Do we have the right people on boards to deal with climate change?

According to a recent study, only 29% of corporate boards "completely agree that they have sufficient knowledge to effectively challenge management on sustainability plans and ambitions and exercise oversight on their execution."

This is not only a potential risk for the business but also a potential personal liability for directors serving on boards.

Institutional investors and proxy advisors are increasingly focused on the climate-related capabilities and skills of board members. The Climate Action 100+, for example, whose investor members control more than $60 trillion in funds under management, has recently updated its corporate benchmark criteria to explicitly include an assessment of how companies assess the climate capabilities of the directors. And, as climate litigation cases have more than doubled since 2015 and insurers are advised to address their potential exposure to climate litigations, so are Boards and Executives seeking insurance.

Climate change, biodiversity loss, the health impacts of pollution and other issues related to the degrading planetary systems – highlighted in the latest stocktake report, which will be the focus of discussions at COP28 in Dubai – have typically been outside the range of issues that most board directors face during their tenure.

With changing market expectations, regulatory requirements, litigation risks, and natural resource scarcity, board members around the world will need to acknowledge and address environmental and societal risks and opportunities, either by upskilling themselves or seeking external advice.

• Non-linearity: Boards are facing multiple issues at a pace of change not seen before and the non-linear nature of change creates a level of unpredictability that is unprecedented. As the global economy is interconnected, every business is impacted by these complex changes, whether it is the impact of climate change, cyber security attacks, the cost of living crisis or escalating geopolitical conflicts.

• Double materiality: There are more material risks to businesses now due to increased regulation, carbon pricing mechanisms and changes to financial disclosure requirements. Companies must understand the cost of their activities on the environment, as well as the cost of environmental degradation on their business.

• Intergenerational disconnect: Better age diversity on boards continues to be challenging in a world where nearly half of the population is under 30. Climate change is an existential threat for these young people, creating an intergenerational disconnect between board members, other decision-makers, and those facing the consequences of inaction.

• Cost of inaction: The cost of inaction is predicted to be significantly more expensive than acting now. Runaway climate change could cost the global economy $178 trillion in net present value terms from 2021-2070. However, there is an upside of $43 trillion if there is rapid decarbonization now.

• Every degree matters: Every fraction of a degree matters. The science is clear: with every slight increase in average global temperature, the adverse impacts of climate change increase. Uncertainty regarding tipping points in our natural world creates additional risk for businesses.

• Governmental intervention: The Inevitable Policy Response suggests that holding off on difficult decisions today will mean that governments will need to step in and mandate the necessary changes further down the line, which will have a more severe effect in creating winners and losers.

Below, you see the Former Head of the Bank of England interviewing the CEO of the Norwegian Sovereign Wealth Fund on the role of Boards related to climate change and diversity.

Here are some questions you may want to put to your board:

• Strategy and business: Have we tested our corporate strategy across the short-, medium- and long-term for resilience against climate-related risks – including the risk of an orderly and disorderly transition to a net zero emissions economy? On what basis are we confident that we have asked the right questions? Do we need to change our business model to maintain cash flow, access to capital and a strong valuation of our assets based on different forward-looking and scientifically-based climate change scenarios?

• Governance structure: What assessment has been conducted on whether our governance and oversight structures at board, committee and management levels remain fit-for-purpose in light of the significant step-change in regulatory and investor expectations on climate change?

• Knowledge and culture: Do we have the right skills on our board to take a stewardship approach to the creation of long-term, sustainable value – including people who understand how to develop new business models, deliver systems change and cultural mindset shifts? Do we have the right culture within the business that is focused on protecting and enhancing the value of assets in the long term?

Building resilience, adaptivity and a stewardship mindset on boards is critical. Bringing in diverse voices representing different perspectives and knowledge of the challenges we are facing is of equal importance.

Do you have the right people on board to address these challenges?

The World Economic Forum´s Community of Climate Governance Experts is an interdisciplinary knowledge network dedicated to advancing good climate governance at the board level as an enabler for climate action. Read more about its activities here.

The Climate Governance Initiative mobilizes Boards of Directors around the world to address climate change in their businesses. We do this by developing and supporting local networks that equip their members with the skills and knowledge needed to make climate a boardroom priority, building on the World Economic Forum’s Principles for Effective Climate Governance.

Join your local Chapter of the Climate Governance Initiative.