Climate action: a fiduciary responsibility for NEDs

When it comes to tackling business’s relationship with climate change, views are all over the place. The constant noise doesn’t help.

In boardrooms of many businesses, the ‘grown-up’ response has been to acknowledge but not prioritise the potential specific climate risk to their companies’ operations and the implications on their broader stakeholders. After all, the real impact in many sectors is well down the road, right?

All the following scenarios are possible: problems with supply chains due to drought, fires, too-hot working conditions or floods; the subsequent impacts on insurance rates and capital costs; and legal costs if Client Earth shows up on your doorstep. Right now, these risks may only bite at the edges. And maybe for your business, they won’t throw much sand into the machine. Until they do.

So, here’s the question: does your board have both a clear understanding of the strategies required to not only firefight a sudden climate-induced operating problem, but also what is required to shoulder the climate-driven longer-term risks and business opportunities for which you as an NED are ultimately responsible?

Or has a ‘grown-up’ decision been made to wait until push comes to shove? Until regulation makes it a ‘level-playing field’ and everybody takes the hit for the required investment in change? Or until some ‘magic’ arrives that creates or enables cheaper, cleaner power globally (surely nuclear fusion will be with us before it’s too late, some better battery storage…and of course there’s always Mars). Has your board fully grasped how time features in the problems that are emerging?

The responsibility is on NEDs

Around board tables big and small, we accept that as directors we bear fiduciary responsibility to our companies and institutions. We’re legally on the hook for it – morally too – otherwise none of us should take a NED role.

But sometimes, an asymmetry can creep into the understanding of what fiduciary responsibility really means in terms of timescales, the stakeholders it relates to and how priorities are set. It too often gets conflated with financial responsibility which, while important, is a fiduciary subordinate. And the importance of climate change is too often caught in that confusion and asymmetry.

Risk Committees may point to their ‘heat map’ showing where they believe climate-related concerns should live relative to other concerns. However, like any risk, the probability and financial impact of a climate change-related issue – where it ‘lives’ on the heat map – is only as meaningful as the work done to unpack and explain it, and then how well it is understood.

Not a question of personal views

The relative newness and complexity of climate change-related risks in board thinking means it needs greater focus by NEDs, and the ability to test the soundness of this work and its conclusions, not less, irrespective of our personal views.

Our fiduciary responsibility demands that we both collectively and individually work harder and do more to address how our companies affect the planet. There is no excuse for allowing someone to drive as fast as possible near a cliff edge in the dark. Just because you can’t see it, doesn’t mean it isn’t there.

Equally, we are responsible for using every means possible to navigate the cliff edge without abandoning the journey. That is the core underpinning of fiduciary responsibility: ensuring the company’s ability to deliver objectives over time, avoiding the cliff and keeping the show on the road.

While NEDs cannot possibly become scientists to do this, they have a duty to understand what those scientists are saying and ensure their companies have the skills and perspective to do the best job possible to understand the spectrum of impact – at the right levels – to inform strategy over different time horizons.

Back on the risk ‘heat map’ – multiplying probability times impact to get expected value/cost seems sensible, but those long-term impacts are already looking less long-term than you might currently think.

Maybe you’ve now caught the can that was kicked down the road a decade ago. You’re the next guy who’s supposed to be able to solve all this. Maybe this aspect of fiduciary responsibility wasn’t so obvious then, but it is now. And it’s ours. Let’s all own it.