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The board’s role in confronting climate risk

Stephen G. Parker Partner, Governance Insights Center, PwC US March 10, 2021

The Biden administration is making the battle against climate change a top priority—and it expects companies to join the fight. Treasury Secretary Janet Yellen has pledged to explore tax policy changes to incentivize companies to cut carbon emissions and plans to appoint a “climate czar” to assess potential risks to the financial system. And, after announcing plans to revisit its 2010 climate disclosure guidelines, the SEC launched a task force in the Division of Enforcement that will scrutinize any material gaps or misstatements under the existing rules.

From a corporate director’s perspective, pressure to act more aggressively on climate change is nothing new. After all, the largest institutional shareholders have long been clamoring for greater disclosure around companies’ climate risk and footprint. But with the White House putting climate risk front and center, boards will see the need to do even more. 

Time to dig in

The good news is that directors increasingly believe that climate change should play a role in forming corporate strategy. Two-thirds (67%) of board members agreed with that statement in our latest Annual Corporate Directors Survey, up about 13 percentage points from the previous year. But, when it comes to environmental, social, and governance (ESG) issues like climate change, only 51% of directors say their boards have a strong understanding of how they impact the company.

It’s worth noting that corporate executives largely agree that their boards’ understanding of ESG issues could be stronger. When we polled more than 550 C-suite leaders about board effectiveness in 2020, less than half (47%) said their directors had a good grasp of the subject.

Fortunately, board members don’t need to be full-fledged climate experts to fulfill their oversight responsibilities. A broad understanding of the scientific consensus will suffice most of the time—especially when coupled with a willingness to explore its consequences for their companies. What toll will rising seas, stronger storms, and longer droughts take? When these questions are particularly complex, then true experts can—and should—be called in to help.

Overseeing climate risk

A director’s goal should be to understand how their management team assesses these and other climate-related risks, what they plan to do to mitigate them, and how they envision sharing that story with stakeholders outside the company, such as regulators, investors, communities, and customers. With expectations around transparency ramping up, boards will want to understand their management teams’ strategy for aligning with frameworks from groups like the Task Force on Climate-Related Financial Disclosures.

Risk oversight is an important part of boards’ remit. Climate change may differ from other risks a company faces due to the potential magnitude of its consequences, but boards can still look to risk management oversight best practices as they grapple with it.

Before that can happen, however, it must be on the agenda. Only 45% of directors said that ESG issues regularly have a place there, according to our Annual Corporate Directors Survey. That’s a strong indication that most boards aren’t giving climate risk oversight the attention it deserves—and that stakeholders demand.

The questions boards can ask management

Boards can ensure effective oversight of climate risk by asking their management teams the right questions. These may include:

  • How will the physical and transition risks associated with climate change impact the company’s strategy?
  • Has the company analyzed the opportunities that may arise from the shift to a less carbon-intensive economy?
  • What is the company’s climate story? How is it preparing for increased disclosure requirements?
  • What additional investment is necessary to ensure the company can measure its climate impact—as well as the impact of climate change on its business?
  • What operational changes could be made to mitigate the company’s climate impact?

Improving boardroom climate competency and ensuring that climate change is on the table during discussions of risk management are key first steps. But boards shouldn’t stop there. Because climate change—both as a corporate governance matter and a fact of life—is here to stay, boards should ask themselves where responsibility for overseeing this crucial risk should lie. Whether it lies with the full board or a committee, what matters most is that ownership of the matter is clear and that it remains on the agenda. When it comes to overseeing climate risk, the work has just begun.