Biden’s Focus On Climate Will Challenge Boards

To achieve the President's ambitious goals, his administration will need cooperation from corporations. What boards and CEOs need to know.

As President Joe Biden holds a global climate change summit with world leaders this week, corporate board members should begin considering how they will react to calls for all companies to implement measures to reduce carbon emissions that may result from the meeting. Climate change has been a major focus of the Biden administration, mirroring the sentiment of many Americans who are concerned about damage being caused to the environment. Shareholders are becoming increasingly concerned about climate change as well. With government and shareholder pressure for companies to address climate change expected to increase, boards should begin crafting a carbon emissions reduction/sustainable energy strategy that can be rolled out to investors sooner rather than later.

On Thursday, Biden committed the United States to reducing greenhouse gas emissions by 50 percent below 2005 levels by 2030. To achieve such an ambitious goal so quickly, the Biden administration will need cooperation from corporations. Some of the incentives for corporations to comply will no doubt come from government regulations that have yet to be presented. Another source of incentives for corporations to comply will need to come from corporate boards, so expect President Biden to make some sort of plea to CEOs to accelerate efforts to reduce carbon emissions.

• Carbon emissions reduction should be an agenda item directors prioritize this year. Open discussions on this topic can help the board determine where it stands on the topic, and what type of measures the board is willing to agree on taking to reduce carbon emissions. Of course, some boards may decide to take no action on carbon emissions, but it makes sense to gather information on the subject in order to develop a well-prepared response for investors.

Additionally, directors should begin to anticipate how the company will respond to potential regulations aimed at reducing carbon emissions. Oil and gas companies will be directly affected by this legislation, but any company that uses their products may be affected as well. Determining how restrictions on the use of fossil fuels may affect a company’s bottom line is the least companies should do so they can report the potential impact to investors.

• Boards may want to seek advice on converting to renewable sources of energy. Since more companies are considering transitioning from fossil fuels to alternative energy sources, there is a wealth of information on the benefits of green energy conversions. Companies can reduce carbon emissions and save money by implementing green energy strategies, whether it involves replacing gas-powered vehicles with electric vehicles, setting up solar power grids on office buildings and implementing energy efficiency improvements company-wide. Having consultants come in and conduct an energy audit can identify measures that can be the beginnings of a viable sustainable energy strategy.

• Boards can use compensation as an incentive to reduce carbon emissions. Since studies suggest that tying compensation to goals yields greater results, tying CEO and director compensation to results related to lowering carbon emissions may be something boards consider. While this would clearly be a shocking decision for a board to make, it is an option that is being pushed by investor groups at fossil fuel companies like Shell and BP.  Boards should at least be aware that they may face increased pressure on this issue from investors and that they should be prepared to develop a response to possible shareholder proposals asking for compensation to be tied to reductions in carbon emissions.

• Boards should anticipate how their industry will change as alternate energy sources become mainstreamed – then find ways to capitalize on the transition. The Covid-19 pandemic demonstrated how the elimination of a key resource can have a significant impact on a business, positively or negatively. Some companies were able to pivot quickly and move to virtual operations that in some cases increased their customer base and sales revenues. Other companies weren’t able to adjust and have yet to recover from business interruptions. Boards should consider studying how their company will be affected by a reduction in the use of fossil fuels and how industry competitors will be affected as well. Determining how they will replace any potential lost revenue now will help sooth investor concerns as the country attempts to meet President Biden’s goal of reducing carbon emissions by 50 percent by the year 2030.