The non-executive board and the task of the net-zero transition are perfect bedfellows, according to Chapter Zero’s Chief Executive.
Transition planning will progress in earnest in 2024. The first stage of reporting could come into effect as early as January 2025 for listed companies, defining the wider strategic context for UK businesses.
Good transition planning requires good governance. HM Treasury’s Transition Plan Taskforce (TPT) developed the TPT Framework as a methodology for developing a strong transition plan. This puts governance and the board’s role front and centre. Its governance strategy pillar demands forward-looking plans that consider oversight and reporting, accountability, culture, incentives, and skills and training.
Boards should approach transition planning as a business transformation imperative. The framework developed by the TPT recommends a process that starts with the definition of the strategic ambition, which needs the input of the board. With this in mind Chapter Zero, a philanthropically funded membership organisation designed to equip and inspire non-executive directors and chairs to lead on climate from the boardroom, has launched a dedicated Transition Planning Toolkit in support of the TPT framework, designed to help directors get up to speed on what transition planning means for boardrooms.
“The strategic ambition answers the central question: how do we need to transform the business model to manage climate-related risks and opportunities, and to both prepare for and contribute to the transition to a low-emissions, climate-resilient economy? And how do we govern for this?” says Vicky Moffatt, Chapter Zero’s Chief Executive.
The CEO must focus on quarterly returns, she explains, but it’s the remit of the non-exec board to consider the long-term success of the company and its impact on wider society according to the corporate governance code. This is why transition planning is especially important for boards; the regulation demands a longer-term strategic focus. Also, it does not just ask how the entity intends to decarbonise, but also how it will decarbonise the wider economy in which it operates.
“Implementing transition planning will be messy,” Moffatt says. “Boards need to encourage the executive to adopt a ‘test, learn, evolve’ approach. This is uncharted territory for every board.”
The starting point is to accept that everyone is learning as they go, she says. This is why Chapter Zero members find sharing best practice in a peer-to-peer community of directors and chairs so helpful.
Transition planning should be grounded in board-level scenario planning and risk modelling by considering two future scenarios. “Either we will enter runaway climate change because proactive action has been left too late, moving us beyond the 1.5°C limit. Or we’re going to see socio-economic tipping points fuelled by the trillions of capital investment required to transition to green energy, seeing us innovate our way out of the problem,” says Moffatt. “No matter which scenario, businesses need to transform.”
Chapter Zero’s Transition Planning Toolkit for NEDs helps them prepare for and give oversight for transition planning from a governance perspective. The toolkit consists of a Briefing, Scorecard, Governance Compass and Board Capability Tool.
The toolkit will help boards to explore transition planning in the context of the UK climate-reporting landscape and explains the key role of the NED in transition planning. NEDS can use it to assess how effectively a board is responding and contributing to a transition to a net-zero economy, and gain insight into an organisation’s readiness for transition plan disclosures.
The Governance Compass included in the toolkit helps board committees make sure their work considers and supports the company’s strategic ambition and transition plan. The aim is to thread environmental and social considerations into every aspect of the board’s role.
“In time, we may see the death of the environmental, social and governance committee,” says Moffatt. “As entities transition, climate will become a topic for the full board and impact every committee. And to support that we need strong climate-competent NEDs. All the great work that’s been done in gender, diversity and inclusion over the years can now be applied to climate.”
Transition planning will start to change the investor narrative by taking transparency to the next level, she explains. Organisations need to be clear about both what is working and what is not working. That will require new forms of leadership for boardrooms, with a new focus on strategic communication, transparency and change management skills.
“The slower we are to transition, the greater the climate risks, impacting the entire system,” says Moffatt. “So it’s a race against time where boardroom leadership can help us evolve with the urgency that is required.”