How board chairs are approaching climate change governance

By: Eric Landicho

YOU do not have to follow the news to know that climate change is disrupting daily lives here in the Philippines. You can feel it every day with the extremely high temperatures affecting established routines, including in-person classes for students still recovering from the prolonged disruption of the pandemic. The challenge is profound, which underscores the importance of owning the problem at the level where the power to effect change is most concentrated.

For board chairs, it may be the biggest risk to their organizations, which is saying a lot considering how volatile the world has gotten in just the past four years. A 2023 Deloitte survey of C-suite executives around the world found that 61 percent of these leaders expect climate change to have a high or very high impact on their organization's strategy and operations over the next three years. Knowing the key role board chairs will play in managing that impact, Deloitte interviewed more than 200 chairs of some of the largest companies in the world to better understand how they are navigating the climate change agenda.

The short and long view

While the board chairs understand the urgency of the climate crisis, many expressed concern about near-term challenges that are getting in the way of meaningful action. The investment needed for climate initiatives, for example, is a major impediment, especially when weighed against other critical issues that are also top of mind for business leaders.

As boards of directors make plans now for climate action, they do so with the awareness that these initiatives may not be realized during their tenure. Decarbonization or energy transition, for example, will likely take years, which means boards will have to plan not just for hitting these goals but also for keeping the momentum going long after their term.

To address these challenges, the board chairs Deloitte spoke with pointed out the need to view climate action using the same framework leaders apply to operations and financials. That is, there should be accountability for climate activities, transparency with stakeholders, and metrics for effectiveness over the short, medium, and long term.

Board chairs, in particular, have to champion the climate agenda, making sure climate strategy is always a part of discussions around corporate strategy so that the entire board stays focused on the climate challenge. Part of that focus involves integrating climate actions into each risk management activity. In doing so, board members stand to discover opportunities to innovate, which several board chairs say go hand in hand with climate action.

Breaking down long-term climate commitments into short-, medium-, and long-term targets and actions is one way to approach the very long time horizon involved in climate action. Organizing climate commitments this way will make it easier for leaders to derive key performance indicators (KPIs) to monitor progress. Going a step further, tying these KPIs to executive and management remuneration and incentives strengthens the accountability mechanism around these commitments.

Take a cue from stakeholder expectations

Climate change affects everyone and is, therefore, everyone's concern, which is why we are seeing more and more stakeholders focusing on climate-related matters and expecting companies to act. The board chairs Deloitte interviewed are paying close attention to institutional investors in jurisdictions where there are more regulations in place, such as some European countries. These stakeholders are interested in long-term sustainability solutions, not just in compliance with regulations.

Responding to and staying mindful of these expectations as they shift requires productive, two-way dialogue, where the organization is regularly gathering and sharing information through appropriate forums and tools. One board chair Deloitte spoke with, for example, said their ESG briefings are opportunities to better understand the interests of key stakeholders, and whatever feedback is gathered during that exercise is used as a reference for the organization's sustainability initiatives.

Employees are important partners in driving an organization's climate agenda. Deloitte's 2023 Gen Z and Millennial survey found that these younger generations expect businesses to take a leading role in addressing social issues ranging from inequality to environmental sustainability. Board chairs can leverage the advocacy of this stakeholder group for brand-building and attracting and retaining talent. For this reason, the board chairs Deloitte interviewed prioritize communicating goals and achievements with employees, making sure they understand what the organization is working towards when it comes to climate issues.

As the rigor increases around definition, quantification, and measurement of climate-related goals and as the effects of climate change grow increasingly disruptive, so does the pressure on organizations to act in meaningful, impactful ways. The chairpersons Deloitte interviewed cautioned against taking a "wait-and-see" approach, especially for their counterparts who may be operating in regions with fewer regulations. (In the Philippines, for example, ESG reporting is mandatory only for listed companies.)

It is clear that climate change will transform the way we do business, and chairpersons — as the highest-ranking officers in organizations — have to lead the way in managing that transformation, all while making sure they strike that delicate balance between long-term ambitions and short-term performance expectations.

As published in The Manila Times on 8 April 2024. The author is the Managing Partner & CEO of Deloitte Philippines.