Are directors asking the right questions?
It is a financial imperative to actively navigate the risks and opportunities that the carbon transition presents. It follows, therefore, that corporate strategy in relation to climate risks and opportunities is no longer appropriately housed solely in Environmental, Social and Governance (ESG) or sustainability function areas: best practice is now to embed climate change into the fabric of corporate governance and treat it as a core financial matter. Indeed, Australian corporate regulators are amongst the most active in the world in promoting climate-related financial disclosures.
Against this background, the impetus is now here for directors to reflect on what climate-related risks and opportunities mean for their fiduciary duties, and to take prudent steps to safeguard their organisations. We believe that a key early step is to update governance frameworks.
Guidance is gradually becoming easier to come by on how to do this, but we believe this is still a bespoke task, informed by:
- macro trends: a panoramic understanding of the forces at play, and the short, medium and long-term scenarios associated with climate change; and
- organisational stress testing: an interrogation of the strengths and vulnerabilities of existing governance frameworks to respond to these macro trends.
Below we provide a high-level survey of key macro trends, and sets out a list of questions boards can ask, in order to inform board strategy.