In our article Climate-related financial disclosures become mandatory for quoted and large private companies, we outlined Government proposals to introduce climate-related reporting in line with the recommendations of the Task Force for Climate Related Financial Disclosures (TCFD). These requirements would apply in addition to requirements for premium listed companies which from next year will need to report whether they have made disclosures in line with TCFD. As explained in our article, the proposals stem from Government concern that voluntary engagement with TCFD reporting has been slow.
The TCFD recommendations for reporting climate risk and opportunities are structured around four main key pillars: (1) Governance, (2) Strategy, (3) Risk Management, and (4) Metrics & Targets. In this follow on article, we explain the TCFD recommendations in relation to pillar one - Governance - and pick out some examples of company reporting and practices so far.
TCFD Governance recommendations
The TCFD recommendations explain that corporate governance is the framework of authority and accountability through which an organisation's management, board, members and other stakeholders realise its objectives and evaluate its progress. It defines governance as "the system by which an organisation is directed and controlled in the interests of shareholders and other stakeholders."
The TCFD recommends that companies make two key governance disclosures describing: firstly, their board's oversight of climate-related risks and opportunities; and, secondly, the role of management in assessing and managing those risks and opportunities.
In relation to the first, TCFD guidance recommends that companies explain the process by which the board and/or committees (whether the audit, risk or other committees) are informed about climate related issues; how they have taken them into account in a wide–range of listed decisions (including on strategy, budgeting and incentives) and how climate-related goals and targets are monitored.
In relation to the second, the organisation should describe whether it has assigned climate related responsibilities to management-level positions or committees; who those committees report to; a description of the organisational structure and processes for reporting on and monitoring climate-related issues.
How is this reflected in practice?
A November 2020 Quoted Companies Alliance (QCA) and Henley Business School research report on ESG in small and mid-sized quoted companies suggests that although investors prefer the board (led by a Chair) to take ownership of ESG matters, with the CEO accountable for its execution, out of the 100 companies and 50 investors surveyed, only 44.2% cited the board as a key internal driver, and even less the CEO (28.3%). Nevertheless the QCA Small and mid-cap sentiment index Q4 2020, revealed that around one in ten companies had a board level ESG committee.
As will be seen below, companies in the FTSE100 appear to be more advanced in their planning. Globally, too, the Sustainability Board Report found a 17% increase in the number of dedicated sustainability committees of the board of the 100 largest of the Forbes Global 2000 as compared to 2019 and a 19% year on year increase in the number of directors on sustainability committees. So it would appear that the market is reacting.
The report comments that, whilst there remains limited evidence to suggest that having a dedicated board committee will, by itself, significantly improve the sustainability performance of a major international company, there is strong evidence to suggest that they are useful in at least five ways:
- as a source of knowledge and expertise;
- as a sounding board and constructive critic;
- as a driver of accountability;
- as a stimulus for innovation; and
- as a resource for the full board.
Ensuring that directors on sustainability committees have sustainability credentials is also highlighted in the report as an area for improvement.
In fact, a large number of companies in the FTSE100 have already voluntarily made statements in relation to the TCFD recommendations in their 2021 annual reports or published stand-alone reports. Picking out three examples of companies (which all emphasise that the board has ultimate responsibility for climate risk and opportunity):
Ninety One's disclosures reveal that the board has a Sustainability, Social and Ethics Committee (SSEC), but that the audit and risk committee ('ARC') also has oversight of climate risk and carbon management. There is a helpful diagram showing how management level risk and investment committees and sustainability committees, report into the ARC on the one hand and the SSEC on the other. The report explains: "As an investment manager, we are responsible for managing climate risks and other investment risks on behalf of our clients, who own the capital we manage. Climate risk in portfolios is overseen by the Chief Investment Officer (CIO) office and Ninety One’s existing investment risk infrastructure, with support from the Sustainability teams."
The Berkeley Group Holdings Plc reports that the Chief executive is accountable for climate action (including the achievement of Berkeley's science-based targets) and one of its Executive Directors, Karl Whiteman, has responsibility for sustainability. They meet bi-monthly for 'Vision and Sustainability' board meetings with the CFO, Head of Responsible business and Head of Sustainability. The group also has a central Sustainability Team focused on identifying strategic risks and opportunities, performance monitoring and reporting across the group. There are clear responsibilities and procedures for identifying and updating on risks through the risk register and dedicated sustainability practitioners throughout their operating companies support local management and project teams.
Workspace Group Plc has a management level ESG Committee focussing on the environmental, social and governance aspects of the business and supply chain, including climate change mitigation and resilience. It reports via the Executive committee to the Board's risk committee. It is chaired by Workspace's Head of Sustainability and made up of cross functional members who are actively involved in new developments, refurbishments and building operations. The Head of Sustainability also reports directly to Workspace's Development Director who has responsibility for sustainability at the Executive Committee level, where overarching progress and performance against the company's targets is governed. The Head of Sustainability provides a monthly update to Workspace's board on ESG matters and formally presents to the Executive Committee and the board multiple times per year.
As seen, given that the TCFD's guidance does not prescribe the governance structure to be used, in practice organisations have adopted differing approaches in relation to climate governance, depending on their business and existing set up.
However, it is clear that establishing separate committees to discuss and monitor governance climate-related and ESG factors, whether at board or executive level and assigning specific responsibilities for climate risk and opportunity, is featuring increasingly in the governance story.
This is no surprise. Companies appear to be recognising the importance of climate-risk. The QCA/Henley report suggests that 73% of organisations it surveyed believed that they understood the impact of ESG on long-term financial performance, so we expect best practice to flow into the governance of smaller quoted companies as they try to react to the demands of investors. Companies need to ensure that they not only have the structures in place but also those with appropriate expertise and experience in positions of authority to ensure their climate-related strategy is put into action.