Boards Say Climate Change Is Important, But Don’t Prioritize Measuring Progress

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Nearly three-quarters of all boards say they don’t prioritize climate change in their executive performance metrics.

A recent report from Heidrick & Struggles and the INSEAD business school suggests that although many companies claim to be committed to taking steps to address climate change, their corporate directors may not have the right experience and knowledge to be effective. Corporate board members should be prepared to defend their track record on climate change and explain how they’ve factored the potential effects of climate change into their business model as more shareholders and stakeholders express concern over how companies are reducing carbon emissions and implementing policies that can save the earth’s environment while boosting future returns.

According to the report, “Changing the Climate in the Boardroom,” although 75 percent of boards surveyed said climate change is very or entirely important to the strategic success of their company, and 72 percent said they were confident they would reach their climate change goals, 69 percent said that climate change knowledge is not a formal requirement for joining their board and 74 percent of boards said they don’t prioritize climate change in their executive performance metrics. Equally discouraging was the fact that over 80 percent of companies said they have someone that is responsible for reporting on climate change to the board, but 50 percent of all board members were concerned about the level of reporting they receive on climate change progress.

Boards that say climate change is important to them but then don’t implement ways to measure their progress in dealing with it open themselves up to criticism and shareholder actions in the coming year. The competency of individual directors may be challenged and activists may launch proxy fights seeking to replace board members with candidates they feel have stronger climate change experience, as was the case with ExxonMobil last year. And as weather-related risks continue to be connected with climate change (such as the December tornadoes that caused more than 100 deaths in Kentucky, Illinois, Tennessee, Arkansas and Missouri this year), almost any company can be taken to task on this issue.

“As companies continue to evolve their ESG efforts…boards whose primary focus is enforcing good corporate governance must lead on climate change,” said Heidrick & Struggles Partner Louis Besland in a press release. “Regulatory and other pressures are converging to influence access to capital, as insurers, investors and lenders are increasingly requiring ESG disclosure that mirrors financial reporting to secure funding.”

The report, which asked 301 board members in 43 countries how they viewed their board’s actions on climate change, also offers suggestions on what companies can do to prepare for potential demands from stakeholders regarding climate change. Recommendations include adding climate change experts to the board and tying climate change goals to executive compensation. However the real test for boards will be their willingness to develop systems to measure their company’s success meeting climate change goals and to share that information with investors and other stakeholders.

Boards need to identify their deficiencies regarding their understanding and addressing climate-related risk and make adjustments before shareholders begin demanding change. Climate change disclosures will grow in importance next year as more financial institutions tie access to capital to reductions in carbon emissions and the implementation of other climate change-related strategic adjustments. Companies that produce sustainability reports, complete with details on how the company plans to tackle climate change-related risk, could avoid activists attempts to question the board’s competency on climate change matters.

The number of climate-related shareholder proposals continues to increase, with 84 such proposals filed through the end of September 2021. Of those climate-related proposals, 23 were voted on and almost half of those received majority support. Expect those numbers to increase in 2022.

In 2021, Shareholders also created “Say-on-Climate,” a proposal that attempts to allow investors to weigh in on a company’s strategy regarding climate-related risk. Investors are also looking to target directors who are perceived “climate deniers” and banding together to vote against them in upcoming board elections. In fact, BlackRock voted against 255 directors for climate-related reasons through the first half of 2021, up from 55 in 2020.

These trends show that directors need to re-evaluate their positions on climate change and business strategy. Failing to factor climate change risk into the financial future of the company would be a major mistake for most corporate boards to make.

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