Climate Change In The Boardroom
Climate Change is an Issue Whether or not it is an Issue
Depending on the political spectrum and where you land or whether or not you subscribe to the issue de jour for political expediency, businesses are impacted continuously by external ideologies and topics new and old, which have a real impact on their bottom line. Failing to address these issues and planning contingencies can harm your business. Such is the case with the issue of climate change.
Proponents of climate change argue that today’s global warming crisis is akin to those that decimated ancient cultures such as the inhabitants of Easter Island, or the Mayan Civilization and that we are facing what “experts” are calling the “sixth great extinction.” Still, others argue that one single volcanic event produces a more significant impact on the environmental carbon footprint than the combined output of humanity since its pre-historic existence until now. Also, there is a “rider” tendency to wrap other unrelated issues into the mix to “piggy-back” on what appears already to be an issue of dire consequence. These arguments include whether or not inequality, discrimination, and poverty are consequences of greenhouse gas emissions, the overuse of freshwater, exploitation of natural resources, or pollution, and are up for debate. Still, one fact remains: businesses are responsible for addressing global issues sensibly.
In his book, “The Carbon Conundrum: Global Warming and Energy Policy in the Third Millennium,” Dr. Robert C. Kelly writes:
“There are legitimate concerns on both sides of the global warming issue. Policy action taken to mitigate the effects of climate change will create economic winners and losers. Because of this, policymakers need to carefully weigh the costs and benefits of any mitigation program. The problem in dealing with these issues is that making value judgments on policies designed to deal with global warming is very complex. First, there is the issue of empirically verifying global warming relationships. Then, even if such relationships are known with certainty, policymakers must develop a framework for weighing the costs and benefits of policies that affect the energy mix and the climate of the planet over very long time horizons, i.e. centuries. Finally, if all of the above could be figured out, how does society implement a policy where the market fails, as it does when emissions of greenhouse gases impose costs on society, but such costs are not borne by those generating the emissions? This is a classic case of negative economic spillover effects–but on a global scale having significant effects on a major global industry–the energy industry, an industry that has a direct and pervasive effect on our lives.”
Dr. Kelly’s book, written 18 years ago, addresses an issue that in today’s political, economic, and social landscape, has become one of the most pressing issues with regard to corporate responsibility. The growing consensus is that we have known about climate change for several decades. If there is any veracity to the issue, it is incumbent upon us as responsible leaders to investigate and respond to the claims accordingly. Assuming that if left unmitigated, global climate change can have a profound impact on businesses and their economic performance, then, as leaders, it would behoove us to respond in a manner suggested by Julie Gorte, Ph.D., who wrote, “There are two things that we need to do, and investors can have impacts on both.”
According to Dr. Gorte, investors should “avoid the unmanageable and manage the unavoidable.” Gorte states that whether or not we do anything, the globe could continue to warm by 5 degrees Celcius by the end of the century and, that if left unanswered, conditions can worsen. Gorte suggests that these changes include the extinction of species, failing harvests, rising sea levels, and water shortages. Gorte goes on to say that we must then go on to adapt to the consequences of what can result from the impact of global warming.
What this poses for businesses is the associated risks involved. Those include the regulatory risks that governments impose on companies that limit their emissions and the penalties resulting from lawsuits for failure to comply with mandated levels. Furthermore, proponents of global warming suggest that businesses will likely have to respond to increased risk of natural disasters, global expansion of diseases, and pests, along with loss of productivity due to extreme heat. Add to this the likelihood of facing risks associated with creating a low-carbon economy, the existential threat of not being able to capitalize on fossil fuel reserves, and the systemic risks of destabilization of economies.
Adding to the list of negative impacts that global warming might have, some suggest that even companies that don’t traditionally fall under the purview of impact, like those in the energy industries do, might still feel the pressures of climate risk. Those impacted include, for example, the fashion industry, sustainable apparel, road, and bridge construction, and the like. As a result, the topic of climate risk must breach the agenda of board meetings across all industries as it appears that the crisis could very well affect everyone, regardless of their industry.
To this end, board meetings should include time to discuss incorporating climate change into related risk and strategy discussions and then delegate these topics to committees, as is the case with other risks. Furthermore, it may be necessary to include climate experts in the boards’ composition to elaborate and enlighten members, thus broadening awareness and understanding of the issue so they can make informed decisions.
Since it is the obligation of the board to determine, with the assistance of management, which metrics they should follow, it is essential to understand that, concerning climate change, these discussions will vary from industry to industry. While tying climate-related metrics to C.E.O. compensation has been suggested as a great way to “move the needle” concerning climate change, having a strategy should be of utmost importance and assessing relevant opportunities, in addition to risk, should be considered a priority. In pursuit of a clear plan of action, companies may include addressing future needs and adjusting business models or changing products while maintaining the types of clients they currently service to adapt to climate change. When adopting these kinds of changes within an organization, the board can work with the management to assess the options, opportunities, and optionality that their organization faces in light of the topic.
As it pertains to shareholders, it is apparent that they are likely to involve themselves in the affairs of the business to the degree that they are shifting their focus from just regulatory risks to that centering around reputation, litigation, and the physical risks associated with climate change. An increasing number of shareholders are asking for action as the issues of climate change become more visible in the media. As the problem grows in popularity, it should not come as a surprise to see more private equity firms requesting in-boardroom presentation to their partners. Furthermore, investors are becoming more attuned to the situation and requiring evidence that portfolio companies are recognizing risks and opportunities surrounding their action or inaction to the issues of climate change. Many companies are now building climate risk into their disclosures. Since the topic has only relatively recently become an issue, most of these disclosures seem to be boiler-plate at best. Still, investors want more information on how the companies they are investing in are addressing the risks, and then evaluating the adequacy of the company’s risk disclosure specific to climate change.
Recently Rob Ferguson attended a Global Warming conference for Directors sponsored by the NACD. One of the takeaways from the meeting was that less than 1/3 of public Boards have climate change as a Board issue to monitor. In light of this article it is incumbent on board members to take note of the import of the subject.
“Boards must override the dominance of short term thinking by the company. It is the Boards responsibility to cause longer term perspectives and strategies to be given attention by company leaders, such as Climate Change impacts to the business.”
Contact Rob for more information related to corporate governance and strategy for middle market private companies.