January 13, 2017 by Canadian Underwriter
Companies in Canada’s most carbon-intensive sectors are not demonstrating “climate competency” in the boardroom and should be doing so to address climate change issues, suggests a report this week by Shareholder Association for Research & Education (SHARE).
“Investors are increasingly concerned about the risks associated with climate change and what impacts these risks may have on companies in their portfolios across the short-, medium- and long-term,” reports the non-profit association that offers responsible investment services, research and education for institutional investors.
The report, Taking Climate on Board: Are Canadian energy and utilities company boards equipped to address climate change?, is based on information gathered from publicly available sources and reviewed disclosures from 52 companies (39 companies in the TSX Energy sub-index and 13 companies in the TSX Utilities sub-index). Specifically, the report considers board skills and experience, oversight and risk disclosure.
“How boards are or should be addressing climate change risks is a subject of increasing interest not only as a corporate governance issue, but also as a legal question,” states the report.
“Public companies in some of Canada’s most carbon-intensive sectors are not currently disclosing to investors the extent to which their boards are adequately equipped with the right skills and experience, comprehensive understanding, and proper oversight processes and systems to tackle the risks climate change poses to their businesses,” the report concludes.
“Climate change issues are inextricably linked with areas of business like corporate strategy, risk assessment, capital expenditures, operations, trade, financial performance and asset valuation,” it states. “How a company manages climate risks and opportunities now will impact its success in the long-term.”
Board competency matrices do not include climate change as a desired area of board competency, the review found, and very few companies report any climate-related experience of board members.
“Not a single company in the study referred to ‘climate change’ in their list or matrix of board skills and experience. Three companies had climate-related experience listed in at least one board member biography,” the report notes.
“From these findings, it seems that companies are not placing emphasis on demonstrating climate competency at the board level. Without proper disclosure of board climate competency, it is difficult for investors to know whether the board has the appropriate skills and experience to tackle climate risks,” it adds.
And no mention of climate risk in board governance documents and committee mandates suggests the issue “may fall lower on the list of priorities and never get properly addressed,” the report suggests.
There is growing attention to the physical, financial and regulatory impacts of global climate change, but companies in carbon-intensive sectors may not currently be up to the task of dealing with the issue.
Review findings indicate the most frequent type of climate risk disclosed was regulatory risk. In all, 92% of companies – including all but one energy company – mentioned regulatory risks related to climate change in their reporting.
Overall, there was more limited disclosure around other types of climate-related risks, the report adds.
“The sparse disclosure on physical and stranded asset risks is striking when contrasted with a growing body of research predicting wide-ranging, climate-related risks to carbon-intensive sectors such as utilities and energy,” the report states.
“Risk management and long-term strategy are fundamental responsibilities of Boards of Directors, and climate risk represents a major challenge to Canadian companies,” says Laura Gosset, SHARE engagement analyst and co-author of the report.
“Boards of Directors have to think about a very different future as we transition to a lower-carbon economy,” Gosset advises in a statement issued by SHARE.
“Investors need boards to demonstrate that they are ‘climate-competent’ – that they understand and prioritize climate change risks to long-term value, including the physical, legal, reputational, stranded asset and regulatory risks related to climate change,” she goes on to say.
“SHARE urges boards at publicly traded corporations to speak more forcefully and openly about their efforts to address one of the most serious challenges of our times,” the report emphasizes.
“Boards of Directors that devote the time and resources to fully understand the climate risk they face will be better prepared to both meet the challenge and seize the opportunities,” the statement adds.
On behalf of its institutional shareholder clients, SHARE notes that it plans to approach companies reviewed in the report to prioritize climate change competency in board development and risk assessment processes.
“Collectively, the findings of this study suggest that a gap exists between the acknowledgment of climate risks and the disclosure of specific competencies at the board level to address these risks,” the report notes.
“While many boards do address environmental risks in their committee and board mandates, the issues under consideration may be substantially different from the specific challenges emerging from climate change,” the report explains.
While traditional environmental considerations might include meeting regulatory requirements related to pollution and remediation, protected areas and endangered species, climate change risk might add to that issues such as changes in physical weather patterns, availability and access to natural resources, regulatory frameworks and market conditions.
Climate change poses an unprecedented risk to global socio-economic, political and biophysical systems, the report states.
“However, because the exact physical, regulatory and legal implications are still unclear, the most pronounced risk is that corporate Boards of Directors will aim to do exactly that – proceed with business as usual – without fully understanding or addressing the risks climate change may pose to their business strategy,” it adds.
To properly and effectively manage risks, boards “must have a full understanding of the risks to their business model.”