Climate Change - Why Worry?

Climate change risk is not a new issue for many organizations (particularly those in the resource sector) but it has now landed on the board agenda for organizations across all sectors. There can be no doubt that climate risk poses an existential threat. Courts have taken judicial notice of this fact. Central banks, governments and regulators have recognized the danger and have developed frameworks, guidance and requirements for their stakeholders to follow to address the risk. Investors and regulators want a line of sight into how organizations are handling climate change risks and are requiring new disclosures. 

Where does the board fit in?  The board oversees how management deals with the risks facing the organization.  For boards that are just beginning their engagement on climate change risk, the first step is to hear from management. The board should understand the range of factors that are affected by climate change -  physical assets, raw material sourcing, logistics, human resources and corporate reputation are just a few.  Management will be able to brief or refresh the board on how climate change threatens the organization and what mitigation strategies have been adopted.  Boards will most often find that management has been addressing risks posed by climate change for many years, but many not have been packaging those issues to the board under a "climate change" heading. 

The board must decide where oversight of these risks should sit within the board's organization structure. The scale and breadth of the climate change risk makes it difficult to assign responsibility for the oversight of this risk to one committee of the board. In many organizations, the oversight of risk resides in the audit committee. The chair of the audit committee should understand clearly what oversight of climate change risk involves. The chair should consider whether the committee has the resources to conduct this oversight function and whether this additional responsibility could crowd out the resources needed to oversee financial reporting. 

The board and committee chairs should work with management to understand the aspects of climate change risk that fit more appropriately under the mandates of committees other than the audit committee. The human resources committee may need to understand the additional demands being placed on management and employees. These demands and the priority assigned to climate change issues may have an impact on short and long term compensation arrangements. The governance committee may decide to include in their search criteria for new directors, experience in key aspects of climate risk management. There may, of course, be issues that do not fit neatly into a committee mandate and will need to be addressed at meetings of the full board.  The board will also want to understand how all of the pieces relating to climate change risk fit together to be satisfied that nothing is falling between the cracks. 

One of the things that we hear most often from directors is that they want to spend more time on strategy.  Climate change risk presents an excellent opportunity.  Strategic questions from the board in response to management's presentations on climate risk and mitigation strategies can be valuable to management and provide a basis for the board to continue to move the discussion forward. 

Carol Hansell is the Senior Partner of Hansell LLP, a member of the Hansell McLaughlin Advisory Group. She is the author of the recently updated opinion on the responsibilities of directors in addressing climate change risk, Climate Change Risk on the Boardroom Table.