The board, judgement and climate

In recent research conducted by Fidelio into board judgement, we were surprised that climate was not identified as being a top challenge for boards. This may be because of geo-politics and AI. It’s also true that many boards have already undergone a significant upskilling on climate and may be taking comfort from greatly strengthened climate reporting.

We would argue, however, that the complexity of the backdrop is requiring boards to engage more fundamentally on climate, not in terms of sound bites and aspirations, but in a granular and practical way. Fidelio has seen this borne out in board performance reviews with examples of board contribution on climate including:

• Ensuring that sustainability and decarbonisation are embedded in the strategy and business model, and that the benefits to the company can be clearly articulated to shareholders and stakeholders.
• Avoiding blind spots with board members from different backgrounds, jurisdictions and viewpoints making sure that the company is well placed to navigate differing expectations on climate.
• Bringing judgement to bear on complex issues of timing and investment so that the company builds resilience today and is positioning itself for transition.

In many ways the easy phase is behind us. Board learning on climate needs to continue but in a more tailored and specific way, both with regard to policy frameworks and technical understanding and very much reflecting sector priorities.

Climate and sustainability are permeating the work of the board, requiring all board members to have at least a foundational level of climate competence. The Chair absolutely needs a macro understanding which is critical to navigating the turbulence created by political and regulatory uncertainty.

Both the Chair and Audit Committee Chair will be alert to a more muscular form of stewardship where investors want to see how climate measures are mitigating risk and creating competitive advantage. The burden of climate reporting may be increasing but not necessarily evidencing either benefit for investors.

Most Remuneration Committees have incorporated climate into compensation objectives, in particular through the LTIP. The refinement of these targets and KPIs is often proving more challenging than the original introduction. Remuneration Committee Chairs need a good grasp of decarbonisation KPIs, for example, if compensation is to be meaningful and trusted.

If there is a Sustainability Committee, the Chair needs to be a credible counterpart to the business on climate, as well as a transformation champion. Other companies continue to reserve the sustainability discussion for the board. Whatever the structure, the Nomination Committee Chair needs to ensure that the board has the requisite climate insight and that this is adequately reflected in the skills matrix.

Thus, climate and decarbonisation feature across the work of the board. Judgement and insight are required for weighty and difficult decisions that will face all companies as they build resilience and transition. Attention to detail and thorough, meticulous oversight of climate and sustainability programmes is also needed. The board will also want a firm grasp of culture, ensuring the organisation is well placed for opportunity and adaptation.

As Chapter Zero looks ahead, the role of the board in addressing climate becomes more important and the expectations of individual board members will only increase.