Boards and Climate: 3 Imperatives from Global Business Leaders

Throughout 2021, Diligent had the fortunate opportunity to talk about “The Climate Agenda: What Boards Need to Know” with a prestigious panel of business leaders:

• His Royal Highness The Prince of Wales
• Jenny Johnson, President and CEO, Franklin Templeton
• Mike Wirth, Chairman and CEO, Chevron
• Carmine Di Sibio, Global Chairman and CEO, EY
• Brian Moynihan, CEO, Bank of America
• Klaus Schwab, Executive Chairman, World Economic Forum
• Betsy Atkins, Board Member, Wynn Resorts, SL Green Realty and Volvo Cars

Insights from these panels are particularly prescient as boards look ahead to the new year. Climate has become a priority like never before. In the annual 2021 PwC Corporate Directors Survey, directors ranked ESG as the number one topic shareholders want to discuss. Nearly three-quarters (73%) noted the climate crisis as an area of concern for business and societal impact. How can boards make sure their companies satisfy stakeholder demands and stay ahead of change? Words of wisdom follow from these business leaders.  

1. Expand Climate Conversations Around Risk and Capital

“Companies and investments that are ESG aligned have generally outperformed those that are not — even in the current pandemic,” — His Royal Highness The Prince of Wales

Many organizations are starting to connect the dots between ESG strategies and access to capital. This is driven by growing consumer and employee preferences for companies to make a positive impact. There’s also the multifaceted connection between climate action and business risk. Moynihan cited research linking poor ESG metrics to poor company performance. “If you didn’t invest in those companies, you could have avoided the 90% of the bankruptcies over the past decade,” he said. While more than half of PwC survey respondents (54%) recognized that ESG issues have a financial impact on company performance, only 25% say their board understands ESG risks very well. Panelists encouraged boards to broaden their climate discussions around risk, particularly regarding access to capital and impact on liquidity. From an investment firm’s point of view, Johnson noted that “capital will become more costly for the companies who aren’t staying on top of this kind of thing. I don’t think that any asset manager of the future is going to be able to be credible without being able to say they’ve taken into consideration these risks.” Across industries and geographies, this scrutiny will have a bottom-line impact. “During a downturn or other challenges, will your company have access to funds?” Wirth asked.  

2. Double Down on Oversight and Understanding, Even as Frameworks Evolve

“We are living in the age of stakeholder capitalism, and this requires new approaches, and it requires particularly new measurement systems.” — World Economic Forum Executive Chairman Klaus Schwab

What a difference a year makes. Johnson and Atkins noted hearing more and more conversations about ESG over the past 12 months and how the work of the World Economic Forum, a longtime leader in sustainability metrics, has become mainstream beyond the EU. How well have boards been keeping up? While the vast majority of PwC survey respondents (94%) reported that their companies offer some voluntary ESG disclosures, only 28% of directors said that their board has a strong understanding of their company’s ESG/sustainability messaging. Panelists encouraged boards to close this gap — and keep moving with their climate metrics and reporting, despite the complexity of multiple evolving frameworks. They noted that companies with effective climate disclosures would be better able to articulate climate issues and activities to the shareholders who are shining a spotlight on sustainability. Climate disclosures demonstrate “that you’ve held yourself accountable, that you’ve made progress, that you have a goal,” Moynihan said. “We’ve been encouraging a lot of our clients to get ahead of this,” Di Sibio said. Climate disclosures are “a journey,” Atkins reminded webinar listeners. She elaborated that “it’s fine that you’re doing part of the metrics [now] and over time improving [...] a set of values that you can then operationalize to all your stakeholders.”  

3. Recognize Climate Action’s Transformative Potential

“We absolutely recognize the world has committed to a lower carbon energy system, and we need to help create that.” — Chevron Chairman and CEO Mike Wirth

Despite the increased acknowledgment of the climate crisis — and the proven links between climate action, business strategy and corporate performance — do companies still view climate as an obligation rather than an opportunity? Some trends seem to indicate so. For example, fewer than one in five (18%) PwC survey respondents said they wish to make climate reporting mandatory. Schwab encouraged boards to view climate measurement as a positive, a strategic tool, rather than an additional time-consuming exercise. “ESGs are not just a burden, they are a fantastic means to strengthen the competitiveness of a company,” he said. Moreover, proactive climate action gives companies a say in the ESG regulations and conversations of today, as well as the overall business environment — and planet — of tomorrow. “You have the needs of the world, and you need to align capitalism against them,” Moynihan pointed out. “Governments are looking to us on how they regulate stakeholder capitalism.” “Embracing stakeholder capitalism metrics is essential to be on the right side of history,” Schwab said. “This is not just about cost and risk,” HRH the Prince of Wales concluded. “It is about an exciting transformative journey.”