Veena Ramani

Investors are on to a definite theme these days—and Kinder Morgan and Anadarko Petroleum Corp. are the latest companies to experience it.

Earlier this month, investors in the energy infrastructure giant backed shareholder resolutions calling for more transparency and reporting on how Kinder Morgan is addressing the impacts of climate change and mitigating the risks. A similar resolution at Anadarko also received a majority vote this month.

This is a trend that has picked up steam during recent proxy seasons, with shareholders just last year voting in favor of climate change resolutions at major firms, including Exxon Mobil Corp., PPL Corp., and Occidental Petroleum Corp.

As I wrote in a recent NACD blog, one consequence of this growing focus on climate risks is that investors, led by major money managers such as BlackRock and State Street, are increasingly emphasizing the role of corporate boards in driving company responses.

And now Systems Rule, a new report from Ceres, shows that investors are right to push for strong governance systems for sustainability.

Our analysis of board governance practices and performance data of large global companies found that businesses that integrate sustainability priorities such as climate change into board mandates, director expertise, and executive compensation also demonstrate strong performance on sustainability issues.

The report provides important insights for boards to pay attention to as they consider how to oversee climate-change-related risks and strategy.

But here’s the issue: Most large companies aren’t among these performers because they still have fragmented systems of board governance, especially when it comes to sustainability oversight.

This is partially true because many directors and company leaders still do not understand the material impacts associated with environmental and social issues, like climate change. In fact, Systems Rule noted that only 17 percent of corporate directors have demonstrated expertise in sustainability issues.

For companies to get moving and establish governance systems that can deliver commitments and performance on climate change, the whole board needs to start by establishing some baseline fluency that will help them understand when these issues could in fact be material.

That’s where a new Ceres primer, Getting Climate Smart, can help.

Developed specifically to increase board fluency in climate change, the report provides an overview of the different ways that climate change can impact an enterprise and how boards can integrate climate change oversight into their responsibilities in the boardroom.

It’s designed to be a valuable tool for corporate directors who want to educate themselves on what this issue means to their business and what they can do about it.

So how practically can directors build climate competency into their board?

  • Formally include oversight of climate-change-related issues in the board structure. Formalizing climate change’s importance to business by including it in board committees’ mandates ensures the topic is regularly discussed. Citigroup, Ford Motor Co., and Nike are just a few of the companies that do this.
  • Recruit climate-competent directors. Committees should cast a wide net through the nominating process so they can consider candidates with diverse backgrounds and expertise in addressing climate change.
  • Integrate climate change into strategic planning and risk oversight. Directors should ensure that management takes the business impacts of climate change into account at every level of the company. Businesses including BHP Billiton and Shell conduct scenario analyses to assess the impacts of climate change on their portfolio of assets and business policies.
  • Tie executive compensation to actions that mitigate climate change. To encourage action, executive compensation can be tied to a company’s progress on addressing and opportunities, such as cutting greenhouse gas emissions. Xcel Energy links 30 percent of its executive compensation to carbon emission reduction goals.
  • Promote climate change disclosure. Without robust disclosure, investors cannot accurately analyze how a company is responding to climate change. Companies including Aviva, Unilever, and Zurich Insurance committed to updating their disclosures based on new Task Force on Climate-related Financial Disclosure (TCFD) guidelines.

The takeaway from our research is clear. It pays for companies and boards to adopt strong board oversight systems for climate change. But as a first step, boards should first develop climate fluency to understand the material risks their company may face. Fluency with the issues and strong, holistic governance systems will lead to the performance impacts that investors and other stakeholders want to see.

Veena Ramani is program director of capital market systems programs at Ceres.