extent (34 percent) or not at all (17 percent). However, given the current assessment that climate change will impact all areas of the economy, stakeholders and shareholders expect an increasing level of board oversight with regards to climate. Will boards be ready? “Climate shouldn’t get lost in the shuffle of the day-to-day,” said the BLC’s Angele. “Boards are finding ways to put climate on the board agenda.” Angele added that the board needs “to have an understanding of what the issues are, the ability to challenge management, and to keep on top of where the climate discussion is heading.” Institutional investors are zeroing in on the board’s climate competency as well as where on the board that oversight lives. Are directors familiar with recommendations from the Task Force on Climate-related Financial Disclosures or the SASB Standards from the Value Reporting Foundation? In whichever manner the company chooses to publicly address climate risk and opportunity, “the most important thing is to find a framework that works for the company and to ensure that communications are consistent,” said Angele.  

To what extent does your board of directors consider the impact of climate change in its oversight of strategy?*