NACD Report Provides Tools to Convert Climate Governance Goals into Action
Evolving Risk Related to Climate Change Requires Strategic, Decisive Action in the Boardroom
WASHINGTON, DC – The National Association of Corporate Directors (NACD), the authority on boardroom practices representing more than 23,000 board members, today released the 2022 NACD Governance Challenges—Climate Governance Report, which sheds light on the perspectives of directors as the climate change discussion and related requirements move center stage and provides the best thinking on tools boards need to implement their future climate goals.
For this report, NACD compiled top advice from leading experts: Marsh McLennan, KPMG, Pearl Meyer, and Sidley Austin LLP. These leading firms provided helpful tools, tips, and frameworks to help boards establish and improve their climate oversight risk and opportunity; utilize climate scenario analyses to assess their performance in mitigating climate risk; assess the role of executive compensation in evaluating and structuring climate goals and initiatives; and address any legal considerations companies may face regarding climate oversight.
Further, to gain insights into what directors are thinking about climate, NACD recently polled directors in a survey that was in the field from March 28 to April 21, 2022. The survey revealed that climate is not yet considered a top priority by boards. About 47 percent of respondents say their board considers climate change to be "an issue, but not a top priority within the company," just under 19 percent state it is "not a concern for our company," and only 9 percent see climate as a "top priority being discussed at all levels of the company."
Among those that indicated that climate change discussions had increased, 37 percent credited the increase to the relevance of climate change to the long-term growth prospects of their business, while 21 percent stated that disclosure requirements were the primary driver. The majority of boards now consider climate not only from the perspective of compliance but also focus on its potential as a driver of opportunities for long-term value creation. In fact, this transition will likely be a significant growth driver for companies that are able and willing to adapt to this new reality.
"Stakeholders expect boards to be accountable for implementing effective climate oversight to protect the financial and long-term success of their organizations," said Peter R. Gleason, president and CEO of NACD. "NACD commissioned this report to provide our members with a framework to establish and implement appropriate climate goals and initiatives."
The NACD report offers expertise in four subject areas:
Board Oversight of Climate Scenario Analysis (Marsh McLennan): To meet rising expectations, companies will need to assess their organization's performance under future climate scenarios and establish processes for identifying, assessing, and managing climate-related risks and opportunities. This will include climate scenario analysis combined with establishing appropriate governance to ensure effective oversight of the process. NACD survey data suggest that only 15 percent of boards have recently engaged in climate change analysis oversight, however, this oversight can be viewed as an extension of prudent risk management and board oversight into a new field of expertise.
Framework for Board Oversight of Climate Change (KPMG): The business implications of climate change continue to accelerate and the proposed rule on climate-change related disclosure promulgated by the US Securities and Exchange Commission (SEC) adds a measure of urgency for public companies. A framework for board oversight of climate change should focus on developing a plan for board climate competence and oversight structure; actively engaging with management to discuss climate-related risk, including climate-based opportunities; assessing the company's strategy for greenhouse gas emission goals; ensuring a holistic, structured approach to climate-related communications; and setting expectations for continuous learning and oversight.
Evaluating, Structuring, and Communicating Executive Incentives and Climate Issues (Pearl Meyer): Organizations and the boards that guide them are feeling intense pressure from investors and other stakeholders to make meaningful progress against long-term climate goals. Climate considerations and impact can vary significantly from one company to the next, especially by industry, so a one-size-fits-all approach is unlikely to be effective. However, we can learn from companies in certain high-impact industries that have already been addressing environmental goals in their compensation plans, where a scorecard approach to tracking and measuring progress can be highly effective.
Legal Considerations for Oversight of Climate-Related Risks (Sidley Austin LLP): Companies face a growing set of expectations from employees, customers, investors, and regulators with respect to how they incorporate environmental, social, and governance (ESG) considerations into business decisions and how they mitigate and disclose related risks. Today, board oversight of climate-related risks is tied to oversight of strategy, risk management, internal controls, ethics, and corporate disclosures. In addition, with the overlay of federal securities laws and regulations, public company boards also require attention to compliance with disclosure obligations and oversight of corporate disclosure with respect to climate-related matters.
For more than 40 years, NACD has been on the leading edge of corporate governance, setting standards of excellence that have elevated board performance. NACD arms today's directors with insights and education that drive their mission forward, while preparing a new generation of boardroom leaders to meet tomorrow's biggest challenges. NACD is a community of more than 23,000 directors driven by a common purpose: to be trusted catalysts of economic opportunity and positive change—in businesses and in the communities they serve. To learn more about NACD, visit www.nacdonline.org.