How do supervisory boards address climate change?

Article

How do supervisory boards address climate change?

The Audit Committee Frontier

In response to a recent global survey on the topic, supervisory board members from across Europe tuned in to an online round table discussion, with two keynote speakers, about their role in the fight against climate change. With new reporting standards taking shape, education is essential.

The Audit Committee survey

This first issue of the Deloitte Global Boardroom Program’s new series, The Audit Committee Frontier, seeks to answer the question: What are leading practices for Audit Committees with respect to climate? During the roundtable, supervisory board members discussed their role in the fight against climate change.

Jacques Buith of Deloitte Netherlands, Global Lead Partner United Nations and Senior Partner Sustainability and EU Green Deal advisory, presented results from the Audit Committee survey on climate change. Many respondents identified a lack of sufficient knowledge of this topic to act as proactive supervisors. This is compounded by a lack of clear opportunities to educate themselves, a lack of data to measure progress in addressing climate change, and a lack of clarity yet as to the reporting standards to comply with. Despite many commitments from businesses, survey respondents think progress on addressing climate change is too slow, and a clear action plan is often lacking. There is concern about “Scope 3” emissions reporting (in a company’s supply chain), where a lack of data makes it hard to sign off on figures. What the survey makes clear is that supervisory board members must educate themselves so they can ask the right questions and assess climate related risks.

Three-level approach

Guest speaker Gisella van Vollenhoven, non-executive director for various financial sector companies worldwide, approached the problem of addressing climate change at three different levels:

  • Strategy: Companies must identify where they can make a difference, how they want to brand themselves, and how ambitious they are. These decisions call for market-wide data, but companies cannot afford to wait till that is available. The strategy is thus a journey and can be tweaked as the company gains further information.
  • Reporting: The challenge is having auditable data that is suitable for an annual report. It would be a shame, however, to focus entirely on such data, as other internally available data is also very useful for steering the course. Regulation is going to help companies in this area, but considerable resources will be needed to implement all the guidelines.
  • Governance: Action against climate change can be organised at various levels, for example, a dedicated department or executive board member. Responsibilities must be allocated and KPIs defined. In the supervisory board, a separate ESG Committee is possible, or the issue can be added to the responsibilities of another committee (e.g. Nomination & ESG). The Audit Committee, because of its responsibility for the annual report, will always be at least indirectly involved. The charter of the Supervisory Board may need adjusting.
     

Meaningful conversations

Purpose-driven

Addressing climate change should not be something a company does on the side but should be connected to its purpose. The executive board needs to take ownership, and the supervisory board has a role to play here. In companies without a climate strategy, the supervisory board should question the management, and not take no for an answer. Where there is a strategy, they must challenge the management on whether the strategy is feasible and authentic (more than a marketing stunt). Finally, the supervisory board can act (for example set executive remuneration) based on performance against climate-related KPIs. The Audit Committee role is then largely around overseeing the reporting on progress to achieving the strategy – making sure that the Supervisory Board is confident in that oversight to avoid greenwashing.

Risk driven
Climate risk is also a key consideration in developing a climate strategy and very much in the domain of the audit committee where it is also an audit and risk committee. Risks vary per sector: for manufacturers, the focus is on supply chain risk, for instance, while B2C companies are very dependent on consumer sentiment. A business case was shared on a company that, well ahead of current reporting standards, started three years ago identifying long term risks to their business. plus areas where they could contribute towards zero emissions. Now they are struggling with the governance and reporting side, fitting their plans into the new matrix, with reportable and non-reportable activities, key controls, etc. They are thinking of hiring an external ESG expert into the Audit Committee.

Investor-driven
Investors are pushing the climate agenda, placing higher sustainability demands on companies. Companies feel pressure to incorporate climate measures in their strategy and report on their performance against benchmarks as a way of securing access to (affordable) financing.

Education
Most Supervisory Board members who sit on audit committees have a financial background, which is not so useful in dealing with matters like carbon emissions and wastage. The work calls different skills sets like engineering and measurement as well as for creative people, who can think outside the box and ask the right questions. Supervisory Board members should be familiar with the company’s business, and climate change is now a part of that business. There are few formal education programmes, but sector organisations like the Dutch Banking Association are taking initiatives. Supervisory Board members can also tap into companies’ internal resources, like the investment unit in an insurance company. In-house ESG training for employees can be extended to Supervisory Board members. Finally, the World Economic Forum has launched the Chapter Zero initiative, an international community of non-executive directors that share experience and expertise on boardroom approaches to climate change. There are various international chapters, with a Dutch one soon to be launched. Also, there is no substitute for joining education programs that the organisations are investing in across their staff and also engaging directly with chief sustainability officers of the respective organisations.

Level playing field
Maintaining a level playing field in ESG reporting is going to be a challenge, given the various standards being developed by the EU, UN and IFRS. If companies can choose, they might move to jurisdictions where standards are absent/lighter to gain an advantage over competitors. While Western ESG standards seem to be converging, the East is not yet on board. In the Netherlands, the steel and agro-industries are vulnerable. As in accounting, however, we can deal with multiple standards as long as the differences are clear. Reporting standards aside, ESG reporting is a matter of common sense. The issues companies need to report on for compliance’s sake are ones they would want to share with stakeholders anyway. Given how volatile and fluid the reporting standards still are at this stage, companies must try to limit complexity and keep reports readable.

For more information download the key highlights or the full report of the survey above.

If you have questions, please do not hesitate to reach out.

Did you find this useful?