The Critical Role of the Board in Addressing Climate Change

Mar 09, 2017
In late 2016, both the Alberta and federal governments announced programs that aim to reduce carbon dioxide emissions in part through taxation and constraints on emissions. This targeted transition to a low-carbon economy is a part of a global movement creating risks and opportunities that require board attention.

“Canada has a unique challenge amongst developing countries of exploiting its hydrocarbon endowment while achieving credibility with its climate policy,” says Dennis McConaghy, a retired Canadian energy executive and author of the bestseller Dysfunction: Canada After Keystone XL. Boards need to be aware that the continuous drive toward low-carbon economies poses a variety of risks across industries. We break them down here into five categories:

REGULATORY RISK

The provincial and federal governments are enacting different climate change policies. The variations will alter
the competitiveness of companies depending on where they operate or sell their products. Changes, inconsistencies and uncertainties in regulation across jurisdictions are creating strategic challenges for business.

PHYSICAL RISK
Boards must increasingly consider the physical risks to their businesses of climate change, which may include damage to land, buildings and infrastructure, as well as to the natural resources they may depend upon, such as water or forests.

Recent calamities attributed to climate change in Canada include forest fires, floods and droughts. While
extreme weather has always been a fact of life in Canada, there’s no doubt that such events are becoming more frequent and intense and creating serious challenges for business. One response from government that we are already seeing is greater regulation to limit access to natural resources, such as reduced timber-cutting quotas and industrial water use allowances.

FINANCIAL RISK
The potential financial consequences of climate risk are often debated in terms of the lost value of stranded
assets, such as fossil fuels that are left in the ground. These risks are rapidly climbing the investment industry’s agenda. Investors and securities regulators continue to indicate that existing climate-related information provided by companies in securities filings, particularly in Canada and the United States, is incomplete and fails to link to the organization’s business strategy, performance and future prospects.

Climate change disclosures can be used as a tool to demonstrate how an organization is managing uncertainty and a changing risk profile associated with climate change. The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures aims to improve this “energy transition” by improving global transparency over climate-related reporting. In a recent report, the task force recommends new disclosures to improve investors’ ability to appropriately assess and price climate-related risk and opportunities.

LIABILITY RISK
In June 2015, the Hague District Court ruled that the Dutch state had violated its duty of care to protect and improve the living environment by failing to take action to reduce greenhouse gas emissions. The action was brought by the Urgenda Foundation, a Dutch NGO, on behalf of itself and almost 900 named individuals. Since this case, there have been other plaintiffs in other jurisdictions, including Australia, the United States and Pakistan, who have brought climate change litigation against their governments. In Canada, climate change litigation has not yet taken hold, but the discussion of the legal principles required to bring a successful action has become mainstream. While these actions may not yet be successful, companies bear the costs of them and the potential risk needs to be acknowledged and factored into decision making.

The Shareholder Association for Research and Education (Share) highlights another potential source of liability for boards and their corporations. In a recent report entitled “Taking Climate on Board: Are Canadian energy and utilities company boards equipped to address climate change?” Share concludes that, “public companies in some of Canada’s most carbon–intensive sectors are not currently disclosing to investors the extent to which their boards are adequately equipped with the right skills and experience, comprehensive
understanding, and proper oversight processes and systems to tackle the risks climate change poses to their
businesses.” It is a warning which brings with it the potential for shareholder activism and risk of litigation.

REPUTATIONAL RISK
The damage to reputation caused by an organization’s failure to demonstrate action on climate change matters is becoming more prevalent. There are many examples of Canadian businesses that struggle to gain the social licence necessary to expand their operations because they lack government or public support.

Whether boards agree or disagree with the science of climate change or the policies of governments, changes in societal acceptance of certain activities – such as producing, shipping and using coal, heavy oil, light oil or natural gas – is a critical risk for all boards to address. Companies are also facing challenges in recruiting and maintaining a work force as some industries become less attractive to the public as a result of
changing perceptions. In all cases, perception is reality when it comes to decisions being made.

BOARD ACTION
Moving to a low-carbon economy will have a range of effects on different companies. What’s key is to assess the opportunities and risks as a board and also as an individual director and think about ways to integrate key considerations into corporate strategy, so you can be ready to make changes as risks and opportunities evolve over time.

Here are five key considerations for a board:
1. Determine whether your organization has a climate change strategy or policy and, if not, consider developing one immediately to navigate the changing landscape. Remember that climate change adaptation should be aligned with corporate priorities.

2. Determine whether your organization has assessed its full exposure to both existing and future climate change regulations, to better plan for future capital.
This process should include:
  • Evaluating the company’s current business model, financial exposure and cash flow projections against international, federal and provincial emissions-reduction targets and policy direction;
  • Assessing the impact of the proposed changes on your organization’s financial health by adopting a shadow carbon price and conducting emissions modelling. This approach can help to fully assess financial impact over time as carbon prices continue to increase;
  • Conducting a cost-benefit analysis of the financial investment required to reduce emissions using technology versus paying the incremental costs associated with governments’ varying carbon-pricing mechanisms; and
  • Understanding sensitivity to carbon pricing shifts, especially for companies that operate across multiple jurisdictions with differing carbon-pricing mechanisms.
3. Identify and consider the biggest threats and opportunities for your long-term business model, and their impact on your organization’s competitiveness. These may include factors related to implementation of carbon pricing, managing uncertainty of climate change policy when operating across multiple jurisdictions, and the effect of rapid technology development.

4. Evaluate whether you have an appropriate strategy for how the organization discloses the way it is managing uncertainty and a changing risk profile associated with climate change. This includes making a connection between climate change metrics and financials.

5. Determine what governance on climate change should look like for your organization at a board level. Assess whether your board and senior management have a climate change competency gap and assess how to address it.

Beth Reimer-Heck, QC, ICD.D, is a lawyer at Borden Ladner Gervais LLP with a specialty in governance, and energy risk and compliance. She serves on a number of boards and on the executive committee of the ICD’s Calgary chapter.

Patrick Carlson, ICD.D, is the founding CEO and a director of Seven Generations Energy Ltd. A chemical engineer, his previous startups include North American Oil Sands Ltd., Krang Energy and Passage Energy.

Meghan Harris-Ngae, is EY’s Western market leader for climate change and sustainability services.


Source: Director Journal (March/April 2017)
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