Why is knowledge about climate change important for members of Supervisory Boards

The role of the non-executive director (the “NED”) is to provide oversight, strategic guidance and to challenge the executive directors with the objective of improving the corporate’s operations. Therefore, the NEDs can potentially make a huge contribution by introducing climate change to the board’s agenda and ensuring that climate-related issues are embedded in the company’s governance, risk management, strategic decisions and allocation of resources. In order to do that, the NED must be aware of the complexity of the issues, the potential impacts for the company and how they might be effectively addressed.

The climate emergency is not a foresight of threats to come in the distant future; it is our present day’s reality. The world has already warmed 1°C above pre-industrial levels, and will continue to do so – perhaps reaching 4,8°C by the end of the century according to the IPCC.[1]

The international community has begun to take action. Adopted by all UN member states in 2015, the 2030 Agenda for Sustainable Development set out a 15 year plan to achieve 17 goals, which integrate the three dimensions of sustainable development (economic, social, and environmental). The Goal 13: Climate Action is dedicated to combating climate change.

In 2015, nearly 200 governments adopted the Paris Agreement, a flagship initiative and legally binding treaty seeking to “limit the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels.”

Businesses worldwide are beginning to experience tangible financial impacts. A global risk assessment performed by the World Economic Forum indicates that climate-related issues are both the most likely and most severe in terms of impact[2]:

WEF Global Risks Landscape 2020
WEF Global Risks Landscape 2020

Source: WEF

The significance of those risks will rise over time and affect businesses worldwide. This is especially true for emerging markets, which are more vulnerable to potential climate-related impacts, and thus, more likely to experience severe shocks caused by direct and indirect impacts of climate change. From the perspective of the boards, a failure to take this new class of risks into consideration, and to successfully incorporate them into core business activities, might result in a breach of the director’s duties of loyalty and care to the company and its shareholders.

The role of the non-executive director (the “NED”) is to provide oversight, strategic guidance and to challenge the executive directors with the objective of improving the corporate’s operations. Therefore, the NEDs can potentially make a huge contribution by introducing climate change to the board’s agenda and ensuring that climate-related issues are embedded in the company’s governance, risk management, strategic decisions and allocation of resources. In order to do that, the NED must be aware of the complexity of the issues, the potential impacts for the company and how they might be effectively addressed.

Timing is of the essence. The sooner a company will take action, the lesser the potential adverse financial impacts might be. Additionally, combating the issue early might be a source of competitive advantage and provide business with new opportunities.

Climate change should be introduced to the board’s agenda irrespective of the geography, sector and business model of the company. Bringing up a new, complex and perhaps unfamiliar issue might be demanding and not well received by all board members. Therefore, it is important to prepare your case well. The NED should be able to actively challenge as well as provide support and mentorship to the board.

The text is an expert study of publicly available materials for non-executive directors from sectors other than financial services.

[1] IPCC, AR5 Synthesis Report – Climate Change 2014, https://ar5-syr.ipcc.ch/ipcc/ipcc/resources/pdf/IPCC_SynthesisReport.pdf

[2] World Economic Forum, The Global Risks Report 2020, http://www3.weforum.org/docs/WEF_Global_Risk_Report_2020.pdf (access: 15.01.2021)

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