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In the past year, the world has faced a global pandemic, significant natural disasters, intense social and racial issues, and economic plunges that have highlighted the need for organizations to become better at managing major shocks.
Recently, based on broad research, we’ve addressed the role of organizations in managing environmental issues that are deeply affecting both business and communities. But how are boards and management teams actually approaching these issues? What actions are they taking and what factors are at play as decisions are made? And how are these issues affecting other parts of the business, particularly human capital?
Board Member Roundtable Discussion
Willis Towers Watson recently convened the first of several planned roundtable discussions, with nine United States-based board members spanning 50 companies in 31 industries to ask them how they and their management teams are addressing climate hurdles within ESG and any resulting implications across the business.
Not surprisingly, the answers were complex and more sophisticated than a simple sound-bite pledge to “go green” or “achieve net-zero emissions.” Organizations, their boards and management teams are being pressured on all sides to address environmental issues. Regulatory requirements to reduce carbon emissions and overall waste are likely to increase in the U.S. Companies in the United Kingdom, Western Europe, Canada and elsewhere are setting ambitious climate goals and reorganizing their operations to achieve those goals. U.S. companies and boards are aware of these moves and are sorting through which risks and issues are most appropriate for their companies to address.
We asked participating board members to discuss three questions:
- How concerned are the boards of U.S. companies about climate issues and which climate issues are topping the list?
- Are climate issues seen primarily as risk-related or are there other drivers?
- How and where is climate risk addressed by the board?
The conversation was robust, nuanced and, at times, argumentative, resulting in several key points:
- Board members of U.S. companies are authentically concerned about climate issues and risk. However, the specific risks and their relative importance varies considerably by company and industry. Climate risk is viewed in the context of the many other risks that boards consider and address on a regular basis. Cyber risk, for example, has become a serious topic for virtually every board and has increased in importance as well as the amount of time and attention spent addressing it. Yet, climate risk is a newer topic for many boards.
- Boards clearly see risk as part of the overall value equation for their organizations. They see both monitoring risk and driving performance as key to creating value for all stakeholders, including regulators, shareholders, employees and consumers.
- However, climate issues are not just seen as a risk. Addressing these issues is also seen as a potential benefit in terms of attracting and retaining employees, customers and investors (and, therefore, capital).
To the extent that climate issues are seen as risks, there are two broad, and often intertwined categories to consider.
Category 1: What the Climate and Environment Do to Our Company
This includes risks associated with issues such as rising sea levels and intense weather events. While there was disagreement among board members regarding the increased frequency and severity of these events, there was agreement that businesses today have more assets that are exposed to climate events, and that global networks and supply chains also expose companies to greater climate risk. In summary, we heard about two sub-categories of risk from climate events:
- Risk of more severe, sustained or frequent climate events.
- Risk of more assets, people, infrastructure and supply chains exposed to those events.
Category 2: What Our Company Is Doing to the Environment
While corporations and investors are paying a great deal of attention to lowering greenhouse gas emissions and carbon footprints, roundtable board members were quick to point out that environmental impact comes in many forms.
One board member from a large electric power producer shared that her company was very concerned about CO2 emissions, but was also concerned with releasing other pollutants into the air and water. Another board member from a plastics manufacturing company expressed concern about the volume of non-biodegradable plastic produced, how little is recycled, and how much plastic is in our oceans and landfills.
Other board members were concerned about the net environmental cost of making and shipping their products. The discussion made clear that the most important and most actionable environmental impacts vary a great deal by industry.
Board members also discussed the critical role of human capital in any climate or other ESG efforts. Driving meaningful climate initiatives will require companies to hire or develop people with different skill sets and capabilities; re-organize key functions and processes; build new metrics into incentive programs; and incorporate climate issues into corporate governance. Strong ESG performance also will be instrumental in attracting, motivating and retaining employees and customers.
Finding a Way Forward
Board members discussed the lack of simple solutions. Virtually everything a company does to reduce its emissions or footprint has costs and consequences. Every solution involves trade-offs that must be considered, quantified and compared to other possible solutions.
At the same time, waiting for perfect solutions is not an option in a rapidly changing world. For example, wind turbines can be great sources of carbon-free electricity, but also require significant amounts of steel and cement, as well as transportation, to build and install. Some consider them beautiful, others consider them an eyesore. But just because there are trade-offs, board members believe that should not preclude the search for solutions.
It was also acknowledged that, while finding true end-to-end solutions and taking all trade-offs into account is ideal, few companies really do so — nor can they afford to.
During the discussion, some board members placed climate and other ESG initiatives into three categories:
- Value additive: Initiatives that add value by helping reduce company-specific risk, lower the cost of capital, help attract and retain employees and customers, and enhance the brand
- Value decreasing: Initiatives that are expensive, with little perceivable payoff, where the company meets the expectations of regulations, investors, customers and employees, but not much more.
- Trade-offs: Initiatives that require significant displacement of products, production facilities, and other assets, but will generate significant revenue and profit over time, in a way that has more positive environmental (and/or other ESG) impact. Auto companies that switch from manufacturing internal combustion engine cars to electric vehicles or hybrids is one example.
The group also discussed the importance of not making public promises that the company cannot keep. Bold goals are inspiring and work well in certain circumstances, but board members warned against pleasant-sounding commitments and platitudes that have not been adequately planned and thought through. Climate and other ESG statements and commitments are being taken seriously by investors, employees and customers.
In terms of how and where boards are addressing climate risk, and risk in general, we found that there tends not to be a centralized risk committee in most organizations (except in financial services companies). Different risk categories are handled by different committees, with major risks (e.g., cyber) most often addressed at the board level. Climate risk is a newer or less developed topic for many U.S. boards and does not have a common home. However, compensation committees are increasingly addressing climate and other ESG issues as they consider including them in executive incentive plans.
Lastly, roundtable participants voiced a need for more high-quality education for board members on climate issues and climate risk. Boards could use some hard core, fact- and science-based, no-nonsense education and unbiased information on environmental and climate facts and risks. This, then, will allow them to make intelligent, informed decisions and trade-offs for their organizations.
About the Authors
Don Delves is a managing director and North America practice leader, executive compensation, at Willis Towers Watson.
John M. Bremen is a managing director, human capital and benefits, at Willis Towers Watson.
Rowan Douglas is the head of the Climate and Resilience Hub at Willis Towers Watson
Adrienne Altman is a managing director and head of the North America Rewards Line of Business at Willis Towers Watson