Pressure rising to deal with climate governance

Is climate governance at an inflection point? A recent AICD study in collaboration with Pollination indicates pressure on organisations to deal with this issue will only increase.

Recently, the AICD, in collaboration with investment and advisory firm Pollination, conducted a study of director attitudes and board practices on climate governance.

The research, the second study of its kind carried out by the AICD, highlighted a shift in boardrooms since the inaugural study in 2021. In short, there is a move from organisations outlining their climate ambition, towards directors navigating the complexity of implementation with management.

What has become clear, particularly in private discussions with senior directors, is that the pathway to net zero for many is highly uncertain — requiring better stakeholder alignment, concerted long-term investment, clear policy settings and major technological and sectoral change.

There needs to be an open, robust conversation between government, business, investors and other stakeholders on the current pain points and how they can be addressed collectively.

Few climate challenges can be solved in isolation — government must provide an enabling policy environment that offers greater certainty, supports the transition and punishes deliberate greenwashing. Investors must be willing to provide patient capital, and acknowledge the complexity inherent in key sectoral transitions. And organisational leaders must have the focus and risk appetite to reimagine their strategies in a rapidly decarbonising world.

Highlighted below are some of the areas where we saw better climate governance practice emerging in the Australian market.

Long-term outlook despite near-term challenges

The challenge of juggling near-term demands and long-term value creation looms large for all boards. In the area of climate, these pressures are acute, with significant capital expenditure often required to finance transition plans highly dependent on assumptions and factors external to organisations. It was often seen as the board’s role to encourage management to take a longer-term view on climate, despite the complex suite of issues facing organisations day to day.

Although consideration of an organisation’s impact and reliance on nature is seen by some as the next sustainability frontier, integration with a holistic climate and sustainability strategy was seen as better practice — rather than waiting for regulators or investors to ratchet up demands.

Glossing over the costs of transition and stakeholder impacts is not a viable option. Leading organisations are being explicit, both internally and externally, with key stakeholders on the trade- offs that need to be made, and what that means in practice and over different time horizons.

Whole-of-organisation approach

A clear message from the study is that climate is a mainstream strategy and risk issue for most boards. Previously, the topic may have been seen as going to corporate reputation and community standing. Today, it is an area where the hard skills of finance, risk, audit and legal teams must be brought to bear.

Increasingly, we are seeing sustainability teams sitting under CFOs as a clear signal of the increased importance and scrutiny being applied. Similarly, climate-related goals are feeding into pay and performance frameworks as an important signal of organisational priority, despite some investor pushback.

Credible, science-based transition

Perhaps one of the most striking shifts in recent years has been rapidly rising investor, regulator and stakeholder expectations of what a “good” corporate transition plan looks like, despite the lack of a clear benchmark.

Previously, a public commitment to an aspirational climate target with some preliminary planning may have been seen as acceptable to regulators and investors.

Today, such statements are likely to be dismissed as greenwashing and create legal and reputational risks.

As a result, organisations are working closely with external experts and expending greater resources on producing plans that clearly articulate data gaps, uncertainties and dependencies, particularly any reliance on emerging technologies and/or use of carbon offsets. A grounding in the latest climate science, aligned with the Paris Agreement temperature goals, is critical and now seen as a baseline expectation.

With mandatory reporting around the corner, Australia is moving to a phase where climate disclosures will soon be scrutinised to the same level as financials — making boards increasingly turn to external providers for assurance.

Broad internal buy-in

Directors see a need for better communication and internal engagement when developing the business case for transition. Too often, climate strategies have been produced in silos or dropped in from above, meaning limited buy-in from key parts of the business, thereby creating execution risks.

Instead, embedding climate consideration into standard internal decision-making processes is seen as a key step, via mechanisms such as internal carbon prices and climate strategy overlays.

Equally, human capital considerations are increasingly front of mind, with directors asking whether management teams have sufficient expertise in the ranks to handle complex transitions.

Strategic approach to mandatory reporting

While it was well-accepted that mandatory reporting would create significant implementation challenges for organisations, senior directors encouraged a strategic, rather than compliance, mindset. The expected reporting regime is prompting fresh conversations at board and senior executive level, triggering robust reassessments of the ongoing appropriateness of climate strategy and transition plans.

At the same time, heightened regulator focus on greenwashing is prompting many organisations to do a stocktake of their current marketing materials and corporate disclosures to minimise legal exposure. By requiring reporting across a wide span of areas including governance, risk and opportunity, the new reporting standards will prompt management teams to take a deeper look at organisational climate exposure and consider the long-term viability of their businesses.

Always evolving climate governance structures

A key finding from the study was that leading directors not only accepted the need to regularly devote time within boardrooms to climate, but also to continually review the ongoing appropriateness of supporting governance structures.

At least for more mature organisations, the days of climate change being left to the quarterly sustainability committee meeting are a thing of the past. Instead, boards are looking to address potential blind spots — requiring committees such as remuneration, nominations, risk and audit to each consider their unique role in supporting whole-of-board oversight. In some cases, joint committee meetings were seen as valuable.

Lastly, directors are increasingly looking inwards and thinking about how to upskill personally. With investor expectations rising around what a climate-competent director looks like, more board members are investing in formal education and taking part in expert briefings and roundtables.

Future outlook

Looking ahead, climate change will continue to consume significant time at board and senior management level, with a disorderly transition, compounded by geopolitical tensions, requiring constant re-evaluation at an organisational level.

With all indications suggesting the world is not on course to meet the Paris Agreement goals, expectations on corporates will likely rise — from investors, employees, customers and the community at large. Governments will need to be responsive to these currents, making increased regulation and sectoral interventions more likely.

As host of the Climate Governance Initiative Australia, the AICD is committed to supporting directors through this journey and continuing to be a voice for sound public policy that supports this transition. 

Christian Gergis GAICD is AICD head of Policy.

This article first appeared under the headline 'At the crossroads’ in the May 2024 issue of Company Director magazine.