Governance and climate change

It is becoming clearer that directors have a legal as well as moral imperative to consider climate change in their decision-making, says Cathy Parker.

The Aotearoa Circle Sustainable Finance Forum obtained a legal opinion which says, “directors of New Zealand companies are generally permitted, and will in many contexts be required, to take climate change into account when making business decisions” – a requirement which stems principally from directors’ duty to act with reasonable care.”
(see https://www.theaotearoacircle.nz/sustainablefinance) 

In particular they need, as part of their overall risk analysis, to identify when and if climate change presents a foreseeable risk of financial harm to the business, this might come from direct effects or the costs of transitioning to a low carbon economy.

The Institute of Directors (IoD) noted that despite the upward trend of board engagement on climate change related matters there are still only 35 percent of directors who said their boards were engaged or proactive on climate change.

Whilst some potential effects might be obvious, there is a range of possibilities to consider and probably a number we have not mentioned:

• Potential flooding risk if facilities are in coastal or low-lying areas.

• Increased risk from climate-change related extreme weather events.

• Costs of moving to low carbon scenario – especially if an energy intensive business.

• Risk of stranded assets due to changing business models.

• Cost of reducing CO2 emissions if the business is a large emitter.

• Cost of consumer backlash if your products are viewed as non-climate friendly (air travel for instance).

• Knock-on effects if part of your supply chain is affected by any of the above (tourism, if air travel loses popularity, for instance).

• Direct effects from temperature change in say agriculture or similar industries.

• Regulatory risk – potential for further regulation.

• Liability risks – potential legal action by climate activists.

The first step for directors might be to do a business risk analysis for climate change using their normal risk analysis framework. This should be followed with periodic reporting to the board on these risks and any new ones identified and, where needed, engaging external expert advice on the risks or how to best address them.

Directors and boards should ensure they take opportunities to upskill themselves in this area. It might also be worth looking at board skills and diversity, board members with STEM experience might help impart a different vision around this (and other) areas with their evidence-based approach. Interestingly IoD, in collaboration with the Royal Society, has just released a report on this very matter (see https://www.iod.org.nz/Governance-Resources/Publications/Scientists-in-the-boardroom). In it Professor Sir Peter Gluckman describes science as a profession with a culture “of iterative scepticism and questions”.

The report also notes that only around three percent of board members currently have science or technology expertise.

As with any governance issue the consideration of, and response to, climate-change risk may also invoke disclosure and reporting requirements. The government is currently reviewing the requirements for climate-change related financial disclosures via a discussion document (see https://www.mfe.govt.nz/consultations/climate-related-financial-disclosures).

This is no longer an area that businesses can ignore and say “not our problem” as it is their problem due the potential effect on their ongoing business. So it is time to start paying attention. 

 

Cathy Parker is the director of Adrenalin Publishing, which owns Management magazine, and she sits on a number of boards.

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