6 ways company boards should prepare for climate risk

With risk, the writing is always on the wall. We know the storm will eventually come, yet in most cases – when the storm hits – leaders are questioned about why they didn’t take more efforts to plan for a response, build resiliency into their operating models, and proactively avoid risks by creating environments that diminish them.

The COVID-19 global pandemic is a prime example. It has shown us illness and death in real-time and has brought many parts of the world to an economic standstill. The recovery effort will continue to be a slow process, as many unknowns remain regarding the course of the virus.

As we pivot and adjust our operations in this post-pandemic normal, we must be aware that there are other risks, just as serious and as far-reaching, that sit right around the corner. Notably, The Global Risks Report released at Davos this year identified environmental risks as the five most likely global threats for the coming decade. Topping the list were extreme weather, climate action failure and natural disasters.

We are already seeing signs of what is to come. News outlets continue to report record temperatures in the Arctic and Antarctica; the Earth’s air conditioning system is overheating. Reports roll in from the Mauna Loa Observatory of our daily atmospheric CO2 levels reaching record highs, and climate scientists and youth leaders alike continue to demand a swift response to climate action.

If corporate leaders have learned one thing from COVID-19, it is that such signs must not be ignored and resiliency must be built into successful business models. Nobody is saying that this is easy, and most organizations have a long way to go. To support this process, we have outlined six key steps that corporate boards may take to prepare for climate risk.

1. Start the conversation

The time is now to add climate risk to your board agenda. True leadership is the act of stepping up before a crisis hits and putting plans in place to protect your business, your employees, and your position within the marketplace. Board debate, now more than ever, should be open and broad.

2. Know your ESG blind spots

Climate risk planning falls under the ‘E’ category of environmental, social and governance (ESG).

Climate risk management should begin with a broad and thorough ESG assessment to establish a baseline for your business’s existing ESG practices, review areas requiring attention, and benchmark your efforts as they relate to your peers or competitors.

ESG factors are becoming an increasingly critical factor considered by financial institutions in their lending and investing decision-making. By uncovering and addressing your ESG blind spots now, you are safeguarding your returns in the future.

3. IFTTT scenario plan

To prepare for climate risk, use ‘if this then that’ (IFTTT) scenario planning to map out all potential paths forward – including the most dire possibilities.

For example, as beverage companies rely on water as a raw material, analyzing water-sourcing scenarios is key to their resiliency. Industry groups have collaborated to build out technology platforms, like the Aqueduct Project, to assess geographical water risk in relation to the changing climate. As part of this analysis, company leaders must ask themselves – what happens if there is a period with zero access to water? All possible scenarios must be considered, ranging from changing product focus to innovating new ways of creating water.

One silver lining to the COVID-19 pandemic may be that it has helped companies to improve their scenario planning. As we have heard from several board directors: Never waste a good crisis. The rigour and methodology around scenario planning has improved and this discipline should now be applied to climate risk.

4. Build your environmental reporting protocol

In conjunction with identifying your ESG blind spots, develop an ESG reporting system that aligns with your market’s ESG disclosure frameworks.

A variety of general and sector-specific disclosure frameworks have been developed by standard-makers around the world, including the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-Related Financial Disclosures (TCFD), and the Global Reporting Initiative (GRI). In an attempt to measure how companies stack up, there has also been an emergence of ratings organizations, including the Carbon Disclosure Project (CDP), the Dow Jones Sustainability Index (DJSI) and the Global Initiative for Sustainability Ratings (GISR).

Working with internal ESG experts, external advisory services or a combination of both, build your organization’s ESG reporting system in accordance with the ESG disclosure frameworks applicable to your market, and use the available ratings organizations to understand your company’s competitive position in terms of ESG performance.

Transparency is key and disclosure requirements will only increase over time. Understand your reporting responsibilities and take control of your ESG narrative now, as the reputational risk of not doing so is too great. Furthermore, there is a clear correlation between strong ESG performance and resilience in times of crises.

5. Hold your organization accountable

Linked to required public disclosures, your board should drive your organization’s internal reporting around ESG. This is not easy; many ESG risks are extremely difficult to quantify and are often outside of a company’s control. Your company’s mitigating actions will not necessarily map to the risks in the same way as for other key risks.

Nonetheless, it is critical to understand your management’s approach to ESG, to agree to targets, and to monitor your company’s performance against the agreed-upon metrics. Instilling internal discipline around this now will allow your business to continue to thrive in the future, even with greater external scrutiny and increased disclosure requirements.

6. Strengthen your bench

Hand-in-hand with knowing your blind spots, you must recognize any organizational gaps in ESG skills and experience. CEOs need support to bring in the ESG expertise required, and it may be necessary to strengthen your bench at the board level as well.

Your nominations committee is responsible for recruiting expertise in the form of new board members and advisors. It is critical that your committee recruits board members and advisors with experience and knowledge about ESG areas, as these individuals will directly influence your climate risk approach.

By taking these steps now, you are allowing your board to lead from a position grounded in sound research and planning. This will not only mitigate impending climate risk; it will strengthen your standing within the competitive landscape.