If you are a director who is concerned about climate change but are unsure where to start or how to check whether your organisation is managing climate change adequately, then you are not alone. A recent study undertaken by the Australian Institute of Company Directors (Climate Governance Study) found that 46% of directors want to do more but don’t know where to start.
So where do you start and is it a problem that many of us are learning as we go?
According to STSG Founder, Kim Daire, “Being on a learning journey at a time when global standards and best practices are being established is perfectly normal. However, not taking active steps to inform yourself is an issue. It may even be a breach of your director’s duties.”
Where should a director start?
“There are a few places that you could start,” says Kim Daire. “There are a number of national and international resources being developed. However, it is also important to go back to the basics when considering climate risk.”
What are the basics that a director should go back to?
“Go back to the basic responsibilities of directorship and ask the simple questions. What could impact my business? How could it impact my business? What am I doing and what could I be doing about it? You are likely to find that you are already doing things to manage weather related impacts. Part of managing climate risk is acknowledging that these weather related impacts are not going to be a once off and need to be continually managed as they get bigger,” says Kim Daire. “The other part of managing climate risk is recognising that the choices of energy that you use relate to how big the weather impacts get and factoring this into your energy decisions.”
So what are the basic responsibilities of directorship?
There are a few, but at the top of the list we would expect to see:
Set the strategic direction
Provide financial oversight
Provide risk oversight
Oversee organisational and managerial performance
The question then becomes, has climate change been considered in each of these areas?
When answering this question, it is important to remember the two sides of managing climate risk. The first being understanding how weather and changes in weather are and will continue to impact your business. The second being to understand how energy related markets and policies are and will impact your business.
You may have noticed that the language has changed suddenly from climate to weather. This is deliberate as STSG Founder, Kim Daire, explains:
“It has been over a decade since I landed my first climate change specialist role. A lot has changed since then. For all of the changes there are some things that remain the same. Putting a table in front of someone showing that number of hot days will increase between now and year X usually results in a shrug. If people cannot relate to the data you will either be told, “I don’t think climate change will impact us much,” or, “I don’t know how that will impact us.” Both are unhelpful,” says Kim Daire.
“If you change your tactic and ask about what happened the last time weather event Y happened you will find out that: an aged care, in home, service provider nearly had to be hospitalised for heat stroke because they couldn’t afford to get the air conditioner in their car fixed; or, with reduced frequency and increased intensity of rain fall, drains are getting blocked more often, flooding the delivery truck access, but there is no maintenance budget to deal with it,” says Kim Daire.
“Suddenly you have a tangible picture about what is happening and whether the current situation is being managed adequately. While these are operational examples that provide detail beyond what a board normally deals with, they can be link back to risk and budget. As with a standard risk process, key trends and issues can then be summarised for the board. You can also ask, “how would it impact us if this keeps on happening?” and “if this event was slightly bigger, what could have gone wrong and are we set up to manage that?” This in turn can be fed into organisational planning processes,” says Kim Daire.
“So long as your organisational structure enables good information flow, it is the simple conversations that will build understanding from ground level through to the board,” says Kim Daire.
At this point it is important to note that the international standard for Adapting to Climate Change (ISO 14090, section 6.2.1) recommends that:
“It is valuable to first perform an impact assessment based on historic climate trends … The focus can then be on understanding the implications of future climate trends …”
Understanding how weather is and has impacted your business makes climate change more tangible. It also enables your baseline risk and financial impacts to be understood. From this baseline you can then build future projections and start planning strategically to manage these impacts.
The risks and financial implications identified will likely fall into existing delegations of responsibility and budget.
Follow through with good business planning processes and good questions. In this case, those questions are likely to be:
How will I know if those risk and financial impacts are being managed appropriately? This will likely lead you back to your performance monitoring.
Are current structures, processes and resources appropriate for the management of these risks and financial implications? This will likely lead you back to strategy and planning.
Hopefully, developing a greater appreciation about how weather is currently impacting your organisations risks and bottom line has increased your motivation to reduce GHG emissions.
If it hasn’t then look at your energy bills. Look at all forms of energy that you use, electricity, gas, fuel. What does the trend for the next few years look like?
Are you hoping that prices are going to come down or have you realised that renewable energies are getting cheaper while fossil fuels are getting more expensive? When was the last time you did a NPV assessment to work out when it is more affordable to change your energy type (or volume) then to keep paying the current bill?
While looking at direct financial impacts of your energy consumption, take some time to ask stakeholders what is important to them and why. It is likely that you are already aware that your markets are increasingly preferencing companies that are reducing their GHG emissions. Use this information to inform your strategic planning.
If your organisation does not already do annual GHG reporting or have a GHG reduction plan then consider getting one. GHG reporting and GHG reduction plans typically follow standard processes which include:
Recording and reporting yearly emissions
Assessing opportunities to reduce those emissions
Develop a work and budget plan to implement those opportunities (usually done by prioritising biggest GHG reduction per dollar spent)
Ensure that your work and budget plan align with your GHG reduction target
Be aware that staff on the ground might be looking at the problem differently to a board member. In such situation it is always best to make your decision making needs known. This will ensure that you get the most relevant information for you. If your stakeholder analysis shows that you need to stay middle or higher in your industry race to get the net zero and position yourself in the market then make that known. If you have a complex business that uses more than electricity, then ask if all the technologies that you need to transition to net zero are mature yet.
As directors it is not our job to know everything, but it is our job to reflect and ask.
If a director is ready to go beyond this, what are the top resources that a busy director should familiarising themselves with?
1. Climate Change and Director’s Duties – Legal opinion
This legal opinion, commonly referred to as the Hutley review, is a must read for any director of an Australian organisation. Originally commissioned by the Centre for Policy Development in 2016, it provides an introduction to climate related directors’ duties under the Corporations Act 2001.
The consensus of the legal opinion is that directors have a duty to their companies to identify and manage risks from climate change. This includes managing risks from climate shocks, risks from changes in average climatic conditions and risks associated with the transition to a zero carbon economy.
The legal opinion has strong parallels with the next resource, the TCFD. Both documents were developed independently of each other. The parallels between them indicate a developing global consensus on the principles of good climate governance.
Updated legal opinions were commissioned in 2019 and 2021. The main changes are the increasing requirement for directors to actively manage and accurately disclose climate risk and the increased risk of litigation for companies and directors who fail in their duty.
2. TCFD – Taskforce for Climate Related Financial Disclosure
This international standard from the Financial Stability Board aims to provide a consistent global approach to the way financial impacts of climate change are reported. It was developed in response to the 2015 Paris Agreement. The Paris Agreement is an international agreement requiring countries to provide 5 yearly plans to cap global warming to within 2 degrees C. In other words, it requires all nations and companies to reduce GHG emissions by 50% by 2030 and 100% by 2050 (Science Based Targets).
The TCFD framework asks organisations to consider both risk and opportunities associated with climate change. Organisations to consider the financial implications associated with the risks and opportunities identified. These financial implications are then to be recognised in each of the organisation’s financial reports.
One of the practical challenges of the TCFD is converting future risk into a financial impact that can be reported on. An understanding of historical cost associated with weather related risks and strong communication between the financial and sustainability sections of your organisation will be essential to achieving the objectives of the TCFD.
3. How to Set Up Effective Climate Governance on Corporate Boards
The World Economic Forum’s Guiding Principles are designed to support boards to establish the governance framework needed to effectively support TCFD reporting.
The eight principles are:
Principle 1 – Climate accountability on boards
Principle 2 – Command of the subject
Principle 3 – Board structure
Principle 4 – Material risk and opportunity
Principle 5 – Strategic integration
Principle 6 – Incentivisation
Principle 7 – Reporting and disclosure
Principle 8 – Exchange
These principles interlink with and support each other. One of the key themes that runs across several principles is long term financial planning. Hopefully your organisation has implemented some of the long term financial planning recommendations that came out of the global financial crisis. If not, then it is time to consider your organisations performance indicators and how they facilitate the long term financial success of your organisation.
Integrating climate change into board risk committees is a common starting point for many boards. However, you will also need to consider integration with financial and strategic planning processes as well as the board skills matric and board recruitment process to be successful.
If you get stuck at principle 1 then turn to the Hutley review for some important insights.
4. Climate Governance Initiative
The Climate Governance Initiative is the international network for those at the forefront of setting best practice for boards in the management of climate risk. It is the go to place for any director wanting to keep abreast of best practice in this field. Like any good network, they have a selection of news, events and resources to meet you climate governance needs.
There are some excellent resources being developed for those wanting to be at the leading edge of managing climate risk. What is new and leading edge today will become an essential part of business tomorrow.
If you and your organisation are taking their first steps to managing climate risk, then don’t be daunted. You have a short timeframe in which to learn as standards are set and become the norm.
Take some time to ensure that you understand your baseline weather and climate risks and their financial implications. From there you can build understanding of future impacts, plan and monitor performance.
Use sound principles of financial analysis and market research to manage the transition to net zero.
When in doubt ask. Ask the all-important next questions and ensure that your staff and consultants have a clear understanding of your decision making needs. This will enable them to provide the most pertinent information upfront.
Getting your foundations right will build your confidence and understanding of how to manage climate risk as well as that of your team’s.
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