Climate change has been described as the greatest challenge of our time. It might also be one of the great governance challenges for boards over the next 10 years.
This is not to present an alarmist view of climate change or suggest that boards must take radical action in governing climate related risks. Nor is it to downplay the good work of many Australian organisations in understanding, managing and disclosing the impact of climate-related risks on their business.
But this view recognises that climate change, from a governance perspective, is moving to a new phase – one in which global investment markets progressively factor organisation climate-related risks into investment decisions, where increasing scrutiny is being placed on climate risk disclosure, and where the link between directors’ fiduciary duties and climate change risk responses is in the spotlight.
The Australian Institute of Company Directors’ (AICD) Governance Leadership Centre (GLC) recently explored these issues in a special edition of its regular online updates, by asking: “Is climate change a governance issue?” (December/January edition).
The special report considers the governance issues of climate change from a number of different perspectives.
A legal view: climate change and directors’ duties
Sarah Barker MAICD, special counsel at Minter Ellison, examines the opinion of Noel Hutley SC – one of the most experienced senior members of the commercial bar – on the extent to which the law permits or requires Australian company directors to respond to climate change risk.
Barker says Hutley’s opinion confirms that risks associated with climate change have evolved from “ethical environmental” to material financial issues, and that directors who fail to grapple with them could become legally exposed.
Hutley warns that directors who perceive that climate change presents risks to their business should assess the adequacy of their disclosure and reporting of them.
“As a starting point to the exercise of due care and diligence, directors should ensure they are adequately informed in relation to the scientific and economic issues, inquire of experts where appropriate, and critically evaluate the impact of these risks and their company’s strategic response,” argues Barker.
“This does not mean that the law now requires directors to prioritise climate risks or sustainability over any other governance matter. However, it must be afforded the same robust consideration as any other issue that may have a material impact on financial performance, risk management and strategy.”
A call to arms to Australian boardrooms
Ian Dunlop FAICD, the former chair of the Australian Coal Association and a former CEO of the AICD, writes that the “implications for boards and directors [from climate change] are profound.”
He says: “Climate change will be the most important issue of the next few decades for large and small companies alike and, if handled sensibly, the real source of growth. Lack of knowledge of its real risks and opportunities represents a major governance failure.
“Australia’s inaction over the last decade in failing to upgrade its infrastructure on to a low-carbon footing is already proving to be extremely costly, and we now face risks from climate change far beyond anything acknowledged officially here or overseas.”
Dunlop says the business community, and its boards, must show leadership in the climate change debate. But Dunlop argues there is much “climate denialism” in Australian boardrooms.
“Australian directors have been notable in their absence from this debate. They need to take leadership before events move beyond their influence,” argues Dunlop.
Investor perspectives: more than “ESG”
Tony Featherstone, GLC’s consulting editor, recently interviewed the Australasian Investor Relations Association’s CEO, Ian Matheson FAICD, who comments on climate change from an investor relations perspective. He says environmental, social and corporate governance (ESG) data is moving from qualitative to quantitative, meaning it is becoming more material.
Boards often view their organisation’s climate-related challenges as a “sustainability” or “risk-management” issue. But as financial markets demand more data in this area, climate risks are morphing into investor-relations, capital-management and corporate-reputation issues.
This trend has significant market disclosure and reporting implications for companies, and their boards, on climate-related risks.
“The market’s focus on corporate carbon emissions and water usage will only get bigger,” says Matheson. “It’s a complex issue from an investor-relations perspective and not something that may be immediately apparent to boards. In time, ESG issues will have greater influence on board discussions and decisions.”
“The big change is that ESG data and analysis is evolving from something that was mostly seen as qualitative information and useful to have, into something much more quantitative – hard data that can influence company valuations.”
A new guide to support directors
For boards, the complexity of climate change science is compounded by an issue that cuts across many governance tasks. Boards that pigeonhole climate risks as a “sustainability” issue will need to think broadly about its implications.
To support directors looking to explore climate change risks in the context of their governance role, the GLC has released a new report.
Written by Dr Nick Wood of Climate Policy Research and Kate MacKenzie from The Climate Institute, the report covers:
- The global context for climate change risks – including the implications of the Paris Agreement as well as the physical and economic impacts of climate change.
- Climate change risks through a governance lens – including investor and shareholder expectations, tools for portfolio analysis, and insights into new climate data available to boards.
- Insights on “good practice” – drawing on Australian and international case studies of organisations.
- Take-outs for directors – suggested questions to ask and key matters to investigate at the board table.
“Directors who understand how climate change may affect their organisation, and who can identify and harness relevant and up-to-date sources of information and use them in their decision-making, will be vastly better equipped to meet the emerging challenges and opportunities,” note the authors.
About the Governance Leadership Centre
The Governance Leadership Centre is the AICD’s governance think-tank, exploring over-the-horizon views and issues relevant to directors and the practice of governance. Each month the GLC publishes new insights and commissioned research, from Australian and global sources. AICD members can subscribe to the monthly GLC e-newsletter by contacting email@example.com.
To access this update and other GLC material visit: companydirectors.com.au/glc