It’s no surprise that climate change impacts such as extreme weather have the potential to disrupt a corporation’s supply chain, making it more challenging for them to obtain the resources and materials they need.

Increased storms, wildfires, and severe drought caused by climate change may disrupt businesses and result in a shortage of crops used for food, apparel and other products. For companies with real estate and assets in areas most affected by severe weather, this can also cause asset damage, lack of insurability, and increase costs.

As governments enact regulations to address climate change, market demand for products change and low-carbon technology displaces incumbent technology, companies may face increased risks or opportunities. It is up to many factors—the company’s business model, business strategy, the geographic location of its assets and the quality of its corporate governance—that will ultimately determine the size and impact of climate change on its profits and valuation.

Global asset managers have been paying close attention to the potential financial implications of climate change, and are exploring ways to measure and manage the associated risks. Corporate issuers and their boards are working to demonstrate to investors and other stakeholders that they are embedding climate change considerations in their decision-making.

Increasing demands for action

In RBC Global Asset Management’s 2020 Responsible Investment Survey, a global study of attitudes in the institutional investing community, climate change was respondents’ second-highest ESG concern, after anti-corruption.

However, 60% of the respondents said that their firm’s investment policy did not address climate change. There was also significant regional variation here. Only in Europe (65%) did the majority of respondents say their firm incorporated climate change into their investment policy. By contrast, 31% of investors in Asia, 30% of investors in Canada, and 17% of investors in the US made the same claim.

Companies are now seeing increasing demand for action from their shareholders. the Financial Times reported that in the US and Canada, the average investor support for environmental shareholder resolutions rose to 33% in the first half of 2020, up from 22% in 2019. Support for environmental solutions remains a minority position but one that looks to be rapidly growing.

As companies and boards increasingly seek to embed climate-related risks and opportunities in their decision-making, the role and competency of boards to provide oversight is gaining increasing attention. Boards that demonstrate good risk oversight practices and policies are associated with better environmental and social performance, according to a joint study by INSEAD and the University of Pennsylvania.

Enhancing climate intelligence on the board

Corporate boards should establish clear governance structures, mandates, and processes that govern how climate change considerations are integrated with those related to the organisation’s strategy, businesses, and financial planning. Board members should have the appropriate expertise and experience to oversee the effective integration of climate change into business decisions, where material.

Boards must incorporate the following approaches to enhance their climate intelligence.

1. Recruit climate expertise and experience

When putting together a corporate board, companies should focus on recruiting qualified members with a diversity of expertise and experience. This may include board members with an understanding of the physical impacts of climate change and the implications of the transition to a low-carbon economy on the business.

Relatively few companies have a governance and steering mechanism in place to develop and implement comprehensive climate strategies, according to a 2019 report by Deloitte. In fact, among the 1,188 board members of the 100 largest US companies, only three had climate expertise, and only 6% offered broader environmental expertise, according to a new study from the New York University’s Stern Business School.

When recruiting board members, experience in environment, health, and safety are often included together. Identifying climate change as a separate factor could facilitate the identification of board members with this expertise.

2. Build climate awareness

Even with climate expertise and experience on a board, there is a need to build awareness and ensure continual education on climate change. Government regulations, technology disruption, market dynamics, and customer expectations are shifting rapidly. The board should be able to identify these drivers of change, and how they will manifest for the organisation so that this can be considered as part of strategic and financial planning. Bringing in external experts on key topic areas material to the organisation’s sector and business can support this ongoing education.

For example, a consumer staples company may want to bring in expertise on supply chain risk management to avoid business interruptions during extreme weather events, or expertise on shifting agricultural productivity, consumer demand, and food prices under future climate scenarios. A commercial bank may want to bring in expertise on the increasing regulatory requirements for transparent disclosure of climate risks, and related liabilities.

3. Provide effective governance oversight

Boards should establish effective governance oversight of climate change risks and opportunities. This should include establishing accountability for climate change within committee mandates, identifying processes and the frequency by which the board and/or committees are informed on climate issues, and monitoring performance against related goals and targets. Climate change should be considered as part of strategy, risk management and financial planning decisions. It should also be considered from the perspective of the organisation’s key stakeholders, such as shareholders, employees, and the communities within which they operate.

These approaches are critical in sectors for whom the impacts of climate change will be most material. Regulations and requirements related to the measurement and disclosure of climate-related risks and opportunities continue to emerge and evolve at a rapid pace. Board climate change competency and oversight must progress apace as well.

Maia Becker is director, corporate governance and responsible investment, at RBC Global Asset Management.