Shining a light on key issues and questions for boards tackling climate change
This paper provides a summary of key highlights from interviews with 16 members of the World Economic Forum’s Community of Chairpersons, on climate action held in late 2021. It is part of an ongoing series of thought leadership designed to enhance climate competence and steward climate action by board directors across the globe. A special thanks to Olivier M. Schwab and Ramya Krishnaswamy of the World Economic Forum, whose insights and connections to this series were invaluable.
Strategy
Do you understand where your company stands in its climate governance journey and how you will need to evolve?
- There are three broad stages to taking climate action, understanding the “why”, the “how” and the “how fast”. Many boards are still at the stage of understanding “how”. The hardest part of taking action is making the decision – once it is made it becomes a question of execution.
- Pivoting the business towards climate and sustainability requires an increasing speed and collaboration of boards to shift portfolios and instil aculture to think differently
Risk and opportunity
How aware is your board of the risks and opportunities presented by climate change and climate action?
- Many boards are still grappling with understanding the risks posed by climate change and are particularly focused on transitional risks such as regulations and investor pressure. It is important that boards are aware of all the risks and are treated the same as any other risk.
Stakeholders
Do you understand your stakeholder pressures and the trade-off decisions they face?
- Negative publicity is seen as the biggest motivator of change for the majority of companies. Sources of pressure vary by geography and sector, but it is increasing on all fronts.
- Chairpersons also have a role to play in placing pressure on their stakeholders (such as governments and suppliers) to be proactive.
- Board engagement with stakeholders (such as investors or governments) is needed to feed into decision making and obtain meaningful outcomes.
Board competence
Does your board hold the right diversity of capabilities to competently engage on climate and act decisively?
- Overall, there is a lack of knowledge of what others are doing, with climate competency often viewed as a “nice-to-have”. However, this varies massively by sector, geography and ownership model.
- Chairpersons have a critical role in educating their boards and broader networks.
Board operations
How is climate risk and action embedded in your board operations and governance structure?
- Culture and climate cannot be delegated. Establishing a structure so that climate issues are regularly brought on the board agenda, such as by regular board tutorials, appointing an expert or sub-committee, is vital.
- The chair and chief executive officer (CEO) relationship is also critical. Chairpersons assist the CEO in keeping an outward-looking view and vision for the long term. At the same time, chairpersons can support the CEO to influence the board to take action.
1- Strategy
Do you understand where your company stands in its climate governance journey and how you will need to evolve?
Chairpersons broadly outlined that a high-level process to change involves understanding:
– Why must we pay attention?
– How will we change?
– How fast can we, and do we want to, change?
- Chairpersons considered that many companies are still understanding the “How”, some are still coming to terms with “Why”, but this group is becoming smaller.
- Chairpersons need to set the expectation that directors stay on top of global trends. Chairpersons noted it can take a number of years for the board to make the decision to act, but once it is made it, it is just a question of execution.
Increasing speed and collaboration
Chairpersons identified a need for increasing speed
and collaboration, noting:
– It is a fight to stay relevant.
– Once the board has passed the point of “Why” and “How” it is then the process of working out how to go faster.
The key question for strategy is: what is the timing
to step away from key business? If the timing is
right, market share will grow, but there is a fear of
moving too early.
Boards need to decide if the company should lead
or be a fast follower. Both are valid approaches, but
they are mutually exclusive and require clarity to act
in line with strategy.
A key challenge is taking action without all
supporting information and data. Decision-makers
waiting for hard data will act too late.
A big challenge for chairpersons is to get “people who
understand the pace of change, embrace the change
and be willing to take enough risk to execute”.
Board members with a CEO background may not
have the skills that are required now. Chairpersons
believe there is a need to think differently, noting
that boards need to:
- Move from inward-looking technical thinking to an outward-looking ecosystemic focus. This is a critical step to operating with a view of the full value chain.
- Change from having a “sustainability strategy” to having a “sustainable strategy” that embeds sustainable thinking into all strategic endeavours.
- Make sure directors are not all from the samesector as this leads to management becoming myopic and inward-focused.
Chairpersons noted that there is opportunity in crises and emphasized that boards should not waste the current crisis to make significant changes. In their view, boards should:
- Aim to be leaders in investment and to be
ahead of the curve on growth. - Push management on the level of commitment
and take away any options to turn back. By
selling cash flow assets, “the stepping stones
were taken away”– there was no way back.
2- Risk and opportunity
How aware is your board of the risks and opportunities presented by climate change and climate action?
Chairpersons noted that many boards are still grappling with understanding the risks posed by climate change, recognizing that:
– Boards often do not understand climate risk, especially how it might impact supply chains.
– The focus of boards is currently mostly on mitigation and not many are yet thinking about adaptation.
– Transition risks are taking precedence over physical risks at this stage.
– There is a need to understand and balance the risk in the business portfolio.
– Climate risk is just one of many risks; it should be treated in the same way as all risks.
– There is potential that boards are not informed enough to make the best decisions on climate risks.
– Boards need wide risk awareness to have a strong understanding of other arguments and analysis.
Chairpersons noted that their focus on future proofing and opportunity has transformed their entire business, emphasizing the opportunities of new products and services.
Chairpersons recognized that change happened once the board saw the opportunity. Although this is hard, there is a need to bring the plan from the
brain to the heart.
Chairpersons suggested that boards should be
asking:
– How do we reposition towards to growth areas?
– How do we help others to transition to our
commercial benefit?
Greenwashing is a major risk highlighted by several chairpersons, although they noted that it appears to be decreasing.
Chairpersons acknowledged that there are a lot of commitments made, yet there are still plenty of discussions on understanding the “How”, indicating that many businesses are making commitments without understanding how they will be achieved.
To avoid greenwashing, chairpersons noted that:
– Businesses need to demonstrate clear follow-through on commitments.
– If the business is taking action because “you should”, it will not be a committed strategy. Effective climate action has to be wanted.
Chairpersons agreed that standard setting is critical and is starting to come together, noting that:
– Businesses need common reporting standards to enable transition.
– In the first instance, companies need to start disclosing. The next step is quality disclosure.
3- Stakeholders
Do you understand your stakeholder pressures and the trade-offs they must make?
Chairpersons acknowledged that negative publicity is the biggest motivator of change for the majority of companies.
The source of greatest pressure varies significantly by geography and sector but all dimensions of stakeholder pressure are increasing. Chairpersons
provided different examples of stakeholders applying pressure (by stakeholder type and in order of impact), including:
– First community, then employees, customers, investors.
– First employees and then clients.
– Investors, employees and prospective employees.
– Younger employees.
Investors demand huge change and then also demand no change in dividends in the short term. Chairpersons called out this behaviour and noted they cannot have both. Trade-offs are required and will likely impact all stakeholders.
Chairpersons also suggested that investors in Asia are less focused on the “Environment” and are more focused on “Social” and “Governance”.
Chairpersons also highlighted the role of boards in putting pressure back on their stakeholders:
– Companies have a role in educating clients to help them make informed decisions.
– Financial companies have a role in “becoming a factor of change” for companies they finance.
– Some governments are lagging behind and it is the role of companies to help them catch up.
– Chairpersons can play a vital role influencing their networks to put pressure on stakeholders to also take action.
Chairpersons noted that boards and their companies also have a role in engaging their stakeholders.
– Chairpersons and boards have a strong role in influencing finance by engaging with investors to understand their trade-offs and telling the story in a way that can be heard.
– Companies must have a plan backing up the commitments – weaknesses will be exposed.
However, engagement with stakeholders must not be a “tick box” exercise; strategic debate is needed to feed into decision making to obtain meaningful outcomes.
4- Board Competence
Does your board hold the right diversity of capabilities to engage on climate and
act decisively?
Chairpersons noted there is a lack of knowledge among boards on what others are doing and the practical solutions, indicating that:
– A view remains that taking climate action is always costly and value destructive.
– Climate competencies are still seen mostly as a “nice-to-have”.
– While competence and focus vary massively by sector, geography and ownership model, in general:
- Heavy-emitting industries are far more aware and engaged with climate issues.
- European boards have shown more focus on the issue due to high policy and community pressures.
- Public companies are under more pressure from investors compared to private and family-owned companies. For private and family-owned businesses, the vision for change has to come from within.
Chairpersons noted that board competency varies by region:
– In Europe, there is broad board agenda to make the world fossil free and in doing so build a strong company.
– In Asia, there is limited awareness or concern about climate issues. However, with recent netzero targets by governments, including China and Japan, there is some knowledge of the need for emissions targets. Large global companies with operations in Asia are starting to engage, but others have no idea where to start.
Chairpersons suggested that board members must be a board member first and then may bring expertise in specific areas, noting that companies need to be careful in making board appointments based on specialist expertise alone. As such, chairpersons recognized their role in driving competency:
– It is important to get people on the same page, same mindset and agree on the issues.
– Chairpersons can educate their boards and executives through knowledge shares/tutorials outside formal board meetings. This can also involve getting internal and external speakers.
– Education must be more than a “tick box” exercise; it needs to run deep and be committed to driving competency.
The chairpersons considered that a coalition of chairpersons focused on climate could help education, noting that:
– Basic education has to happen as a foundation.
– Chairpersons should not assume a level of understanding. There is a need to get everyone to the same place regardless of the starting place
-Education programmes should be substantive and avoid being political or preaching.
5- Board Operation
How is climate risk and action embedded in your board operations and governance structure?
Chairpersons recognized the need to make sure the CEO is keeping an external world view and challenge their assumptions.
Often the CEO is too busy addressing immediate issues. An independent chair can step back and ensure that longer-term issues such as climate are getting coverage.
Chairpersons can help the CEO and management in shaping the argument so the board can hear it. Chairpersons suggested that:
– The board acts as a bridge between the 5-10- year strategic view and the annual tactical view of executive management.
– Trust and mature dialogue between the chairperson and CEO is critical.
Chairpersons also emphasized that “culture and climate cannot be delegated”, suggesting that the way climate capability is brought on to the board can vary depending on the company’s current needs . For example, there are options to:
– Appoint a climate expert on the board to support raising the broad knowledge of all board members. If experts are involved, the board should consider how skills are transferred for shared responsibility.
– Establish a sustainability sub-committee or full board engagement.
Chairpersons also identified key gaps and issues, in that:
– Board effectiveness reviews often do not include climate.
– Corporate governance needs to leave space for individual leadership and for diverse voices to encourage healthy debate.
Chairpersons indicated that the nominations committee is essential to get the right people, and suggested that:
– Appointments need to shift from “who has the most skills” to those “with the most curiosity”.
– Boards need leaders who look beyond the organization’s borders.
Diversity of thinking, including age and cognitive diversity, is critical to be able to negotiate complex issues such as climate.
– Candidates for boards are starting to be hired on potential rather than on demonstrated experience.
Overall, chairpersons agreed that an effective CEO who is deep in climate is rare; instead, boards should be looking for someone who is open and inquisitive.
Chairpersons also recognized the role of executive remuneration, noting that:
– There is a big variation in current state of remuneration and the likely future step is towards executive remuneration linked to climate.
– It is seen as a critical step, but for some it is not a near-term step
Views on executive remuneration ranged from climate must be part of remuneration, some considered at least 10%-20% of remuneration, while
others considered it is not on the agenda at all.