'YOUR DAILY RESOURCE’: for public company boards, the C-suite and GCs
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(i) are virtual board meetings here to stay?: Some benefits of holding board meetings remotely was discussed in this recent HBR post, "The Upside of Virtual Board Meetings" (see item (i) from July 14/20), and more on the upside in this recent Directors & Boards article (which note refers to the said HBR post), by Harry Kraemer, former CEO of Baxter International, Inc. and who presently sits on the boards of three public companies. Below are some excerpts:
"The COVID-19 pandemic has precipitated massive changes in how companies do business, how their employees perform their jobs, and how board governance is carried out amid tremendous uncertainty and even chaos. As many boards experienced, when COVID-19 struck, meetings increased in number from four to six per year to as often as every two weeks. In fact, early in the crisis, it was not uncommon to have daily board calls. In addition, many CEOs reached out to individual board members for advice.
"While the frequency of meetings rose dramatically, stay-at-home orders prohibiting gathering in-person necessitated that boards use remote technology. Just as senior leaders and other teams within companies meet by videoconference, so do boards. This necessity, however, has become a surprise upside of the pandemic: good governance can be accomplished — and even enhanced — using remote technology. Moving forward, companies and boards have a real opportunity to leverage the efficiencies of remote meetings to help them recruit new and diverse board members, particularly those who are younger, are in earlier stages of leadership, and/or have family responsibilities that might otherwise preclude board service......
"Rather than holding telephonic meetings, boards have turned to videoconferencing. Unlike the technology many of us experienced 10 or 15 years ago, with glitches, delays, and “frozen” screens, today’s videoconferencing is almost seamless. The combination of real-time audio and visuals replicates the feeling of being in the room together. People are seen and heard which encourages discussion, enables for presentations to be made and viewed, and discourages multitasking that can become a temptation with a telephone call.
"As someone who currently serves on 10 boards — three publicly traded companies (Leidos, Option Care, and Dentsply Sirona), three private for-profit companies, and four nonprofit boards — and as the chair of three of those boards (Option Care, Alcami, and Performance Health), I firmly believe that virtual board meetings are just as effective as being in person. In fact, there is evidence that, in some cases, virtual board meetings may have some advantages over in-person sessions beyond the convenience of being at home or avoiding travel. As two experts on boards wrote in Harvard Business Review, “Aside from the obvious benefits of reduced travel and increased attendance, shifting to virtual has allowed boards to improve governance and collaboration through shorter agendas, crisper presentations, more inclusive and bolder conversations, and broader exposure to key executives and outside experts.”
"Based on this experience during the crisis, I believe that, after the pandemic, companies will be able to use remote technology for board meetings to improve governance. For example, I know of companies that are considering reducing the number of in-person board meetings from six per year to two. I do not believe that board meetings should be 100% virtual as that would completely negate the benefits of spending time in person with the management team and of having meals together as a board. The value of in-person interactions should not be underestimated. However, conducting four board meetings a year remotely and holding only two in person would translate into a 66% reduction in travel (both time and cost). The reduced time commitment would also avoid the “opportunity cost” on directors who are unable to engage in other meetings, business activities, or personal/family time because of travel for board meetings. Greater time efficiency, alone, could make outside board service more practical and attractive for executives with jobs that demand much of their time as they build their careers......
"I can attest that it’s not uncommon for 10 hours of committee meetings and board meetings to consume as much as two-and-a-half days when accounting for travel and board lunches and dinners. When international travel is involved, the time burden becomes even greater. As a result, it is often difficult for global companies that increasingly want to recruit board members from their major markets — whether a U.S. company seeking directors from Europe and Asia, or a European or Asian company having more North American board members. An increase in remote boards meetings could allow more candidates, including sitting CEOs and other high-profile executives, to serve on more than one outside board...."
(ii) CEO of CDP on the explosion of ESG data that companies are providing and the shifting nature of the "E" in ESG: The chief executive of CDP (the international non-profit organization that helps companies disclose their environmental impact, formerly known as the Carbon Disclosure Project) is quoted on the explosive growth of ESG data that companies are providing, and the shifting nature of the "E" in ESG, in this FT article last Friday, "ESG data explosion":
"CDP, the non-profit formerly known as the Carbon Disclosure Project, has seen a big jump this year in the number of companies disclosing sustainability data, which is a strong indicator of investors’ growing interest in “non-financial” environmental, social and governance information. The group received data from more than 9,600 companies, which is 14 per cent more than last year and 70 per cent more than five years ago......
"(T)he nature of “E” is shifting. Next up for CDP is to expand its survey beyond its current questions on carbon emissions, deforestation and water security to include a “full range” of environmental factors, said chief executive Paul Simpson. Soon it will begin asking for data to track companies’ impact on nature or biodiversity — which is the next frontier for sustainable investors.......
"Although the US is miles behind Europe on ESG, 75 per cent of the S&P 500 sent data to CDP, said Mr Simpson...... (T)his is a welcome reminder that ESG investors can play an important role in pushing for climate action, no matter what ends up happening in Washington. “We know that CDP disclosure really works,” Mr Simpson said.
“Companies, when they’re first disclosing, only 38 per cent of them have an emissions reduction target. By their third year of disclosure that’s up to 69 per cent. So that process of measuring and disclosing actually is [effective].” He added: “The markets are driving this, and that data is really coming now in unprecedented amounts . . . We think we need to see mandatory disclosure evolve around the world as quickly as possible. But it is important to note that market leavers can actually drive change. Sometimes a lot faster than the regulation.”
(iii) climate change round-up: an SEC Commissioner on climate-risk disclosure by financial institutions/whether companies are meeting the Paris accord targets/Federal Reserve statement on climate change stability risks/UK to require mandatory climate change reporting/new climate-risk disclosure rules for U.K. listed companies/Bank of England to launch climate stress tests:
(a) Below is from the keynote remarks of SEC Commissioner Allison Herren Lee at PLI’s 52nd Annual Institute on Securities Regulation last week, "Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation":
"Climate Risk as Systemic Financial Risk: There is a growing consensus that climate change may present a systemic risk to financial markets. This assessment is shared by, for example, the Network for Greening the Financial System, the Bank for International Settlements, the Task Force on Climate-Related Financial Disclosure (TCFD), and the Market Risk Advisory Committee to the Commodity Futures Trading Commission, to name a few.
"Let’s drill down a bit on why that is the case. There is no universally accepted definition of systemic risk, but, broadly, it is characterized by the following features: (1) “shock amplification” or the notion that a given shock to the financial system may be magnified by certain forces and propagate widely throughout; (2) that propagation causes an impairment to all or major parts of the financial system; and (3) that impairment in turn causes spillover affects to the real economy. Climate change risk has the potential to trigger this chain of events.....
"Standardized Disclosures by Financial Institutions: .......(I)nvestors, asset managers responsible for trillions in investments, issuers, lenders, credit rating agencies, analysts, index providers, stock exchanges and other financial market participants have embraced sustainability factors and metrics as significant drivers in decision-making, capital allocation, pricing and value assessments. The bottom line is that businesses now actively compete for capital based on ESG performance, and that competition needs to be open, fair, and transparent.This requires uniform, consistent, and reliable disclosure. I’ve spoken before about the need for this disclosure from public companies.......
"Today I want to highlight the need for disclosure by those who finance issuers that is sufficient to reflect the real risks and opportunities presented. Consider the role of banks in financing carbon-producing activities. One study, painstakingly assembled through various sources, suggests that since 2016 alone, 35 global banks have invested more than $2.7 trillion into the fossil fuel sector. The non-bank financial sector also plays a significant role in financing fossil fuels. Conversely, banks and other financial institutions also hold the keys to climate solutions and the shift toward a lower carbon economy. This is a heavy lift. For example, the International Energy Agency estimates that globally it could take $3.5 trillion in energy sector investments alone every year through 2050 to reorient toward a climate-neutral economy.
"The SEC should work with market participants toward a disclosure regime specifically tailored to ensure that financial institutions produce standardized, comparable, and reliable disclosure of their exposure to climate risks, including not just direct, but also indirect, greenhouse gas emissions associated with the financing they provide, referred to as Scope 3 emissions. There is a concentration of risk in the financial sector that is not readily ascertainable except through Scope 3 emission disclosures. I’m encouraged to see that at least one major U.S. bank has now joined its international counterparts in voluntarily committing to Scope 3 emissions disclosures. Again, however, some level of regulatory involvement is needed to achieve standardized, comparable, and reliable disclosure in this critical area....."
(b) From this FT article over the past weekend, "Companies defy investor demands on climate change":
"Companies are failing to respond to investor demands on climate change, according to a new analysis that examines how prepared businesses are for the transition to a low-carbon economy. Despite the rise in “net zero” announcements from businesses across the world, few public companies are likely to meet the targets of the Paris agreement to tackle climate change, according to the research from J Safra Sarasin, the Swiss bank. The 2015 Paris agreement aims to limit global warming to well below 2 degrees Celsius.....
"Sasja Beslik, head of sustainable finance development at J Safra Sarasin, said although there had been an “explosion” in environmental, social and governance investing, companies were still failing to take action on climate change. “There is this rush into ESG. But you have a stock market that is not corresponding [in terms of climate change action] with what investors are trying to do,” he said. “It is quite obvious that there is a disconnect between all of the pledges investors are making [about pushing companies to tackle climate change] and what corporates are doing. It doesn’t look like the push from investors on the planned and forward-looking emissions is working.”......Mr Beslik said it was very difficult for investors to obtain accurate data on how prepared companies were for the shift to a greener world....."
(c) As reported in this Reuters article on Monday, "In first for Fed, U.S. central bank says climate poses stability risks", the U.S. Federal Reserve:
"(F)or the first time called out climate change among risks enumerated in its biannual financial stability report, and warned about the potential for abrupt changes in asset values in response to a warming planet. “Acute hazards, such as storms, floods, or wildfires, may cause investors to update their perceptions of the value of real or financial assets suddenly,” Fed Governor Lael Brainard said in comments attached to the report, released Monday.
This is the full Statement by Governor Lael Brainard attached to the Financial Stability Report(FSR) released on Monday, and below is an excerpt:
"I welcome the introduction of climate into the FSR. Climate change poses important risks to financial stability A lack of clarity about true exposures to specific climate risks for real and financial assets, coupled with differing assessments about the sizes and timing of these risks, can create vulnerabilities to abrupt repricing events. Acute hazards, such as storms, floods, or wildfires, may cause investors to update their perceptions of the value of real or financial assets suddenly. Chronic hazards, such as slow increases in mean temperatures or sea levels, or a gradual change in investor sentiment about those risks, introduce the possibility of abrupt tipping points or significant swings in sentiment. Supervisors expect banks to have systems in place that appropriately identify, measure, control, and monitor their material risks, which for many banks is likely to extend to climate risks. At present, financial markets face challenges in analyzing and pricing climate risks, and financial models may lack the necessary geographic granularity or appropriate horizons. Increased transparency through improved measurement and more standardized disclosures will be crucial. It is vitally important to move from the recognition that climate change poses significant financial stability risks to the stage where the quantitative implications of those risks are appropriately assessed and addressed."
(d) As reported in this WSJ article earlier this week, "U.K. Requires Companies to Report on Climate Change by 2025", the U.K. is becoming the "first country to make disclosures about the business impacts of climate change mandatory":
"The U.K. said that companies need to report the financial impacts of climate change on their businesses within the next five years, becoming the first country to make the disclosures mandatory as investors and governments demand corporations curb their greenhouse gas emissions. Chancellor of the Exchequer Rishi Sunak, the country’s equivalent to a U.S. Treasury secretary, said Monday that the rule would apply to most of the nation’s economy, including listed companies, banks, large private businesses, insurers, asset managers and regulated pension funds.
“We are starting a new chapter in the history of financial services and renewing the UK’s position as the world’s pre-eminent financial centre,” Mr. Sunak said. “By taking as many equivalence decisions as we can in the absence of clarity from the EU, we’re doing what’s right for the UK and providing firms with certainty and stability.” By 2025, he said those groups must report in alignment with the Task Force on Climate-related Financial Disclosures, an organization established in 2015 by the international Financial Stability Board to promote more informed decisions by companies......
“Open, honest, consistent and transparent disclosure is a fundamental precondition for the realignment of finance and capitalism,” said Jenn-Hui Tan, global head of stewardship and sustainable investment at Fidelity International, commenting on the chancellor’s decision. The TCFD provides an essential platform for asset managers and companies alike to deliver this, Mr. Tan added......."
(e) As reported in this FT article on Monday:
"(C)ompanies listed on the UK stock market will have to disclose all of the threats to their business from climate change under new rules announced on Monday. “From January 1 we are introducing rules requiring premium listed companies to make better disclosures about how climate change affects their business, consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures,” said Nikhil Rathi, chief executive of the Financial Conduct Authority.
"The new rules will cover all reporting periods that begin after January 1, 2021. The FCA is also considering whether to extend the rules for climate risk disclosure to also cover asset managers, life insurers and pension providers...."
This is the full speech by Nikhil Rathi, Financial Conduct Authority CEO, announcing the new disclosure rules, "Green Horizon Summit: Rising to the Climate Challenge"
(f) And from the same FT article referred to in (e) above:
"...(T)he Bank of England said it would launch a climate stress test for financial institutions in June 2021 — which had been delayed this year due to the coronavirus pandemic. “Compared to the financial crisis and the pandemic, the risks from climate change are even bigger and more complex to manage,” said Andrew Bailey, BoE governor, on Monday. “Our goal is to build a UK financial system resilient to the risks from climate change and supportive of the transition to a net-zero economy.” Banks and insurers in the UK will have to consider whether their capital reserves are commensurate to the climate risks that they face as part of the stress test, Mr Bailey added......"
This is the full speech by BoE governor, Andrew Bailey, "The time to push ahead on tackling climate change - speech by Andrew Bailey".
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