Building a Climate-Competent Board – Rich Ferlauto

Rich Ferlauto has an excellent article in Directorship (registration required) on the climate expertise and ability investors expect from the boards of portfolio companies.

Investors’ expectations for boards have grown as the impact of climate change on business risks and opportunities becomes more apparent. Large institutional investors, concerned with their own portfolio risks, are increasingly calling for climate-competent boards and directors.

The California Public Employees’ Retirement System (CalPERS) is one very long-term investor. Anne Simpson, the fund’s director of global governance, says: “We need to be able to pay pensions for the best part of the next century, and when we’re thinking about the sustainability of the fund, we’re not just thinking about the financial dimension, but we’re thinking about the environmental dimension, because that’s important to risk and return, and we’re thinking about people.”

The emissions software scandal at VW is the most recent and extreme example of what appears to be a corporate governance failure related to environmental malfeasance that has cheated stockholders and stakeholders….While robust engagement remains important to investors, the question is whether boards are competent to respond to climate and sustainability challenges. As such, investors want to be able to effectively intervene with dysfunctional boards or replace dead-wood members with more capable directors….

Sophie L’Helias, director of global initiatives and governance at The Conference Board, believes that “director identification and selection channels use models that do not adjust to the pace of change as new risks emerge. For instance, it took major security failures before boards began asking for skill sets that include [cybersecurity]. If companies heed the market’s warning as climate-related risks are priced in their shares, they will have to identify new channels to recruit directors with the requisite climate expertise.”

 


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