ESG and climate change: time for corporate boards to step up their game

ESG factors are becoming increasingly prominent on investors’ agendas and are only set to continue to gain importance though the next decade and beyond.

The rise of responsible investment, increasing volumes of relevant policy instruments, mega trends and boards’ fiduciary duty of long-term value creation are driving these ESG considerations into the mainstream and squarely onto the radar of corporate boards.

Crucially, investors—as shareholders in corporations—are increasing their stewardship activities on issues across the ESG spectrum along with their expectations of corporate boards to incorporate these factors into their business operations. More and more they’re seeking to understand boards’ thinking and oversight of ESG issues.

Gone are the days when ESG factors were only a niche consideration in corporations. Today, board members have the ability—and in fact the responsibility—to set the direction on these material issues, which pose significant risks and opportunities for entire businesses. Ensuring that these factors are appropriately considered is an important responsibility for boards. 

ESG risks can be material

Not properly considering ESG factors can have some very real repercussions. Many well-known multinational brands such as BP, TEPCO, Volkswagen and Tesla have felt the effects to their share price and reputations of an ignored ESG issue over the past decade. 

Facebook is a recent example; the company’s largest share price drop erased an astonishing US$120 billion in market value on one day in July 2018. The company faces ongoing challenges and is currently receiving calls from shareholders to ‘re-boot’ its brand and move towards a ‘new era of responsible operation’. The New York Times noted somewhat ominously last year that ’regulators around the world are circling Facebook’.

We’ve seen other recent examples in the headlines too. German online payments firm Wirecard saw its stock plunge last February on reports of accounting misdeeds at its Singapore unit, and in late 2018 Danske Bank’s CEO resigned over a US$234 billion money laundering scandal.

Key climate considerations

Within the ESG sphere, our signatories tell us that climate change and the transition to a low-carbon or post-carbon economy is the highest priority issue they face, an area in which they’re seeking more guidance. In turn, this means that they are also asking more questions around the risks and opportunities surrounding climate change of the companies in which they invest.

At the PRI, jointly with our partners and investor signatories, we’re taking part in a number of key climate initiatives. These include:

• The Inevitable Policy Response (IPR): Financial markets today have not adequately priced-in the likely near-term policy response to climate change. This pioneering project aims to prepare investors for the associated portfolio risks.
• Climate Action 100+: An example of increased investor action on climate. It’s the largest ever investor engagement on any ESG issue in history, aiming to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.
• The UN-convened Net-Zero Asset Owner Alliance: An international group of institutional investors who have committed to transition their investment portfolios to net-zero GHG emissions by 2050. Together they represent more than USD 4 trillion in assets under management and are taking united investor action to align portfolios with a 1.5°C scenario, addressing Article 2.1c of the Paris Agreement.

As a board member, it’s critical to recognise that global investors are stepping up to the challenge of addressing climate change. Companies need to embed an ambitious and holistic ESG approach to stay in alignment with their expectations.

I encourage you to find out more about these initiatives, which you can take back to your boardroom to consider how prepared you are for investor questions.

Setting up effective climate governance

One of the best pieces of guidance on climate, specifically for boards, is the World Economic Forum’s: How to Set Up Effective Climate Governance on Corporate Boards, which importantly is aligned with both the TCFD and OECD.

It provides eight climate governance principles and is accompanied by a set of guiding questions that will help boards to identify and fill potential gaps in their current approach. These principles include: climate accountability on boards, material risk and opportunity assessment and strategic integration.

For board members from asset owner organisations, the PRI has recently produced a report with specific guidance on the Taskforce on Climate–Related Financial Disclosures (or TCFD) recommendations. This provides key questions to help boards prepare—in their governance role— for climate-related risks and the energy transition. We also offer a responsible investment review tool for asset owner boards and the PRI Academy provides a number of relevant training courses.

Understanding and driving strategy on ESG issues is becoming ever more important for boards. Climate change, in particular, is an area which demands a strategic approach within businesses, and it can no longer afford to be ignored. There are a vast range of tools and resources available to help board members get started. 

 

 

This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.

Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.

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