This second part of CGj’s review of the Institute’s Climate Change Conference 2022 focuses on what company secretaries can do to facilitate effective board oversight of climate-related issues.
The Institute’s conferences and CPD services have long had a practical orientation and its Climate Change Conference 2022, the Institute’s first major forum dedicated solely to this issue, was no exception. This second part of our review of the forum looks at the practical guidance provided by speakers in the second session of the conference. They addressed what company secretaries can do to facilitate effective board oversight of climate-related issues, the benefits of aligning with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the mindset needed to build sustainability goals into your company’s business strategy.
The benefits of TCFD alignment
The TCFD was set up in 2017 by the Financial Stability Board to establish best practice benchmarks for corporate reporting on climate-related risks. Irene Chu, Partner, ESG Reporting and Advisory, KPMG China, focused her presentation on the key ways that aligning disclosure practices with the TCFD recommendations can help companies improve their performance and disclosure in this area.
‘Understanding the TCFD recommendations is not difficult – the challenges come when you start to implement them – but aligning with these recommendations will bring major benefits, both in terms of better informing stakeholders and helping the company itself to make better decisions,’ she said.
One of the main ways in which the TCFD framework does this is by helping companies to address the broader impacts of their products and business models on the environment. Ms Chu pointed out that many companies have started to report on climate change, but their disclosures tend to focus on a narrow view of their carbon footprint. In other words, the disclosure relates to Scope 1 and Scope 2 emissions, whereas the TCFD framework encourages a broader and more ambitious approach that takes Scope 3 emissions into account.
Another key benefit is the TCFD’s focus on metrics and targets. The expectation of stakeholders is that companies should be setting targets to ensure that they have a future in a low carbon world, Ms Chu pointed out.
She then turned to two areas of weakness in climate-related reporting– the disclosure of companies’ relevant governance structures and practices, and their resilience strategies under different climate scenarios – and outlined the ways in which alignment with the TCFD recommendations can improve the quality of corporate disclosures in these areas.
1. Getting governance right
The first of the four pillars of the TCFD recommendations is ‘governance’ and companies, to be in alignment with the TCFD recommendations, need to disclose the board’s role and responsibilities towards relevant risks and opportunities. Since 2018, the TCFD has been monitoring how far corporate disclosures are in alignment with their recommendations. The finding that relatively few companies are reporting on their governance of climate-related issues might seem rather surprising. You would expect that appropriate corporate governance structures would be a basic and fundamental requirement for all companies, Ms Chu said.
While the reasons for this are likely to be diverse, she recommended boards should certainly consider whether they have the expertise to address the complex issues relevant to the management of climate change risks. ‘A common best practice is to ensure that boards have at least one member with financial knowledge – should there be a similar approach to ESG and climate risks?’ she asked.
In addition, she suggested that boards should review the company’s compensation and incentivisation practices to align them with ESG performance metrics. She also recommended that companies seeking to improve this aspect of their disclosure regimes should take a look at the relevant guidance provided by Hong Kong Exchanges and Clearing Ltd.
2. Improving resilience
The second area of weakness identified by the TCFD relates to how far companies are disclosing their resilience strategies under different climate scenarios. A useful tool recommended by the TCFD to assist companies in this area is scenario analysis. Ms Chu explained that scenario analysis is not the same as forecasting. The latter is more about trying to predict future trends in a company’s performance under a ‘business-as-usual’ scenario. The former starts from a hypothetical future and helps companies to identify the potential implications of different possible future states. There is bound to be a degree of uncertainty in this, of course, but it certainly helps to consider how you can best transition to a number of different future scenarios while minimising any negative impacts on your business, she said.
The role of company secretaries
The presentation by Gillian Meller FCG HKFCG(PE), Immediate Past President, The Hong Kong Chartered Governance Institute, and Legal and Governance Director, MTR Corporation Ltd, complemented that of Ms Chu by looking in more detail at how to improve the board’s oversight and governance of climate-related issues.
She started her presentation with some tips on how company secretaries can get the relevant issues onto the board’s agenda. Persuading directors of the need to comply with climate-related reporting requirements should not, of course, be a hard sell, but she suggested that company secretaries can use these requirements as a lever to open up broader discussions of the company’s ESG disclosure and performance. ‘You can use these requirements as a way to get beyond compliance and shine a light on what you are, or what you are not, doing as a company,’ she said.
Thinking longer term, Ms Meller also recommended scenario analysis (discussed above) as a way to help boards address the impact of various climate change scenarios on the business. ‘Once you start talking about some of the hard numbers and possible scenarios, it generally tends to get people interested,’ Ms Meller said.
One scenario raised by Ms Chu in her presentation was the possibility that extreme weather events, such as flooding, might impact the company’s operations and assets. Ms Meller pointed out that this is an important consideration for MTR. ‘Being a public transport provider, we have to make sure that our infrastructure will withstand future changes in the climate,’ she said. ‘So we regularly do reviews of our assets, and extreme weather and climate change impact studies, to make sure that our adaptation and resilience measures are adequate.’
On the flipside of these risks, directors also need to have an awareness of the potential benefits of taking climate change seriously. These would include access to finance focused on sustainable investments, potentially cheaper insurance premiums and the cost benefits of improving energy efficiency. Ms Meller emphasised that setting up a direct dialogue between board members and key stakeholders about the risks and opportunities discussed above can be beneficial. Getting CEOs and finance directors to hear from active investors, for example, about their concerns relating to the firm’s carbon emissions, reinforces the importance of such issues for the firm’s future.
Appealing to the hearts of board members, not just their heads, can be just as effective in getting their buy-in on climate change issues, Ms Meller suggested. Setting up a dialogue between board members and younger employees might help here. ‘It’s anecdotal evidence, but it is said that when graduates are applying for a job, the first page they look at is the graduate recruitment page on a company’s website, but the second page they look at is the sustainability page. I think younger people really take these matters to heart, so allowing your board to hear from them makes the point that, if you want to be an employer of choice, these are matters that you have to take seriously,’ she said.
Building sustainability goals into your business strategy
The final speaker in the second session of the conference, and the Session Chair, Hendrik Rosenthal, Director – Group Sustainability, CLP Holdings Ltd, focused his presentation on the mindset needed to successfully build sustainability goals into a company’s business strategy. He pointed out that this mindset has to go beyond compliance to a broader understanding of the expectations of stakeholders and the fundamental risks that the business is exposed to, whether that is climate, labour, supply chain, reputational or environmental.
‘It is really up to corporates to respond to the information needs of their stakeholders, not just to meet the compliance requirements of the stock exchange. This is really an opportunity for every company to better understand and communicate its own business strategy,’ he said.
Providing strategic advice on sustainability – the focus of Mr Rosenthal’s role at CLP – therefore requires an understanding which goes beyond regulatory requirements. Similarly, governance professionals seeking to add value in this area would do well to acquire a broad awareness of the macro issues that are shaping the business, the region and the world as a whole. Since it is the duty of the board to be on top of the company’s major risks, this is also a perspective that is desirable for board members.
‘What kind of individuals do we need on our board? We need people who have that bigger picture view, for starters. An awareness of the ESG trends and issues that can really shape the business at its core, fundamentally creating or destroying enterprise value,’ Mr Rosenthal said.
He then shared CLP’s ‘learning process’ in working out how to turn ESG risks into opportunities and how to successfully communicate the resulting business strategy to the market. He said adopting the double materiality concept has helped the company better reflect ESG risks and opportunities in its business strategy from both a financial and an impact perspective, while ensuring that its reporting is relevant to its different stakeholders. Double materiality refers to the expectation that companies should report not only on financially material topics that influence enterprise value, but also on topics material to people, the economy and the environment.
‘This is really about understanding the external forces that are shaping our business, but at the same time understanding our impact on the communities in which we operate and on the natural environment, and the market and economy more broadly,’ he said.
In addition to thorough research of the relevant trends, Mr Rosenthal recommended engagement with senior management and operational staff who are running the business, as well as external stakeholders and experts. The research and engagement should be subject to regular reviews, he added, to determine whether adjustments and changes of direction are needed. Once again, Mr Rosenthal emphasised the need for a broad perspective when assessing any trends or issues noted by this process. Are they likely to erode or create enterprise value? Will they have an impact on customers, the community, the environment, or the economy?
‘We hope that, through this process, we can provide disclosure that is of use to our investors and the financial community, so that they can better understand how we are creating value and minimising risk. We also hope that our disclosure helps our various stakeholders to better understand how we’re minimising our impacts,’ he said.