Business consultants and institutional investors have been warning corporations of the perils of a warming planet. For years, these experts have been saying corporate leaders can no longer ignore the risks of climate change on their companies’ bottom lines.
The message is getting through easier to corporate boards of directors in some countries but not others. Board members in the United States and Canada, for example, are still ignoring the risk of climate change at a high rate.
While a majority of companies recognize the risks of climate change, there are clear differences in the way companies are integrating climate measures in their corporate governance process. According to a new survey of global corporations, U.S. companies are lagging behind their European counterparts in taking measures to combat climate change.
At 66 percent, the U.S. has the lowest proportion of companies with boards of directors that are overseeing their companies’ efforts to tackle climate change matters, according to the survey. In contrast, 95 percent of companies in France, Germany, and the U.K. have board-level oversight of climate change matters. Instead, North American companies’ climate efforts are being managed lower down the corporate ladder.
After a spate of corporate scandals, including the Enron Corp. bankruptcy in 2001, experts pushed U.S. corporate boards to pay closer attention to the running of the company. Through corporate governance improvements and changes in law, boards of directors have become more involved in planning at early stages, rather than reviewing and signing off on a strategy after it has been fully developed by the company’s management. This greater level of board oversight also signals a company’s commitment to tackling an issue.
Though a significant majority of companies report board oversight of climate-related matters, only 1 in 10 currently provide incentives for board members to manage climate-related risks and opportunities, with companies in Canada — at 2 percent — and the U.S. — at 4 percent — having the fewest.
Rather than implementing incentive programs for a company’s board of directors, monetary and non-monetary incentives to manage climate change are often provided only to members of a company’s sustainability department.
But the management of environmental issues can no longer be the sole responsibility of sustainability departments at corporations, according to Simon Messenger, managing director of the Climate Disclosure Standards Board. “It needs to be a priority area for companies’ boards to ensure it is truly embedded into their strategic priorities,” Messenger said Monday in a statement.
For the study, researchers at the Climate Disclosure Standard Board and CDP, formerly known as the Carbon Disclosure Project, looked at 1,681 companies across 14 countries.
The different approaches to overseeing climate risks may be the difference in regulatory environments facing companies on both sides of the Atlantic. In the European Union, regulations have been driving the disclosure of climate-related information over the past decade. For example, an EU reporting directive requires companies to disclose information about policies, risks, and outcomes related to environmental issues. This directive has led to companies’ boards of directors to address climate risks in Europe.
In the U.S., despite the Securities and Exchanges Commission’s guidance on climate risk reporting published in 2010, progress has been slower, in part due to its regulatory environment, according to the study.
“In the U.S., where the perception of litigation risks is heightened, disclosure lags significantly,” Messenger wrote in the foreword to the study. “Meanwhile, in China, where a roadmap to 2020 for climate-related disclosure was recently launched, companies clearly state their intent to act in the next couple of years, if they are not already doing so.”
Vanguard Group, one of the largest investment firms in the world, with more than $4 trillion in global assets, began urging companies to disclose risks associated with climate change in 2017, signaling a major shift for a company that previously had been loath to support climate-related risk disclosures.
Among other businesses, Vanguard pushed for ExxonMobil, the world’s largest oil and gas company, to disclose how its future business models could be impacted by the global effort to keep temperatures below 2 degrees Celsius. Last May, 62 percent of Exxon’s stakeholders voted in favor of a resolution requiring the company to disclose climate-associated business risks.
While ExxonMobil and other companies in the energy sector have only an average level of board oversight of climate-related risks, the sector has a low number of companies — 6 percent — reporting monetary and nonmonetary incentives to its board members linked to climate-related matters. This is noteworthy due to the sector’s “particular exposure to climate-related impacts on core strategies,” according to the study.
Energy companies are considering the financial risks and opportunities that climate change creates in the short term but do not currently disclose an alignment with the long-term public and private action that is required to meet the Paris climate agreement goals, the study found. Under such circumstances, institutional investors with longer time horizons will obtain an incomplete picture of the potential future performance of their portfolio holdings.
President Trump announced last June that the United States would abandon the Paris climate agreement, a decision opposed by many major U.S. corporations. While companies are working to tackle climate change, they need to do more if they want to fill the gap potentially left by the U.S. leaving the Paris agreement.
In recent years, for example, companies have started providing more products that they describe as low carbon. However, the definition of low carbon products or services remains largely up to the companies themselves.
For instance, 69 percent of the energy sector report providing low carbon products. However, more than a third of the energy companies surveyed offer natural gas products. “While less carbon-intensive than many other fossil fuels,” the study says, “this will not be a long-term solution to meeting the Paris agreement goals.”