Five questions director should ask about climate risk

How can business respond to climate change?

Climate change and sustainability has been placed firmly in the spotlight of media and society’s attention. Focus is now turning even more to the business world to play its part.

Given the far-reaching impact and risk implications of climate change, there is a need for boards to better understand how it will affect their organisations and their sector so they can make better informed and more strategic decisions. However in a recent survey of ICAEW’s UK business members (Jun/July 2019), only 37% were aware of the World Economic Forum’s Climate Governance Principles and only 15% were aware of the FSB’s Taskforce on Climate Related Financial Disclosures (TCFD).

How ready is your board to talk about climate change?

1. What skills and experience does the board have?

Climate risk is an area that many firms are still in the early stages of understanding. All boards should be considering whether their current composition has the skills and expertise to fully explore how climate risk affects the organisation with regards to strategy, operations and reputation . Board evaluations are starting to include 'climate competence' and this varies greatly from country to country. For example, UK boards are considered to be light on science backgrounds compared to countries such as Germany. You my need to recruit NEDs or consultants with the requisite experience, particularly from other sectors which have a deep knowledge of embedding this in their strategy. Directors won’t be judged by hindsight – but they do need to be up to date on the science and expertise of the day. They should also be prepared to be challenged on their own carbon footprint.

How willing your board is to make this issue a priority? Do you really want to make changes, or do you just want to comply? Not everyone sees this as an issue that they need to make time for, but ultimately, it is the board who will be responsible if the organisation fails to adapt to the risks of climate change.

2. Is your finance team embedding sustainability in its practices?

The finance team should be central to any conversations about climate risk, particularly in bringing together different parts of the business to understand and implement effective scenario analysis.

Finance teams are essential in helping to drive progress – by transforming the way we see, record and organise the world in which we live. If other parts of the business are to fully grasp their responsibilities, and drive the outcomes needed, finance needs clear vision of the short, medium and long-term impacts of climate change to create a business case for change. A strong finance team, with an innovative and inclusive approach, can be a leading force in building sustainable economies.

3. Regulation is coming – is your governance prepared?

We don’t know yet what further climate regulation could look like, and there is currently no mandatory global reporting standards for climate risk. However, TCFD gives us a good indication of the way regulation could develop, and mandatory uptake of its recommendations is a possibility in the future in the UK.

Progressive businesses are taking positive climate action before regulation makes it mandatory. Chapter Zero is a network of company chairs, committee chairs and non-executive directors, committed to developing their knowledge of the implications of climate change for UK business. Given the far-reaching impact and implications, their purpose is to enable directors to understand better how it is likely to affect their companies and sectors, and to encourage their boards to hold informed and strategic discussions and respond effectively to the climate change challenge.

In the face of uncertainty, good climate risk approach starts with good governance. If you don’t have the answers – go back to how you deal with risk, change and opportunity, and ultimately – disruption.

4. Are you speaking to your sector about climate risk?

Understanding of climate risk is uneven and sector-specific, which isn’t surprising as, for example, some sectors structurally have a far greater exposure to carbon in their portfolios. In many cases individual companies will have to work across the value chain to be able to effectively decarbonise. Sectors such as construction and manufacturing, FMCG and aviation have a huge amount to do here. ICAEW will run a range of sector-specific webinars in 2020, to cover climate risk for our Retail Community, Construction and Real Estate Community (with plans to cover more sectors). These webinars will equip members with the information they need to be professionally ready for climate change in their sector. Please visit the Communities Hub to join for free and receive more information.

5. Do your key financial relationships align with your values?

If your organisation has a defined benefit pension scheme overseen by trustees, you can use your influence to ensure that the funds are invested in sustainable funds with superior ESG values. You can take the same approach with your investment portfolio too.

If your organisation doesn’t have such a pension scheme or significant investments, you can take action by considering the sustainability and CSR credentials of who the organisation banks with. Do those companies align with your values? Who is your insurer, and what is their approach to climate risk? You are only as strong as your supply chain.

Finally, you can empower employees by making them aware of their influence on how their defined contribution pension savings are invested. They can contact their accumulation fund to ensure that the asset allocation they have aligns with their values.

Author

Julia Root-Gutteridge, Manager – Board Effectiveness
ICAEW
julia.root-gutteridge@icaew.com

Further resources

About

This article is drawn from a roundtable hosted by ICAEW’s Corporate Governance Community in November 2019 which included presentations from Chapter Zero and Baker McKenzie.