There is significant speculation today about what will be expected of public companies and their boards around environmental reporting and consideration of risks. While the exact form this will take is under debate, one thing is certain — companies must ensure that directors individually and their board as a whole are prepared for this increased responsibility. So, what do directors need to do to prepare themselves, and what actions should the board take collectively?
Before ESG became a household acronym, it was tempting to dismiss the increasing demands of environmental reporting and risk assessments as something affecting companies only in certain industries, like utilities or heavy manufacturing. Or perhaps some believed that only companies in industries with significant after-use waste needed to be bracing themselves. But today, directors realize that no industry and no company is immune from the sometimes disruptive and unexpected impacts of climate change across many dimensions of business operations, and the pressure for increased environmental reporting. Take, for example, directors of insurance or commercial real estate companies: Climate change is already having significant impacts on the assumptions inherent in their business and financial models. Likewise, although investment companies may not engage in production activities that directly impact the environment, executives in these companies must understand fully how climate shifts and more extreme weather events affect the financial stability of the companies in which they invest.
How do directors ensure they are preparing to tackle this increasingly important boardroom topic? Here are 10 actions directors and boards can take to prepare themselves for a world in which environmental issues are rising to the top of every company's list of key risks.
Establish an annual expectation of individual educational programming for directors, which includes environmental training opportunities. Many companies already offer directors opportunities to pursue training and education, so adding courses and board developmental programs in the area of environmental concerns is an easy first step. We encourage one or more directors on each board to engage in focused training programs aimed at exploring the direct and indirect effects of climate change and environmental sustainability.
Create easy ways for directors to share information about the environmental educational programs in which they participate. It's surprising how often directors attend training sessions, and yet the company has no formal mechanism for directors to share what they've learned from the training or even whether they found the training useful. We recommend setting up a formal feedback program that offers directors the opportunity to brief other board members on what they learned and the educational experience overall. This avenue for feedback may encourage other directors to participate in effective programs and can quickly determine if a program was ineffective or irrelevant to your company's needs, helping other directors to search for more relevant opportunities.
Add environmental expertise to your board's skills assessment. Many boards conduct skills assessments to ensure directors collectively have the skills and knowledge sets considered most important for the company's board responsibilities. If environmental expertise is not present on your board's list of director competencies, consider adding it. Once all directors have completed the skills assessment, the board as a whole will be able to gauge the degree to which it has the requisite proficiency in this area. This will also alert the board to decide the degree to which educational opportunities for individual directors or the board collectively will be valuable.
If your board doesn't have environmental expertise, consider adding a member who is experienced in the field. While the director and board educational route is one option, another possibility is adding a director who brings significant environmental expertise to the board. Even if expanding your board currently is not an option, this area of expertise could be moved to the top of the list when considering replacement candidates at the time of your next board opening.
Create (and regularly update) a resource website that tracks articles, webinars and other environmental resources that would be valuable to directors. We encourage companies to keep track of some of the best environmental resources with value to directors and make these resources available to directors in advance of board meetings. The board chair or lead director should encourage members to engage in a “common read” article or listen to a common podcast or webinar. Collectively examined resources could be used as conversation starters at a board dinner or lunch.
Bring environmental experts from various areas into board educational sessions. At least once or twice per year, your company should invite environmental experts from across the spectrum to address the board. Environmental scientists, advocacy representatives, financial experts, consumer groups and others can help the board understand the specific environmental issues facing your company. Whether introduced prior to the start of the official board meeting, during the meeting or afterwards, these types of experts are valuable for keeping the board informed about stakeholders' perspectives. And, while these types of sessions can be very effective face-to-face, they can be equally effective if conducted virtually.
Elevate environmental sustainability updates to standing board reports. Many boards will feature standing or regular updates every meeting to cover topics of great significance. Manufacturing companies, for instance, often hold a safety briefing at every board meeting. Similarly, it's not uncommon for boards to provide legal briefings at each meeting. Boards should consider adding a standing or routine report to regular board meetings to ensure environmental concerns remain “front and center” in terms of the board's attention. These board updates should include corporate counsel sharing legal, regulatory and shareholder activism matters in environmental areas.
Clarify the committee(s) where environmental oversight is housed. Often, responsibilities that don't have an “owner” remain unfulfilled. Therefore, the responsibility for environmental issues must be assigned to one or more board committees. For some companies, this might mean creating a new environmental oversight committee. But, for most boards, the responsibility will be given to an existing committee, such audit, risk or nom/gov. Two points are important to stress.
First, the decision on whether a new committee is needed or the responsibility can be assigned to an existing committee depends on the size and significance of the environmental issues facing your company. For this reason, it is important to engage directors and management in an environmental risk assessment that identifies environmental risks facing your company and assesses the likelihood and impact of each.
Second, environmental issues can be divvied up and assigned to multiple board committees. If this is done, however, it is imperative that each committee inheriting “a piece of the environmental pie” understands its responsibility. That responsibility should be clearly stated in the committee's charter and covered in the committee's schedule of meetings and agendas.
If your organization faces direct and serious consequences from various types of environmental crises, conduct periodic board tabletop exercises. It's becoming increasingly common for boards to engage in cybersecurity tabletop exercises because of the heightened risk of cyber threats. If your company faces heightened risks due to environmental crises, consider enacting one or more similar exercises at future board retreats. This helps ensure the board is prepared to respond in case of an environmental crisis.
Encourage the company to prepare an annual environmental impact report and engage the board in reading and offering feedback on it. More and more companies are issuing annual impact reports as a way of documenting their environmental goals and objectives and the progress being made. If your company does not yet produce this type of report, consider preparing one. It is a good way to ensure you share the progress your company is making in addressing environmental issues with constituents (both internal and external). Yet, even for companies that have such reports, it is often the case that directors see these impact reports only after they are issued publicly. Management should engage the board before impact reports are made public. Not only will such sharing allow directors to stay abreast of and better understand the full range of the company's engagement in environmental issues, but also directors may be able to contribute to the report in meaningful ways, ensuring it's an effective communication tool.
Boards must make sure they are integrating often complex environmental changes and issues into their regular deliberations, whether that means increasing directors' educational opportunities or adding such expertise onto the board.