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10 questions NEDs should be asking about climate change in financial services

17 February 2020: climate change is firmly on the board agenda, but it can be challenging to ask the right questions. ICAEW’s Financial Services Faculty and the Sustainability team highlight 10 questions non-executive directors can ask to help drive meaningful conversation and make sure boards are taking a proactive approach to the risks and opportunities posed by climate change.

  1. Where does the board get its climate change information and is it of a high quality?

    Climate change is a complex issue where the risks are uncertain and not always visible. Boards need access to high-quality information to allow them to effectively evaluate the risks and opportunities, and then make decisions based on this knowledge.
  2. Is the board fully aware of how climate change may affect the company?

    Boards need to ensure that, collectively, they are aware of the effect climate change may have on the business. Understanding the risks and opportunities allows the board to take early action to mitigate some risks, maximise opportunities and create a strategy to effectively deal with what the future could hold.
  3. Is there a climate change expert on the board? If not, how can the board access that expertise?

    Boards may consider including a non-executive director who has specific expertise when it comes to climate change. If this is not possible, advisers need to be tasked with including climate considerations in their advice.
  4. Is there a designated director responsible for climate change and how is that responsibility structured?

    Managing climate-related risks and opportunities at director level ensures they receive sufficient scrutiny. For banks and insurers in the UK, there is regulatory expectation that a senior manager will have responsibility for managing these risks.
  5. How does the board ensure that there is sufficient and sustained attention given to climate change-related risks?

    Once there is the right level of expertise on the board, the board needs to maintain awareness and understanding of the issues. These considerations need to remain standing items on the agenda, and regular updates must be requested from executives.
  6. Does corporate strategy include a holistic climate strategy informed by scenario analysis?

    Climate-related risks and opportunities will affect the business over different timeframes in uncertain and variable ways. Strategic planning decisions should therefore be based on detailed scenario analysis.
  7. What are the short-, medium- and long-term risks and opportunities posed to the business by climate change?

    Short-term decisions may have a profound effect on a company’s long-term position. Boards must explicitly consider the long-term impact of climate change on the business, taking into account long-term resilience.
  8. How does the board ensure that climate risks and opportunities are identified, monitored and managed across the company?

    Climate-related risks and opportunities should be communicated to the whole company so the potential impact, whether negative or positive, is clear to all. All parts of the organisation can then help to mitigate risks and seize opportunities where appropriate.
  9. Are any climate targets and/or goals integrated into management’s incentives?

    Incentivisation should be used to align the interest of executive directors to the long-term health and resilience of the company. The board should approve and monitor the related targets and goals against which management is assessed.
  10. Is the board prepared to disclose climate-related information to investors?

    Some companies are reluctant to disclose climate-related information in case detailed disclosures reveal commercially sensitive information and/or make the company vulnerable to future legal action. But, actually, accurate and decision-useful climate disclosures made to investors and other stakeholders should help mitigate the risks of failing to disclose relevant information about the company.

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