Time for boards to lead on climate change

When the Philippines sent its delegation to the United Nations Climate Change Conference (COP26) in Scotland last year, the 19-person team was headed by the Secretary of Finance. It was the first time that the country's top fiscal manager attended the annual UN climate conference, no doubt to underscore the importance of acting on climate change and the need to lead from the very top to effect meaningful change. In the private sector, however, it looks like there is still some hesitation in boardrooms to fully own the climate crisis.

During the fourth quarter of 2021, Deloitte conducted a survey of more than 350 board audit committee members in 40 countries. While they are the leaders responsible for managing and responding to risks and opportunities, many of the respondents had yet to sufficiently lodge climate change initiatives at the core of their agendas. Nearly 60 percent said they didn't regularly discuss climate change during meetings, and nearly half acknowledged that they lacked basic literacy in climate issues needed to make informed decisions.

Considering the authority and the responsibility vested on boards of directors (BODs), it is concerning to see how many board members have yet to take on climate change as a BOD concern even as the entire world is in agreement that it is the biggest threat right now to our way of life. Here in the Philippines, the need for key leaders to own climate action is even more urgent since we have been identified as one of nine countries at the highest risk of multiple climate hazards.

To be fair, the Deloitte survey respondents recognized the enormity of the problem and the roles they played in addressing it: 42 percent said they wished their organizations had a swifter, more robust climate response and 61 percent agreed that responsibility for action rested not with any specific committee but with the entire board. Certain roadblocks, however, prevented them from crafting long-term strategies for dealing with climate change. For starters, about 60 percent of the respondents thought the lack of global reporting standards made it difficult to compare their organization's progress against meaningful benchmarks. Hopefully this will not be the case for long.

During COP26, the IFRS Foundation's International Sustainability Standards Board announced that it was developing global sustainability reporting standards. It also plans to issue new climate standards this year, which will reflect recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD). Established by the Financial Stability Board, the TCFD released a framework for climate-related financial disclosures in 2017 to help companies incorporate climate-related risks in their existing reporting processes. Since then, more than 1,500 organizations around the world have expressed support for the TCFD, including Aboitiz Equity Ventures, the Ayala Group, and Pilipinas Shell here in the Philippines. 

Companies that have embraced the TCFD recommendations already have a head start, not only in complying with sustainability disclosures but in capitalizing on new climate-related opportunities. They can also help frame the conversation around climate action rather than merely play catch-up to the evolving reporting and regulatory landscape, which is another roadblock identified by Deloitte's survey respondents.

Forty-six percent of respondents cited the ever-shifting reporting and regulatory landscape as one factor in their organization's slow response to climate change. Perhaps these organizations are in wait-and-see mode, allowing the dust to settle before deciding on the best approach. These companies risk being left unprepared as climate threats such as extreme weather events, changes in rainfall patterns, and extreme temperatures continue to loom and start to hurt business value chains and the economy. The losses we have sustained as a country from the climate impacts continue to reverse important developmental gains achieved over the years. According to government estimates, the recent typhoon Odette set us back P24.5 billion in losses in agriculture and infrastructure, not to mention the nine million people who were displaced.

Instead of waiting for these barriers to be cleared before taking action, companies must take a more proactive approach. Best practice from the survey respondents indicate that committees, boards, and organizations are already investing time and energy in their climate strategy. Among these respondents, 87 percent said it was essential for board members to be more educated on the topic of climate change. This is critical in laying down commitments and strategies critical to the organization's climate action.

Another best practice is to get more robust information from management, which 79 percent of respondents recommended. Board members should, for example, get a clear picture from management on climate-related risks and opportunities up and down the value chain. Board members should insist that management use scientific evidence to better understand the financial implications of the impacts of climate change on their business in different climate scenarios. This will enable the company to optimize its investments in climate resilience. Measurable targets and milestones must be in place to get everyone on the same page. It is also important to communicate plans, especially to investors. Sixty-three percent of respondents recommended that companies publish their climate change plans so as to allow investors to assess a company's risks and opportunities and their climate impact.

During this period when we are facing several great challenges — a health crisis, climate change, transition to a new administration — it is not surprising that everyone, including business leaders, is called to participate in crafting solutions. The expectation is high because so are the stakes. As the governing body tasked with looking out for shareholder interest, the BOD's voice will be crucial in mobilizing the private sector towards climate action.