The climate of corporate governance

This piece is part of the series, Governance Propositions of 2022

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Failure to address climate change mitigation and adaptation, extreme weather events and natural disasters continue to rank among the top five global risks for companies, in terms of both likelihood and impact, according to the World Economic Forum Global Risk Report 2019. There is a growing consensus on climate-related risks, embedded in business-as-usual practices, to have the potential to dramatically escalate financial losses and swerve the financial system to a precipitous tail off.

Companies worldwide have started to take cognizance of the looming complexities of climate change and acknowledge the tremendous risks as well as opportunities posited by the climate predicament.

The World Federation of Exchanges will be revising its Environmental, Social and Governance (ESG) Guidance & Metrics based on the TCFD recommendations.

Standard setting bodies have designed and developed guiding principles for companies to manage climate-related financial risks and opportunities better, most noteworthy being the recommendations by the Task Force on Climate-Related Financial Disclosures (TCFD), established by the Financial Stability Board. Regulators too are pushing for companies to adopt and adapt to sustainable practices. The World Federation of Exchanges will be revising its Environmental, Social and Governance (ESG) Guidance & Metrics based on the TCFD recommendations. The Securities and Exchange Board of India (SEBI) intends to mandate Business Responsibility and Sustainability Reporting (BRSB), based on global frameworks, for the top 1,000 listed entities (as per market capitalisation) from the financial year 2022 (currently, it stands as a voluntary exercise). 

However, for policy to turn into action, the onus lies with companies to incorporate effective climate governance structures in management processes to guide strategic decision making, assess short-, medium- and long-term climate related risks and opportunities as well as to track, monitor and report progress across climate indicators and metrices.

Knowledge sharing and ESG-training for boards of directors and management personnel should be made mandatory by companies.

Corporate governance, stewarded by the board of directors, plays a crucial role in setting the right tone at the top and embedding a culture that trickles down ensuring robust and sustainable management practices.

In light of increasing climate advocacy and environmental shareholder activism, failure of boards to rise up to the task, will leave many biting the dust. In a classic case, Engine No. 1, a fund from San Francisco with a meagre stake of 0.02 percent in ExxonMobil’s stocks, criticised the collective experience of the board on matters of clean energy and managed to successfully instate three directors on the board of ExxonMobil to help the company transition away from fossil fuels in the future. Closer to home, shareholder activism in India is also gaining traction but is driven mostly by institutional investors, such as the mutual funds, pension funds, insurance companies and foreign portfolio investors.

While boards of directors have started to agree that climate change is important to strategic decision-making, the ineptitude of climate knowledge and an insufficient understanding of

of climate change’s implications for financial performance among directors, precludes progress. In this regard, it is imperative that climate-related factors are built into the recruitment, induction and compensation processes. Knowledge sharing and ESG-training for boards of directors and management personnel should be made mandatory by companies. It might prove useful to consider integrating sustainability-related targets into existing incentive structures for both executive and non-executive directors.

The responsibility of the committee will be to devise a corporate sustainability strategy, identify, assess and manage sustainability-related risks and opportunities, plan to transition to a low carbon emission pathway, set science-based targets and monitor and report performance across ESG metrices and indicators.

Another persistent challenge the board of directors face is the paucity of time to discuss climate-related matters, which usually find only a tangential mention given the plethora of items on the board’s agenda. Therefore, to ensure adequate oversight of the issue, a standalone Sustainability Committee should be mandated by law. In its current form, under Section 135 of Companies Act 2013, it is mandatory for companies beyond a certain threshold to set up a Corporate Social Responsibility (CSR) Committee. It is, perhaps, time we expand the aperture of its scope and subsume CSR under an overarching Sustainability Committee. The responsibility of the committee will be to devise a corporate sustainability strategy, identify, assess and manage sustainability-related risks and opportunities, plan to transition to a low carbon emission pathway, set science-based targets and monitor and report performance across ESG metrices and indicators. The committee should constitute climate competent executive as well as non-executive members who are in a position to ask tough and incisive questions to the auditors and management. The committee members should be held accountable for its targets and report to the Board on a regular basis.

Building long term climate resilience will become a critical strategy for business survival. Stakeholder activism coupled with new financial and accounting models will enhance sustainability standards in companies. Embedding climate governance in the overall corporate governance framework will be key to both managing performance and building goodwill for organisations of the future.

• Domestic Politics and Governance
• Climate Change
• India
• adaptation
• BRSB
• Climate change
• Corporate Governance
• CSR
• ExxonMobil
• fossil fuels
• mitigation
• TCFD

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