Mindy Lubber of Ceres hopes that C-suites will heed the IPCC report and make 2019 the year they give the environment the attention it deserves
In what has been a landmark year for corporate leadership on sustainability, one of the most interesting and important developments has been the progress in the world of corporate governance. Momentum has been building steadily throughout recent years toward what I see as a potential tipping point in 2019, when sustainability will take its rightful place as a key priority for corporate boards.
The urgency could not be greater. In 2018, two major reports underscored the scope and scale of the climate challenge, sounding the alarm for the entire global economy. The National Climate Assessment warned that climate change could wipe out 10% of the US economy, costing $500bn per year by the turn of the century. Earlier, the landmark Intergovernmental Panel on Climate Change report revealed a vanishingly small window of opportunity to avoid the worst impacts of climate change, prescribing nothing short of an overhaul of the world economy to protect against the devastation that lies in wait should we stay the course.
If we didn’t know it before, we sure know it now: we must rapidly decarbonise the global economy, slash emissions, and invest in solutions that will sustain us for generations to come, and we’re going to need unprecedented corporate leadership – starting at the very top – to get us there. Sustainability cannot be cordoned off to one department, the purview of one or two corporate sustainability officers. It must be tackled at the board level by sustainability-competent directors who understand how and why these issues are material to the business and critical to a company’s long-term success.
Climate change poses disruptive risks to businesses. As explained in our Lead from the Top report, boards, as stewards of corporate performance in the long term, have the responsibility to work with management to build the resilience of their business for this changed reality. With their ability to hire, fire and incentivise management, corporate boards can drive the establishment of measures that reduce their company’s contributions to climate change, lower its exposure to climate risk, and position it to capture the opportunities embedded in the low-carbon transition.
Through their oversight, boards have a tremendous opportunity to reinforce leadership on climate change that ripples throughout their companies, out into their supply chains, and beyond to the wider economy. As stewards for corporate performance in the long term, they have a responsibility to lead in this way.
Despite a clear business case, most public company directors don’t see sustainability issues as board-relevant
To be clear, we still have a long way to go. Many corporate boards still don’t get it. Despite a clear business case, most public company directors don’t currently see sustainability issues as board-relevant: 53% say environmental and sustainability expertise is “not very” or “not at all important” to have on their board, and 39% think climate change should not impact company strategy at all, according to a 2018 PwC Annual Corporate Directors Survey. Meanwhile, 74% say disclosure of sustainability issues is not important to understanding a company’s business or helping investors make informed decisions, according to a 2018 BDO Board Survey.
The 2017-2018 National Association of Corporate Directors (NACD) Public Company Governance Survey asked directors to choose what top trends they think will have the biggest impact on their companies in the coming year. Just 6% put climate change in the top five.
But while many corporate boards have not yet seen the writing on the wall, that doesn’t mean that it isn’t there or that those around them aren’t underlining it with big red markers. In fact, the powerful forces that shape the ecosystem surrounding corporate boards have come to understand the importance of sustainability-competent boards, and they’re helping push us toward the tipping point in 2019.
In recent years, investors have woken up to the need for sustainability-competent boards like never before. In 2015, the Bank of England’s Mark Carney sent a shot heard round the world when he proclaimed climate change a financial risk that threatened the stability of the entire global market. BlackRock’s Larry Fink doubled down in his 2017 and 2018 letters to investors, insisting that companies must have a sense of purpose in order to be sustainable in the long term.
Last year, nearly 400 investors representing $32trn in assets supported The Investor Agenda to provide disclosure on climate change risk, while just under 300 investors with $31trn in assets under management launched Climate Action 100+, a five-year initiative to engage the most carbon-intensive companies in the world on their climate change strategies, governance and disclosure.
In the last two proxy seasons, we’ve seen major asset owners (including BlackRock and Vanguard) deliver historic majorities during shareholder votes on climate risk proposals at fossil fuel companies like Exxon and Occidental Petroleum.
Investors want their assets protected by corporate boards that incorporate considerations of climate change into decision-making
Whether through direct engagement or the shareholder resolution process, many investors are making it clear that they want their assets protected by corporate boards that incorporate considerations of climate change into their decision-making. They’re not satisfied with simple disclosure of climate change’s impact on a given company, they want companies to address these risks in the long term and they want to know how they factor into corporate strategy.
We all know that as fiduciaries to corporations and their shareholders, boards should and do pay close attention to investor concerns.
Beyond investors, professional associations, corporate secretaries, general counsels, and consultants are helping elevate sustainability to the board level as well. While the survey figures from PwC, NACD, and BDO mentioned earlier are indeed disappointing, the fact that these questions are now being asked is progress in and of itself. In 2018, we saw sustainability make its way into the materials produced by these bodies like never before.
Here are some examples:
The NACD, the US’s largest membership group of corporate directors, is increasingly featuring sustainability in its conferences, training and blogs. Ceres regularly contributes to the NACD.
The Society for Corporate Governance, the United States’ largest professional association of corporate secretaries, has issued educational materials on sustainability to its membership.
Lawyers are getting into the game. Noted corporate governance law firm Wachtell, Lipton, Rosen & Katz, published a memo that begins: “Be aware that sustainability has become a major, mainstream governance topic” and recommends that “boards should consider how their risk oversight role specifically applies to various ESG-related risks”.
Proxy adviser Glass Lewis is now explicitly tracking which board committees or directors are charged with sustainability oversight, and in instances where a company does not manage sustainability risks well, may consider recommending that shareholders vote against the directors in relevant committees, or absent this, the audit committee.#
In the coming year, the business case for climate action will become even more clear
We at Ceres are also working hard to build sustainability competence at the corporate board level. As companies look to develop climate-competent boards, they can use our recently released Getting Climate Smart tool.
All of this amounts to strong evidence that the mainstream corporate governance community is coming to understand that climate change as a board issue, and we expect to see increased uptake from corporate directors themselves as we work toward a breakthrough in 2019. In the coming year, the business case for climate action will become even more clear as companies are forced to respond to the ever-intensifying impacts of extreme weather events, and as they position themselves to take advantage of the opportunities embedded in the transition to a low-carbon economy. Their investors, their advisors, and their governing bodies will all demand corporate boards oversee sustainability directly. I’m hopeful that they’ll heed the call.
Mindy Lubber is CEO and president of Ceres. Ceres is a sustainability nonprofit organization working with the most influential investors and companies to build leadership and drive solutions throughout the economy. @MindyLubber
climate change US economy PwC Exxon low carbon transition Ceres Investor Agenda Climate Action 100+