With the impending SEC climate disclosure rule, California climate bill, and European Union regulations regarding board oversight for climate risk on the horizon, what are boards doing to prepare? The short answer is, not enough.

In the last year or so, most public company boards have taken some action to prepare themselves for the SEC’s cybersecurity oversight requirements. Companies either found cyber experts or developed cyber expertise among the existing board members. Now, many management teams and boards are treating climate risk oversight similar to cybersecurity oversight, but they shouldn’t be. The truth is there is a vast delta between the two issues. Cybersecurity risks are largely controllable and unanimously bad, and cybersecurity experts are a dime a dozen. On the other hand, climate risks are entirely out of the control of any individual or company; they can actually pose potential upside to some companies; and climate risk experts are a scarce resource.

All of these factors converge to place most companies behind the eight ball in terms of their ability to oversee climate-related risks.

Lack of board-level climate expertise is a significant and widespread problem

Unfortunately, the data proves this fact: only 15% of directors believe their board is fully equipped to oversee climate-related risks, and less than half feel their management briefings are helpful. Nevertheless, directors are expected to be experts in the risks and affairs of the businesses they oversee. So, the perceived lack of board expertise is concerning, given expectations from regulators, exchanges, investors, and other stakeholders for boards to oversee—if not drive—climate risk management, ready or not.

As a result, companies are sometimes placing blind faith in a board of directors to oversee climate risk. In some ways, this is no different than the trust many of us may put into our auto mechanic—we begrudgingly shell out the cash in acceptance of their recommendations and our inability to repair our own vehicles. The difference, however, is we aren’t expected to be experts in auto repair. But business leaders can’t afford to be in the dark on climate change. Clearly, executives have a job to do in ensuring that directors know enough to ask the right questions about climate risk in order to fulfill their oversight role.

Unprepared boards are reactive instead of proactive

Due to a lack of preparedness, many boards are playing whack-a-mole, reactively addressing climate risks as they present themselves rather than proactively preventing or mitigating them. In practice, this can look like the following scenario: a management team briefs its board on the company’s need to establish greenhouse gas emissions reduction targets due to impending regulations. Directors may ask about the process, the costs, who should be involved, and what is the likelihood that the regulation won’t materialize. This skim-the-surface oversight simply is not cutting it when it comes to meeting expectations for effective oversight.

A proactive board, instead, would be aware of pending regulations and direct management to take action to ensure compliance. Directors’ questions would focus on how to integrate climate efforts with business strategy and satisfy stakeholder expectations. Since only half of directors believe their company’s strategy is linked to ESG issues, such a proactive approach is clearly missing in most organizations.

The path to a more educated board consists of two lanes—the how and the what

Developing a board with the capabilities to deliver meaningful climate risk oversight will require education and skill development in several key areas.

How to educate the board on climate

Let’s start with the how. The right solution is to develop a more educated board—namely one that has multiple ESG experts, not just one. After all, ESG is a big umbrella that should not be delegated to just one individual. Undoubtedly, one of the several ESG experts on the board should have distinct expertise in climate risk management.

Additionally, boards can make progress by educating the directors who are already present. To that end, directors can educate themselves on climate risk through any number of mediums, be it trainings, workshops, conferences, literature, and more.

Keep in mind that few directors ever think that they are the problem, and that’s not surprising. In fact, 83% of directors believe they have intermediate, advanced, or expert level of expertise in ESG, yet they believe only 62% their peers on the board have the same expertise. Whether they’re right or not is moot. If board members take their fiduciary duties seriously, all directors should embrace further learning whether they feel up to speed or not.

Members of senior management should do the same. Executives concerned about a lack of expertise on the board can lead by example. Management cannot fairly expect directors to learn about things that they themselves don’t even understand. Making the effort a family affair—a workshop, retreat, or seminar involving both senior management and the board of directors—is much more effective than one involving just one group.

What should be the focus of climate education?

This brings us to the what, which represents a big gap to fill for most directors. To help, we’ve honed in on five key tips for directors to get the most out of their skill-building.

1. Know the Regulations. First and foremost, directors should understand if their business is impacted by regulations from the SEC, the EU, the UK, California, New York, or other governing bodies and, if so, when they will be impacted. Working backward from regulatory compliance deadlines, directors can align and develop their skill set to ensure the company is adequately prepared. Questions to consider:
   • ◦  What regulations impact the company?
   • ◦  When do the regulations go into effect?
   • ◦  What are the company’s gaps to achieving full compliance?

2. Find the Owner(s). Within the business, there is a person or a committee responsible for assessing and/or managing climate risks. This may fall under legal, facilities, enterprise risk, or another function. It is important for responsible directors to collaborate and align with internal owners to stay abreast of progress and plans for identifying and managing risks. Questions to consider:
   • ◦  Who is responsible for identifying climate risks?
   • ◦  Has a climate risk assessment been conducted?
     1. If yes, what risks were identified?
     2. If no, when will an assessment be conducted?
   • ◦  What efforts are being taken to mitigate identified climate risks?

3. Close the Gaps. Whether at the board level or among senior management, there are inevitably knowledge gaps. Directors can be most useful by identifying these gaps and focusing their learning on skills that will fill them. Doing so will ensure comprehensive oversight and prevent strategic blind spots. Questions to consider:
   • ◦  In what areas do our leaders lack expertise?
   • ◦  Among these areas, which are seemingly most pertinent for the business?
   • ◦  Which leaders with complementary areas of expertise can collaborate with the board?

4. Demand Useful Briefings. Directors say that briefings on climate aren’t useful. To address this problem, boards can clearly outline what it expects from management and push hard to get it. Be explicit about how information should be received and hold the leadership team accountable. Questions to consider:
   • ◦  In what format(s) does the board best receive and retain information?
   • ◦  How often does the board want to be briefed on climate-related information?
   • ◦  Can the board share questions in advance of briefings to ensure relevance?

5. Align Internal and External Resources. If the board is relying on external experts, ensure that these same experts are aligned and coordinating with internal experts. There is no reason for strategic advisors to be speaking with board members and not management. Bringing together the two groups develops consistency and alignment on priorities and goals. Questions to consider:
   • ◦  Are management and the board using two different advisors for the same purpose and, if so, can this duplicity be eliminated?
   • ◦  Who among senior management can coordinate best with consultants?
   • ◦  Can advisors help achieve congruence and address any goal misalignment between the board and management?

Think beyond compliance to develop a winning approach to climate oversight

At a bare minimum, progress toward a more climate-knowledgeable board needs to be made for compliance purposes—regulations and stakeholder expectations are only moving in the direction of more oversight and more disclosure. Beyond the bare minimum, ESG management and oversight will inevitably be a deciding factor in separating winners from losers. In any case, a whack-a-mole style reactive approach to climate oversight will not suffice for much longer. If companies want to do more than tread water, they must rely on their boards to have foresight and expertise to anticipate risks and changes and address them before the competition.

If your board would benefit from a workshop on the latest ESG developments, give us a call. The climate and ESG consultants at Riveron can help create a customized program to address ESG gaps in your organization and establish the right level of board oversight on these critical issues.

Sources:

Board Oversight: Key Focus Areas for 2022 (harvard.edu)

Sustainability and What the Board Needs to Know

Annual Corporate Directors Survey 2023: PwC