Climate change is now firmly on the agenda for boards. Yet a gap remains between what directors say about climate change (essentially, that’s it’s a critical strategic issue) and what their companies do about climate change (essentially, very little). Based on a survey of dozens of directors in 43 countries, ten pieces of advice emerged for boards in 2022, including conducting a board-effectiveness review focused on climate; refresh the board make-up to ensure climate expertise and linking executive compensation to climate targets.
We have some optimistic news to kick off 2022: Climate change is at long last on the corporate-governance agenda, according to our research. When we surveyed 301 directors of companies headquartered in 43 countries, three-quarters of our respondents said they recognize climate as very important to their companies’ strategic success.
At the same time, however, our findings revealed a stark disconnect between what boards say and what they do. For example, in our survey 72% reported being confident that their company will reach its climate goals, but 43% haven’t yet established any carbon-reduction targets.
The good news is that our research also suggests that the gap between good intentions and climate action is surprisingly easy to bridge. Here are ten things every board should do in 2022 in order to prepare their company for this species-critical issue.
Conduct a short board-effectiveness review, specifically about climate change.
Audit what your board does know and what it must know. Our research suggests that 85% of boards need to increase their climate knowledge, so you may need some outside help just to ask the questions. However, directors know better than anyone what is usually on their agenda: financial performance, executive performance, new investments, and the rest. The fundamental question is: do they know enough about the implications of climate change for these key issues to perform effective oversight?
Determine how to plug the knowledge gaps uncovered by your review.
You can’t have an expert on the board for every topic, so do you need one for climate change? As it happens, our respondents were split down the middle on this question, but to the 50% who answered “no,” we ask: Do you need external climate advisers to the board? Can you learn more from the executive team (while of course continuing to oversee their performance objectively)? Is there a temporary fix, such as a short-term appointment? Or an educational program? Or membership in a specialist organization such as Chapter Zero.
Bring new voices into the boardroom.
Depending on the outcomes of our first two pieces of advice, you may need to refresh your board membership sooner rather than later. At the very least you will probably want to revamp your board refreshment strategy to include climate change in the competency matrix. Even if you decide not to recruit new members or seek new skills, you will most likely need to bring climate experts in as observers or advisers.
Make climate change an explicit part of your agenda.
Sometimes, it may be a stand-alone item for discussion. Other times, the words “climate” and “change” will appear next to “asset allocation” or “risk assessment” (or some other strategic discussion). Alternatively, if relating climate change to everything, seems too overwhelming, zoom in on a single business unit, product line, or asset to make it real.
Embed climate change in your governance structures.
Depending on your industry or your board’s level of knowledge, there will be different approaches. If you have a sustainability committee, there is a natural home for discussing the impact of climate change on your business. Nearly a quarter of our respondents were members of such a committee. But other structures may be equally relevant: a specialist non-executive director (NED) or a “decarbonization taskforce,” for example.
Mandate the executive team to set specific climate-change goals.
If, like 57% of our respondents, you are a director of a company that already has carbon-reduction targets, consider looking beyond Scope 1 and 2 to Scope 3, that is for emissions beyond your direct control, such as outsourced operations or product use. Only 16% of the companies whose directors we surveyed have already taken this step, which suggests that 84% of companies “could do better”.
Tie executive recruitment to climate knowledge and executive compensation to climate targets.
Define a clear chain of executive accountability for setting and meeting climate change goals, starting with the CEO — and harmonize hiring and compensation decisions to it. Only 35% of our respondents say that climate change is a formal requirement of their company’s selection of a new CEO and only 26% that climate change is integrated into executive performance metrics. These tricks are just too simple to miss.
Make your climate reporting as robust as your financial reporting.
Granted, the lack of universally applicable reporting standards has been an excuse for inaction in the past, but one outcome of COP26 is that the world will have standardized emissions reporting by 2024. Your company’s auditors should be able to provide guidance. And if they can’t, maybe it’s time to think about changing provider.
Use your company’s purpose as a lens.
Reporting and regulations will only take you so far. As well as zooming in on the detail (see point 4) to make climate change real, zoom back out again to the bigger picture. If you can use your purpose to frame your climate-related decisions, you have a platform to engage the entire company. What’s more, any specific measures that you do take will have a greater chance of success.
Lead on climate change from the chair.
Board chairs have a particularly important role to play in driving all nine of the quick wins above, but even more in ensuring that the right tone is set in the boardroom. Those who sit at the head of the table must set climate change as priority, ensure open and honest discussion about it, and — above all — encourage reflection on how the board and company can do even better in 2022 and beyond.
Are corporate boards paying lip service to climate change? We believe that this interpretation of the gap between their words and their actions is superficial. We prefer to think that many directors are so overwhelmed by the scale and complexity of their environmental, social, and governance (ESG) responsibilities that they don’t know where to start. With these ten quick wins, we hope to lead the way.