Thinking Through Climate Change As A Business Issue

Understanding the impact that climate change and other environmental issues may have on a business can be messy and complicated—especially given that many impacts of climate change are not immediately ascertainable, and some may only apply in the distant future.

As a board member, how do you broach the issue of climate change to ensure that your board is performing its fiduciary duties and that management of the company is adequately assessing the impact climate change may have on the business? As the saying goes, one bite at a time. Understanding the business risks posed by climate change, the company’s contribution, if any, to climate change drivers and possible disclosure obligations takes a strategy. Here are some suggestions to get you started.

Understand Climate Change-Related Disclosure Implications

Federal securities laws require disclosure of certain business risks and opportunities and adherence to these laws guides climate-related disclosures. The SEC’s 2010 Commission Guidance Regarding Disclosure related to Climate Change is a good place to start (https://www.sec.gov/rules/interp/2010/33-9106.pdf). The guidance clarifies that material risks and opportunities to the business from climate change should generally be treated like any other business risks. Certain state laws and regulations also require climate change–related reports and disclosures outside of SEC filings. The applicability of any such state laws to the company should also be considered when determining a strategy.

Educate the Board Regarding Greenhouse Gases

No climate change strategy can be developed if you don’t know what “greenhouse gases” are and whether your company emits them directly, as a by-product of combustion, or indirectly through energy use. Getting grounded in these concepts and how they fit into climate change evaluations will ease communication around strategy decisions.

“UNDERTAKING A SERIOUS ANALYSIS OF THE ISSUES CAN BENEFIT BOTH THE COMPANY AND ITS SHAREHOLDERS.”

Consider the Potential Business Risks of Climate Change

Conceptualize the myriad ways climate change can impact a business, regardless of whether those impacts rise to the level of mandated disclosure.

Operational—Physical and Regulatory, Direct and Indirect—Could the company or its supply chain be physically damaged by extreme weather or other impacts of climate change? Could rules and regulations related to climate be imposed on you or those in your supply chain that could hinder or prevent the company from doing business or cause the cost of doing business to increase?

Administrative or Judicial—Could the company be subject to litigation related to environmental practices or be subject to new rules to address greenhouse gas emissions?

Reputational—Could public attitudes about the company or its industry impair its ability to make a profit? Are consumer groups or public interest groups targeting a business practice or product that could jeopardize a financially rewarding aspect of the business?

Investor Backlash—Do the company’s institutional investors have environmental policies that could cause them to quit investing in the company or vote against members of your board or committees for environmentally related actions? Are the company’s shareholders likely to demand increased disclosure of environmental issues?

Think Conceptually about How Your Company May Be Impacted

Keeping in mind the variety of ways that climate change can impact a business, start with broad “what if” scenarios. For example, start with a basic premise that a changing climate could result in geographic instability that could affect the business either in the short term or the long term.

• Consider a near-term situation: What if a hurricane floods the plant for three months. What would that mean to production? To employees? To customers? Would everyone wait for the company to restart production, or would they find a new employer and new provider?
• What about a situation that is predicted to be 20 years away: Will garment workers in Vietnam be affected by sea level rise, and if so, how? Or even when?
• And then consider a question with an even longer-term horizon: Will the melting Arctic have any impact on anything related to my business?

Consider Likelihood and Materiality of Impact

Narrow your what-ifs to identifiable near-term and longer-term risks and benefits that appear to apply to your business. By getting concrete, you can begin to determine a reasonable direction for the evaluation of business risks and opportunities and determine whether any of the identified risks are reasonably likely to materially impact the company’s future.

Be a Prepared and Informed Board

Talk to Management—Ask management what analysis and metrics it has undertaken so far. Ask it to identify any known climate-related goals and to describe its ongoing efforts to stay up-to-date on potential climate change risks.

Schedule Time for Review—Determine the appropriate frequency of review for your company and make climate change an agenda item for your board meetings. Monthly, quarterly or annual targets and evaluations may help narrow what issues are relevant for your company.

Consider a Committee—Consider whether a separate committee should be dedicated to climate change or whether an existing committee should be tasked with review of climate change. Some companies create “sustainability committees” that are tasked with review of issues related to climate change, water use, supply chain and social issues, to name a few. Some companies prefer for the entire board to be tasked with climate change review.

Consider the Board’s Skill Set—Consider whether the board has the appropriate mix of background and skills to effectively exercise oversight over climate change issues that impact the company and whether new directors should be sought to fill in any gaps.

Invite Experts to Present to the Board and/or Consult Academic and Government Reports—Reports prepared by academics and government officials can show where, when and what climate change impacts should be expected in different regions of the country. These maps and information can assist a company in answering “what if” scenarios and to help plan for data collection. They can also be used by board members to develop the “what if” scenarios the board think most likely in need of exploration. (See https://www.climate.gov/climate-and-energy-topics/climate-projections-0.)

Consider Voluntary Disclosure Guidelines—Even if your company ultimately determines that voluntary disclosure is not appropriate, consulting and considering the guidelines and recommendations that are available can help the board understand trends and possibilities in this area.

A variety of guidelines exist for tabulating a company’s greenhouse gas emissions as well as for identifying business risks and opportunities. The latest voluntary guideline was released by the Task Force on Climate-related Financial Disclosure (https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Report-062817.pdf). The TCFD recommendations guide companies in the types of information and disclosures a company could provide shareholders about the business risks, opportunities and impacts posed by climate change. The Climate Standards Disclosure Board and the Global Reporting Initiative are two other reporting systems that have recommendations on developing climate change-related disclosures.

Be Aware of Your Company’s Unique Circumstances

The outcome of these inquiries will depend on each company’s unique circumstances. Even seemingly similarly situated companies within the same industry may come to different conclusions about the extent, if any, of any material risks posed to the company by climate change. Some companies may determine that climate change poses a significant risk to their businesses requiring disclosure in SEC filings. Others may decide to make voluntary disclosures based on their own social or political motivations, a desire to appease shareholders, or some other reason altogether. Still others will determine that any risks posed are too tenuous or remote to be disclosed. Regardless of the result, undertaking a serious analysis of the issues can benefit both the company and its shareholders and demonstrate the prudent exercise of fiduciary oversight by the corporate board.

Thinking through climate change–related business risks requires a strategy, and these ideas may help you develop yours.