Implementing climate governance in your organisation
Posted on: November 16th 2022 · read
Climate change is a financial risk and the related acute physical risks (event driven such as flash floods and extreme heat) need to be integrated into your business model! The increased frequency of these acute extreme weather events is affecting businesses decision making, infrastructure, employees and our global food supply chain.
The Deloitte’s 2022 climate check survey (ref Climate Action Ahead Of COP27 | Deloitte Global) identified most organizations have initiated climate mitigation and/or adaptation strategies (69% are executing mitigation and 68% are executing adaptation strategies, but some industries are lagging).
The ambitious challenge of achieving a net zero economy by 2050, the incremental climate reporting obligations and the increase in climate litigations are increasing the pressure on the board of directors. According to the U.N. Intergovernmental Panel on Climate Change, climate litigation "has influenced the outcome and ambition of climate governance." As its 2022 report noted: "Outside the formal climate policy processes, climate litigation is an important arena for various actors to confront and interact over how climate change should be governed."
If organisations get the implementation of governance and allocation of individual management responsibilities wrong it will lead to bad decisions being made on climate strategy, risk management and during the determination of metrics and targets. Without governance in place, a company will be ill-equipped to deal with the threats or to respond appropriately to stakeholders.
If an organisation achieves good climate governance, this will unlock opportunities and help the organisation make prudent and informed decisions on the climate strategy.
Governance TCFD pillar explained
Governance is central to determining how well prepared an organization is to cope with the impacts of, and the organization’s impact on, climate change.
The Taskforce for Climate Related Financial Disclosures (“TCFD”) includes 4 key pillars (governance, strategy, risk management and metric & targets) with 11 recommended disclosures to assist organisations report on climate change.
The governance pillar of TCFD consists of the following two recommended disclosures:
Governance A – Describe the board’s oversight of climate-related risks and opportunities
Governance B – Describe management’s role in assessing and managing climate-related risks and opportunities
These disclosures allow stakeholders to understand whether its board and management are paying sufficient attention to climate change.
MHA recommends the first step is to review if any knowledge gaps exist at the board level on net zero and climate change that need to be addressed (such as via awareness TCFD training to the Board) before you are captured by the incremental reporting requirements on climate disclosures.
Is the board able to answer the following considerations:
- What does the commitment mean in practice? How do I translate the commitment into my products and services, and metrics and targets?
- What are the activities I need to support or enable to help reduce emissions in the real economy? What will be the nature of the changes?
- How should I measure progress and portfolio alignment? How do I compare against my peers?
Top 4 considerations when implementing climate governance
- The board needs to take responsibility for the company’s climate strategy. Climate change is a potential strategic risk to companies, and it is therefore the duty of the board to identify and manage it in the same way as any other strategic risk.
- Climate leadership needs to come from both the board and managers! Start assigning individual responsibilities to managers who can support the direction of travel!
- Is the Board being properly informed about climate related risks ad opportunities and able to make relevant decisions on material climate matters? The board needs to start collating information from management on the climate risks posed to the organization to ensure prudent and informed decisions are being made on the climate strategy.
- Speak to your critical stakeholders and understand their requirements. The board should consider disclosing material climate-related risks, opportunities and strategic decisions to all stakeholders by integrating TCFD framework governance pillar.
The following resources MHA considers useful that can support discussions with the board of directors on climate change:
- The Board Scorecard: shifting the climate conversation | ICAEW
- Climate change risk: A good practice guide for Audit and Risk Assurance Committees - National Audit Office (NAO) insight
- TCFD Knowledge Hub Online Learning (tcfdhub.org)
- Board Scorecard introduction - chapterzero
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