Board of (Climate-Change) Directors

A new SEC plan that would greatly expand mandatory climate-related disclosures could also shift the makeup and responsibilities of boards. Will it usher in a new breed of ESG director?  

What do Exxon Mobil, Warner Music Group, the Iowa Farm Bureau, and Mothers & Others for Clean Air have in common? They are among the hundreds of organizations that have written to the Securities and Exchange Commission about its proposed new rules on climate-related disclosures—rules that, if adopted, could have major implications for current and future board directors of public companies.

First proposed in March, the new regulations would require public companies to disclose their greenhouse gas emissions, any climate-related risks likely to have a “material impact” on the business, and the specific climate expertise of their board directors. The proposed rules have generated so many comments—both for and against, and from what the SEC describes as a “wide breadth of investors, issuers, market participants, and other stakeholders”—that the agency had to extend the comment period. Anthony Goodman, a Korn Ferry senior client partner, and head of the firm’s Board Effectiveness practice, says the number of comments underscores how dramatically the new rules could alter the landscape. They could change not only how and what climate information companies disclose, but also how boards are constituted. “It’s going to require a lot of companies to do things differently,” says Goodman.

Many public companies have already been disclosing how they deal with climate-related risks (as well as opportunities). Around 70% of the Russell 1000 companies already publish a sustainability report, for instance. But as Goodman notes, there is no standard governing what they report, how the data is verified, or what framework is used for disclosure. “What has been missing is direction from the SEC that will help with comparability for investors,” says Goodman, who notes that the proposals tie climate-related issues to financial risk for both businesses and investors.

To draw up its plan, the SEC says, it relied heavily on a framework created by the Task Force on Climate-Related Financial Disclosures, or TCFD. The TCFD framework has been backed by the largest asset managers and comes with the seal of approval of the Financial Stability Board, which created the Task Force in 2015. The SEC notes in its proposal that “according to the TCFD, only a small percentage of issuers that voluntarily provided climate-related information presented governance disclosure aligned with the TCFD’s recommendations.”

While the proposals are far from being finalized, and will likely look very different if implemented, experts say they’re part of a wave of environmental, social, and governance (ESG) initiatives that could shift the makeup and responsibilities of boards. For instance, the SEC is proposing that companies disclose the extent of the board’s expertise in climate-related risk, the way boards will provide oversight (such as via a committee), and the frequency with which management will report climate-related concerns to the board. Boards would also have to disclose how climate-related risks are integrated into corporate strategy and risk management, including the setting of targets and goals. To put this another way: if the proposals pass, board directors would have to be sufficiently versed in climate issues to be able to assess whether management had adequately planned for flooding that could knock out a factory located near a coastline, or if a supplier’s proximity to a forest might expose it to global-warming fires. 

The problem is that—according to the National Association of Corporate Directors (NACD)—only six percent of current directors have any ESG skills. That’s because boards have primarily addressed climate concerns, if at all, by appointing a single director with environmental expertise. But Ghita Alderman, associate director of ESG Content at NACD, says this strategy often leads to a siloed view of climate change. She says directors with such specialized expertise are often unable to guide or challenge the main business of the board, including strategy, capital allocation, and CEO succession planning. “The goal of the board should be to build collective climate knowledge among all directors,” says Alderman. “Otherwise, they are not fulfilling their oversight role.”

For his part, Goodman worries that the SEC’s proposed rules could lead to a talent sprint for a new breed of specialized directors, instead of to the appointing of well-rounded leaders able to focus simultaneously on people, planet, and profit. These directors would integrate ESG into their investment and business philosophies. “I think the baseline for every director is that boards need to get educated about climate and other ESG matters, and not simply rely on appointing experts to the board,” says Goodman.