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Arctic ice caps melting. Raging debates over the Paris climate agreement. And, oh yes, a hot new director job inside at least some boardrooms.
Turns out there is no subject the modern board can ignore. Along with weighing company dividends and CEO comp packages, some boards are debuting a new responsibility: considering how climate change will impact strategy, budgets, business plans and every other aspect of the firm. Already, of course, companies are designing products that use less energy, while others are demanding suppliers become more energy efficient. But the most recent push has been to bring on board members who are “climate competent.” Indeed, some firms have even made it a mandatory part of director duties on their boards’ governance and public affairs committee.
The subject is as thorny as any, but analysts say demanding that company management give regular updates about the firm’s climate-related risks and opportunities is becoming part of the bottom-line agenda inside boardrooms. “Board members are bound by fiduciary duties that now extend to considering environmental factors when providing oversight for strategy and risk,” says Peter Gleason, president and CEO of the National Association of Corporate Directors (NACD).
For some boards, it’s been a natural evolution. At Prudential Financial, the board’s focus on sustainability has evolved from looking at social and environmental risks to applying a climate-change perspective in reviewing the company’s overall strategy, says Margaret Foran, the firm’s chief governance officer and corporate secretary. Legal considerations may force similar changes, depending on where; in Australia, for instance, a growing number of law experts believe board directors could be held personally liable if they fail to properly consider and disclose foreseeable climate-related risks.
Elsewhere, activist investors are demanding that companies start taking climate change into account. CalPERS and CalSTRS, the California-based pension funds that collectively invest almost half a trillion dollars, is now asking companies in which they own stock to recruit green-knowledgeable directors. And this spring, State Street Global Advisors, the world’s third-largest asset manager, pressed the companies in which it owns stakes to disclose much more about how they are preparing for the impact of climate change on their businesses. Rather than just divest, State Street, CalPERS and other asset managers have decided to challenge board directors who aren’t adjusting. “We can affect change by being owners,” says Steve Waygood, chief responsible investment officer of the London-based Aviva, which has more than $400 billion in assets under management. “It’s better than simply walking away from the problem.”
Of course, all this expertise isn’t in every potential director’s skill set, so there is a scramble of sorts to find them. Heather Zichal, one-time top climate and energy advisor to former President Barack Obama, is now a director at a natural gas firm. Earlier this year, ExxonMobil appointed noted climate scientist Susan Avery as a director. Avery helped the US National Oceanic and Atmospheric Administration formulate a national plan for climate research and was a member of the scientific advisory board to Ban Ki-moon when he was secretary-general of the United Nations.
With such superstars few and far between, however, many companies will rely on educating at least one director on climate-change issues. The NACD recently released a report specifically on how directors can improve their oversight of climate change and other environment and sustainability issues. And the Financial Stability Board, an influential agency that oversees risk for insurers and banks worldwide, released guidelines for climate-change disclosure. Aviva’s Waygood, who is on the task force that came up with the guidelines, says that getting boards up to speed on climate change likely will take some time, but it has to be done. He says, “Climate risk, for many sectors, more than they realize, is a material issue.”