Disclosures On Climate Strategy And Climate Risk Management Key Issue For Boards In 2021

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If BlackRock is willing to hold directors accountable, other institutional investors will follow. Three strategies to prepare for greater accountability.

There is a high likelihood that corporate boards will have to give greater attention to climate change risk and climate related disclosures in 2021 and beyond. Many large institutional investors have expressed concern over the negative effects climate risk can have on the long term growth of companies they’ve invested in. Expect to see shareholders confront boards about climate risk disclosures, complete with threats to hold them accountable if transparency and new approaches aren’t embraced.

Additionally, boards will have to consider how the incoming Biden administration’s approach to climate change may affect their ongoing operations. The administration has already re-entered the Paris Climate Accord and with former secretary of state John Kerry nominated to become the nation’s climate czar, the expectation is that that domestic climate-friendly legislation will be a major part of the Biden agenda. Boards must begin reviewing how they may be affected by climate-related concerns with an eye toward developing a strategy for compliance and for taking advantage of potential new opportunities.

Already, BlackRock, the world’s largest money manager, has made it clear that climate risk will be a major point of interest this year. In its recently released “BlackRock Investment Stewardship: Proxy Voting Guidelines for U.S. Securities,” the company states:

“Given the increased understanding of material sustainability risks and opportunities, and the need for better information to assess them, BlackRock will advocate for continued improvement in companies’ reporting and will hold management and/ or directors accountable where disclosures or the business practices underlying them are inadequate.”

If BlackRock is willing to hold directors accountable, other institutional investors will certainly follow, so corporate boards should take the warning seriously. In recent years we’ve seen shareholders resolutions filed at companies like Chevron and Exxon asking the companies to report on climate-change related public health risks and how the companies will deal with transitioning away from fossil fuels. Boards should expect to see more of those types of resolutions plus others aimed at reducing carbon emissions and/or requests to reveal strategies the company will use to deal with supply disruptions caused by climate-related events.

Climate strategy and climate risk management will need to be discussed among directors this year, so corporate board members should begin to prepare.

Re-evaluate the level of climate change related experience currently on your board. There is nothing wrong with looking at the current skillsets on your board to determine if the company is prepared to deal with the changes that appear likely now that climate change risk has been elevated as a major shareholder concern. If there are not enough directors with climate risk experience, it may be time to recruit someone that can be an asset on this issue going forward, or enlist consulting services that can help the board understand climate related issues better and come up with strategies that fit the unique circumstances of the company.

Review what the company is currently doing on climate risk disclosure. Now that climate change risk disclosure is on BlackRock’s radar, every company must determine how they stack up. What level of disclosure does the company currently have and how should it be improved?  BlackRock has recommended that companies follow guidelines put forth by the Task Force on Climate-related Financial Disclosure (TCFD) and the Sustainability Accounting Standards Board (SASB) to better determine what information may be financially material. Perhaps appointing a subcommittee to examine how TCFD suggests companies disclose how they identify, assess, manage and oversee sustainability-related risks and opportunities. The subcommittee will be needed during the year to determine how the company should react as new regulations from the Biden administration are implemented. The committee must also focus on ways the company can derive some financial gain from paying better attention to climate related risks. Should the company begin pulling out of certain lines of business because the climate risks are increasing? Can the company provide products and services to help other companies deal with climate-related disruptions? The board should explore these questions.

Engage shareholders and stakeholders on climate risk related concerns. Talk with shareholders about their climate risk related concerns before they take action against the company. If the board can get advance warning regarding what shareholder issues might be brewing, it can better develop an adequate response detailing why changes won’t be implemented. If compromises can be made, that’s likely a win for everyone because the Biden administration will certainly usher in new climate-related regulations that are likely to affect every company. Companies should also pay attention to the voices in the communities they operate in and the concerns of their workers and customers. Disregarding environmental impacts can lead to reputational damage on a larger scale than has been seen in the past. Municipalities are suing companies for damages related to climate risk and environmental impacts that result from their business operations and employees are striking against companies that do not pay attention to the environment or environmental risks. Such actions can affect revenue numbers and stock price growth.

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