December 22, 2022 | Board Governance, Climate
By Rochelle Campbell and Callie Le Renard, PhD.
Last month’s COP27 saw a win for climate justice as wealthy countries committed to a loss and damage fund to help vulnerable developing nations mitigate the impact of major climate events. Despite this, there was no agreement among nations to begin a broader phase out of fossil fuels.
However, in the U.S. we are seeing meaningful action on climate change that may impact how companies do business – with changes at the federal, state, and shareholder levels which will affect board governance practices as soon as 2024.
In March 2022, the SEC proposed new rules to enhance and standardize climate-related disclosures for investors. Under the proposed rules, the SEC would require public companies to report their direct and indirect greenhouse gas emissions and other aspects of climate change related performance. The disclosures would fall under four categories:
- Governance of climate-related risks and relevant risk management processes;
- How climate-related risks have had or will have a material impact on a company’s business, in the short-, medium-, or long-term;
- How climate-related risks have affected or will affect a company’s strategy, business model, and outlook;
- The impact of climate-related events (severe weather events, etc.) and transition activities on a company’s audited financial statements;
After taking comments and meeting with stakeholders, the SEC is expected to release its final rules in 2023.
According to PWC’s 2022 Annual Corporate Directors Survey, only 11% of directors believe environmental/sustainability expertise is very important for their board. This ranks dead last on PWC’s list of skills and areas of expertise. This skillset will become much more important if the SEC requires companies to disclose how the board of directors and management oversee and govern climate-related risks.
At the state level, the California State Senate passed the Climate Corporate Accountability Act in early 2022. Although the bill failed to pass in the Assembly, the legislation’s sponsor plans to reintroduce it in 2023. If passed, the Act would apply to all U.S. companies with revenues over one billion dollars that do business in the state of California. Under the Act, the reporting requirement for direct and indirect greenhouse gas emissions would exceed the proposed SEC rules, and according to the existing definition of “doing business,” would apply to many businesses incorporated outside the state. As the 5th largest economy in the world, California has historically been at the vanguard of climate change policy, and other states tend to follow their lead.
Beyond the federal and state levels, shareholders are also playing an increasing role in demanding accountability for corporate action to address the risk associated with climate change. Between 2014 and 2021, average shareholder support for climate-related resolutions increased from 20% to 40%.
In 2017 ExxonMobil shareholders approved a resolution calling on the company to disclose projected risk to the company under a two-degree Celsius warming scenario. Although the board recommended against the proposal, over 62% of shareholders voted in favor, sending a signal to the company that climate change is an important risk factor and investors want to know more about what companies are doing to transform their operations and products to remain competitive in a low-carbon world.
As a result of shareholder pressure, ExxonMobil signed a deal to capture carbon emitted by a manufacturing complex in Louisiana and transport it to underground storage facilities. Scheduled to begin in 2025, deals like this might usher in a new era of managing carbon produced by manufacturers. The deal is also the latest step in ExxonMobil’s often-tense dialogue with investors who want oil companies to slash emissions.
PWC’s Corporate Director Survey found that only 63% of directors believe their board understands climate risk/strategy well. That number falls to 56% when asked specifically about carbon emissions.
According to Britt Ide, board member with NorthWestern Energy (Nasdaq: NWE), “Every company is or will be affected by climate change. The fiduciary duty of a board member is to understand how that risk and/or opportunity affects the company strategy for financial success and communicate that to owners.”
As we look toward 2023 SEC rule-making and proxy season, is your board prepared for stricter reporting requirements, shifting shareholder priorities, and the eventual transition to a low-carbon economy?
Nasdaq describes a future-ready board as one that is “diverse, socially responsible, and tech-savvy, understands inclusion, and demonstrates keen awareness of how to balance profit expectations with long-term stakeholder values.” How does your board measure up?
Leadership Elevated has the experienced faculty and recruitment team to help your board navigate the evolving landscape; for more information email us at [email protected]