Board Oversight of Net Zero – A Long-Term Imperative or Passing Fad?

There’s been a lot of noise lately with respect to environmental, social and governance (ESG) issues, including climate change. The notion of ESG being “woke capitalism” and the politicization of climate change are rampant in the United States. While it’s difficult not to pay attention to the anti-ESG movement south of the border, in my view, it is clearer than ever that board oversight of net zero is here to stay.

Here are five reasons why Canadian boards should pay attention to the net-zero transition:  

Reason #1: Climate oversight is aligned with directors’ fiduciary duties 

Directors have a responsibility to oversee all material financial risks to the organization, which includes oversight of climate-related financial risk. Fiduciaries must act in the best interests of the corporation, and the mismanagement of climate-related risks can quickly become financially material. Considering climate-related risk gives directors a line of sight to financial stability issues and potential impacts to business models and strategies in the long-term, climate oversight directly aligns with their duties to oversee companies’ risk management and strategy. 

In 2022, the Hansell McLaughlin Advisory Group issued an updated legal opinion that stated “directors must put aside any preconceptions they may have about the reality or imminence of climate change risk and be open to the information relevant to the business of the corporation. They must require reports and recommendations from management and external sources as necessary and be satisfied that the corporation is addressing climate change risk appropriately.”  

Reason #2: Access to capital increasingly depends on effective climate governance and disclosure 

Institutional investors have been increasing their focus on ESG integration in their investment decisions, with a clear emphasis on climate change as a systemic financial risk to the global economy and longterm portfolio returns. The anti-ESG movement in the U.S. has not changed investors’ focus on ESG issues. A 2022 survey by Millani found that 97% of investors have not changed their approach to ESG over the last six months, although many did increase their focus on engagement. 

To address systemic financial risks posed by climate change, investors are seeking information on how boards are establishing effective governance structures to oversee climate change and ensuring they have the necessary skills and competencies to do so. Whether you serve on the board of a public, private or NFP entity, if your organization seeks debt or equity financing, climate competency will become imperative to accessing capital in the long run.  

Reason #3: New mandatory climate disclosure regulation is coming 

Investor demand for climate-related disclosure is also driving new regulations in North America. In the past 12 months, securities regulators in Canada and the U.S. have proposed new mandatory climate change disclosure regulations for public companies. Both proposals are based on the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), and both will require organizations to report on processes for climate governance and risk management. The proposals diverge, however, on the treatment of emissions disclosures, transition plans and financial statement impacts. 

Regardless of their final scope and coverage, these disclosure requirements will also impact private companies, particularly those with customers that are public companies. As public companies are pushed to report and reduce Scope 3 emissions within their supply chains, they will require suppliers to do the same. Therefore, boards of public and private companies must pay attention to the growing demand for transparent information on climate change from financial stakeholders.  

Reason #4: There are unprecedented opportunities in the global low-carbon transition 

In a 2022 study, McKinsey estimated that getting to net zero by 2050 will require investments of US$275 trillion by 2050, or US$9.2 trillion per year on average. While climate change may pose significant physical and transition risks to organizations, it also presents significant opportunities as the world seeks new and innovative products and services to decarbonize the way we eat, live, work, travel and invest. 

In his 2022 CEO letter, Larry Fink, the CEO of the world’s largest asset manager, BlackRock, said the “decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime.” As climate action ramps up globally, Canadian organizations have tremendous opportunities to illustrate how a natural resource-based economy can transition to net zero, all while exporting our products and solutions to other jurisdictions in support of economic growth.  

Reason #5: To attract talent, organizations must demonstrate climate action 

Whether you serve on a board that is publicly traded, privately held or a not-for-profit, human capital management is one of the biggest issues facing organizations today. The COVID-19 pandemic exacerbated this issue, adding terms like ‘quiet quitting’ and the ‘Great Resignation’ to our vocabularies.  

The 2022 Edelman Trust Barometer found that “when considering a job, 60% of employees want their CEO to speak out on controversial issues they care about and 80% of the general population want CEOs to be personally visible when discussing public policy with external stakeholders or work their company has done to benefit society.” Of note, 68% of respondents also expect CEOs to shape the conversation and public polices on climate change. 

According to Deloitte’s 2022 Gen Z and Millennial Survey, almost half of Gen Zs (48%) and millennials (43%) say they have put some pressure on their employer to take action on climate change. In a world where society is increasingly expecting the private sector to address real-world environmental and social challenges, savvy organizations are leveraging their ESG and climate change efforts to differentiate themselves in the war for talent.  

Tips for Getting Started 

Boards must respond to the growing push for transparency on the management and governance of climate change issues. Here are three tips for corporate directors looking to get started: 

1. Educate the board on climate change – It is important that corporate directors can understand the link between macro-level trends in capital markets and their responsibilities as board members. Leading organizations are offering their boards climate change education tailored to their sector and unique circumstances. 

2. Establish clear structures and accountabilities – While there is no one-size-fits-all framework for climate governance, it is best practice for the full board to have accountability for oversight of climate change. Committees can be leveraged to assist the board in fulfilling its duties. 

3. Issue a TCFD report – Given new regulations and financial market convergence around the TCFD recommendations as the preferred framework for reporting on climate-related financial risks, boards should prepare to issue their first TCFD reports. As part of this process, organizations should start by conducting a materiality assessment to identify and prioritize the climate-related risks and opportunities with the greatest potential to impact the organization’s value.  

Make no mistake: board oversight of climate change is an emerging norm that will become an imperative over the long term. Directors should ensure they are paying close attention to these converging trends that are accelerating financial markets’ focus on climate change and the net-zero transition. By getting started with the three tactical items above, boards can ensure they keep up to speed with this rapidly evolving area.