Investor Insight Editorial: Placing climate governance front and centre is key to success

This article by Executive Director, Brynn O’Brien, was first published in the October 2024 edition of the Australian Institute of Company Directors - Company Director Magazine.

As the global energy transition gathers pace and temperature records tumble, acting to mitigate climate risk has become inseparable from good governance. As ACCR Executive Director Brynn O’Brien says, being open to renewal and new skills will be a hallmark of the best boards.

To play with a well-known saying, the best time to focus on climate governance was 20  years ago — the second-best time is now. This is particularly applicable to the boards of carbon-intensive companies, which are overseeing the development of strategy in an economy that must decarbonise at an accelerating pace.

Given the scale of the structural change required — and the threat runaway climate  change poses to the stability of financial systems — climate governance sits at the core of good governance. Boards need to be doing three things:

One, is staying on top of and genuinely reckoning with the latest climate science. Too often we see some company climate plans built on interpretations of science that appear crafted to “fit” a view of the world where limited changes to company strategy  are required. A board that understands the science — both the required pace of change,  likely policy responses and the current and projected impacts — will be better placed to  anticipate changes.

Two, is being aware of the risks of groupthink and developing muscle in asking tough questions of management.  Businesses will need to change in line with climate science and market direction, and this will involve major decisions. Executives may need to be challenged to break away from styles of thinking and doing to which they are accustomed. As the recent governance review at Qantas revealed, the robust challenge of management is a critical role for boards.

Three, is an openness to board renewal. It is vital boards possess the requisite skill sets to navigate the challenges and opportunities of the energy transition. As seen recently, even contested board renewal, while it may appear controversial at the time, can be a prudent move. Every shareholder has an opportunity to nominate and vote on directors, who have legal obligations to act in the best interests of the company, not any individual shareholder. Aspiring directors should also step forward. When the same challenges keep reappearing, shareholders can and should play a role in nominating candidates they think are better placed to position for change. Board renewal is an effective way for shareholders to deliver a fresh injection of skills.