Boards must take an active role in addressing organizational impacts of climate change

By now, we’ve all heard about climate change and the global movement to a low-carbon economy. Last week, I had the opportunity to participate as a panelist at an Institute of Corporate Directors event in Calgary, Alberta, Canada, along with Pat Carlson (CEO of Seven Generations), Jeff Lewis (Reporter for the Globe and Mail) and Dennis McConaghy (former Executive Vice-President of Corporate Development for TransCanada Corporation). Along with over 200 people who attended, we talked about the impetus for boards to consider the significant risks and opportunities presented by this movement, especially for the energy sector.

As a board member, it’s a fiduciary duty to address the impact of the move towards a low-carbon future regardless of government policy, including potential changes to US policy as a result of the recent election of President Trump. Although policy is a driver of change, there are many other factors at play, including advancements in technology. Boards must strive to balance the conversations between risks they can control (such as investments in technology) and those they cannot control (such as government policy making).

Moving to a low-carbon economy will have a range of effects on different companies. For example, low-cost operators will likely do okay because the decarbonisation will be gradual. What’s key is to assess the opportunities and risks as a board and think about ways to integrate key considerations into corporate strategy for the short-, medium- and long-term, and to be ready to make changes as risks and opportunities evolve over time. For a board, this means having prudent oversight of climate change risk while taking a long-term view on innovating business models through disruption, and managing shareholder expectations about how these may affect investment holdings.

Board members should consider the following as immediate actions to take:

Determine if your organization has a climate change strategy/policy and if not, consider developing one immediately to:

• navigate the changing regulatory landscape
• ensure climate change adaptation is aligned with corporate priorities

Assess your organization’s full exposure to existing and future climate change regulations, to better plan for future capital

• Evaluate the company’s current business model, financial exposure and cash flow projections against international, federal and provincial emissions reductions targets and policy direction
• Assess the impact of the proposed changes on your organization’s financial health by adopting a shadow carbon price and conducting emissions modelling – these approaches can help you fully assess financial impact over time as carbon prices continue to increase
• Conduct a cost-benefit analysis of the financial investment required to reduce emissions using technology versus paying the incremental costs associated with varying carbon pricing mechanisms

Identify and consider the biggest threats and opportunities for your long-term business model, and their impacts on your organization’s competitiveness, in terms of: 

• the implementation of carbon pricing at a provincial, federal and international level
• how to manage uncertainty of climate change policy when operating across multiple jurisdictions, the impact of rapid technology development and the impact of climate change 

Evaluate whether you have an appropriate climate change disclosure strategy

• Consider how climate change disclosure can demonstrate how the organization is managing uncertainty and a changing risk profile associated with climate change
• Consider disclosing meaningful information that is proactive and granular enough (i.e. methane emissions rather than just greenhouse gas emissions) that stakeholders can understand how your organization specifically is addressing the risks and capitalizing on the opportunities strategically – this also means making a connection between climate change metrics and financials

Other key considerations for boards

• Do your board and senior management have a climate change competency gap? If so, how should it be addressed?
• What does governance on climate change look like for leading organizations at a board level?
• In addition to assessing climate change risk, have we truly determined whether we can take advantage of the disruption caused by rapid technology advances to reduce our risk and capitalize on the opportunities to operate more efficiently and sustainably?
• Have we assessed whether integrating climate change considerations into our corporate strategy can increase our competitiveness?

At EY, we love asking #betterquestions and seeing what comes of them. Let me know your thoughts and let’s find some answers together.