Why boards are in the climate change firing line

Of the many complex challenges facing directors in 2024, climate change is the top issue requiring leadership from boards, according to co-chair of the Australian Climate Leaders Coalition, John Lydon GAICD. Lydon says we have a lot of work to do, and boards are starting to realise they’re in the firing line. Lydon will speak on the topic Powering Change: The Energy Transition and Climate Governance at the March 2024 Australian Governance Summit in Melbourne. Register now to secure your seat.

Notwithstanding the most prominent issues challenging company directors such as stakeholder expectations, risk management, governance changes and the economy, Lydon says investors, stakeholders and the world in general are starting to look at companies and are not just asking what their climate targets are but asking what is being done about them.

“Boards are at the forefront of those expectations of setting the right governance environment and ensuring that companies don't just have targets but are reporting and delivering against them,” he told the AICD in a recent interview.

He says in terms of Australia’s progress to the Paris Agreement, we have a lot of work to do, and boards are starting to realise they are in the firing line - that investors and stakeholders are looking to boards for guidance to see how they are going to lead the way.

Lydon says directors need to consider how to best incorporate climate change into broader organisational strategy and meet the range of standards the Australian Accounting Standards Board is examining right now, across governance, strategy and climate-related risk.

“Directors and boards need to be sure they're aware of how quickly this space is moving,” he told the AICD. “What might have been fine two or three years ago, to have a target for a certain amount of emission reduction - maybe net zero at a specific date in the future - isn’t enough anymore. Very soon, we will see the obligation for climate-related disclosures in Australia, and many people are considering or adopting those voluntarily beforehand.

“They're going to entail not just what companies are doing, the targets they're setting and how they are governing those targets, but also the financial risks,” says Lydon.  “There's the potential of the double materiality concept as well of not just the financial impact on the company, but the company’s impact on the environment and climate.”

Beyond that, Lydon says companies are now realising they need to have a credible transition action plan that details not only the targets but the measures to be implemented to ensure they're doing their part to help reach net zero growth.

Reporting obligations in the works

The International Sustainability Standards Board (ISSB) has been working on reporting obligations that all boards need to prepare for. But what exactly should boards do to get ready for these measures?

“When I look at the companies that are truly leading here, it's not just about reporting. It's about how the awareness and the potential to reduce emissions and the impact on climate is embedded into everything that company does—embedded into capital allocation, discount rates, strategy, incentives and all those decisions which happen day by day that executives make. Boards can be sure that the right actions are being taken if they're also sure that companies are embedding these types of measures into the way business is done.

“I know that the AICD has done a really good job in bringing some of that awareness into their membership,” he said. “I'd urge boards not just to stop at reporting and how the company is carrying out that task, but also at what are the ways their company is responding. What are the ways in which the corporation and its executive are meeting its obligations to reduce these emissions?”

The Australian Climate Leaders Coalition is a group of 50 companies and their chief executives committed to helping each other and Australia reach net zero.