Why should U.S. board directors follow the news and conversations around the various energy and climate-related proposals being advanced by today’s “Green New Deal” activists?
Why should they pay attention to the World Economic Forum’s recent conclusion that its annual survey results show we are “sleepwalking into catastrophe” when it comes to addressing the financial risks of climate change? And why should they care that the scientists of the Intergovernmental Panel on Climate Change say we have roughly a decade left to change course and avoid climate change’s worst environmental and economic impacts?
Let’s unpack these signs of the times a bit more to see why. Late last year, negotiators at the international climate talks (or COP24) in Poland adopted a shared rulebook allowing for global implementation of the Paris Climate Agreement. In the face of the U.S. playing spoilsport, this deal shows continued resolve by the global community for action on climate change. Furthermore, a record 415 investors managing over $32 trillion USD signed a statement calling on governments to support the Paris Agreement through action.
All this action from global economic actors stems from the growing pile of evidence that climate change poses a disruptive risks to our planet and capital markets. Extreme weather events are now the new normal – with record breaking losses caused by hurricanes, wildfires, heat waves and floods in the U.S. and worldwide. Businesses and investors are feeling these impacts. In 2017, 73 companies on the S&P 500 publicly disclosed a material effect on earnings from weather events, and 90 percent felt it was negative. Mark Carney, the governor of the Bank of England and head of the G-20’s Financial Stability Board, has declared that climate change poses financial risk that threatens the very stability of global financial markets.
Despite the efforts of the current U.S. administration to distance itself from the global efforts on climate change, it is important to keep in mind that the impacts of climate change do not know borders, and are happening now.
The Rhodium Group recently published a preliminary estimate of a rise in carbon emissions released in the U.S — a ratcheted rise of 1.9 percent in 2018 — despite the number of power plants closing. Similarly, last year’s 4th National Climate Assessment Report paints a sobering picture of the economic and public health impacts that climate change is already having on the U.S., and warns that without prompt action, the U.S. economy would shrink by billions of dollars in the coming decades.
As noted above, latest report from the Intergovernmental Panel on Climate Change (IPCC) notes that the window for action is closing quickly. The report warns that the world has just 12 years to prevent catastrophic losses from extreme heat, floods, droughts and poverty for hundreds of billions of people.
Before this picture feels too fatalistic, it is important to keep in mind that change is possible – and the global community is stepping up to take action. Countries are putting in place climate change-related regulations in ever increasing numbers, and we are even seeing a spurt in litigation aimed at climate change laggards.
In the U.S., a number of cities and states, notably California, New York State, Seattle and Atlanta have adopted strong regulations on climate change. In September, California passed a law putting the state on a path to 100 percent carbon free energy by 2045. Global investors are teaming up on initiatives, such as the Climate Action 100+ effort, to engage the most carbon intensive companies in the world on climate change.
So, let’s bring this back to the question that I asked at the beginning. Why should a U.S. director pay attention to this global context around climate change? Because: This context poses a range of physical, regulatory and financial risks to U.S. corporate strategies, not just in the long term, but also right now. And it offers opportunities as well. Investments needed to act on climate change will generate trillions of dollars of clean energy investment opportunities through 2050, and employ diverse sources of capital.
What are boards to do? Here are some thoughts:
One – Address climate change like an atypical, disruptive risk: NACD’s Blue Ribbon Commission Report on Disruptive Risks, and COSO’s new guidance on how to integrate ESG risks into the enterprise risk management process are great resources to that can help.
Two – Pay attention to how your investors are engaging on climate change: Some of the largest global investors, including BlackRock, Vanguard, State Street, and asset owners like CalPERS, CalSTRS and the New York City Comptroller have explicitly started to engage with their portfolio companies on climate change, and are increasingly focused on the role of the board as a part of this.
Three – Assess your board systems for climate change oversight: Specifically, investors are looking for boards to put in place robust systems that allow for systematic and effective oversight for climate change, such as explicit board mandates and linkages to executive compensation.
Four – Educate yourself: For boards to be able to assess climate change risks effectively, directors need to be conversant about the scope of the issues and associated business implications. Ceres’ primer on climate change aimed at the corporate director audience can provide a launching pad for boards.
Finally – Enhance climate risk disclosure: As investors are seeing climate change as a risk to their portfolios, they are increasingly calling on companies to provide disclosure to help them assess this risk. A large number of investors have called on companies to use the recommendations of the Task-force on Climate related Financial Disclosures (TCFD) towards this.
While there is much that corporate boards could do to position their companies for resilience in the face of the risks posed by climate change, the window for action is shrinking. Proactive and bold action by companies, supported by their boards, is critical to safeguard not only the vitality individual companies, but also the markets in which we operate and the planet in which we live.