Good corporate governance practices are essential for companies seeking to meet the challenges posed by climate change and the transition to a net-zero economy.
Climate change and corporate governance
Climate change and the transition to a net-zero economy are the defining changes of our time, affecting all areas of commercial activity. To remain competitive in terms of attracting funding, employees and partners, organizations of all kinds need to stay up to date on changes in scientific thinking, regulatory approaches and public opinion. This can be daunting, but it is a change that can be more easily managed if good corporate governance practices are in place.
Corporate Governance, as defined by the Institute of Chartered Accountants of England and Wales, refers to the legal, regulatory and voluntary frameworks that deal with how companies are effectively managed. Company”.
The board of directors is responsible for the governance of the company. The shareholder’s role in governance is to appoint directors and auditors and ensure that an appropriate governance structure is in place. Good governance provides a framework for protecting the interests of shareholders while ensuring that the interests of employees, customers, suppliers and others with a direct interest in the company’s performance are taken into consideration. .
“Weak” governance structures are quickly exposed, but existing governance frameworks do not necessarily need to be redesigned for climate considerations. Rather, they must become part of that framework. How companies incorporate climate-related issues into their governance arrangements will depend on the circumstances of individual organizations. There is no single solution.
Investors, funders, and other stakeholders are increasingly assessing the maturity of organizations’ preparedness for the impacts of climate change and the transition to net-zero. The TCFD reporting framework has a “scenario planning” requirement that helps infrastructure companies demonstrate maturity.
The scenario planning requirement envisions companies engaging in “a structured study of a range of possible futures that will enable companies to test their business models against the broad impacts of climate change.” increase. This future planning, facilitated by corporate governance, informs today’s decisions with medium- to long-term risks affecting strategy. Corporate governance underpins the ability of an organization and its directors to carry out these activities.
Culture and Directors’ Duties to Promote Company Success
UK company directors have a legal obligation to act in ways they believe in good faith are most likely to promote the company’s success in the interests of its shareholders. In doing so, they are aware of the likely long-term consequences of determining issues, the interests of the Company’s employees, the need to promote the Company’s business relationships with its suppliers and customers, high standards of business conduct and A company that maintains a reputation for the impact its business has on communities and the environment.
Therefore, for many years, directors had to ‘consider’ the company’s environmental impact. However, since no factor takes precedence over the other, the overriding duty to promote the company’s success in the interests of its shareholders lies with one or more of these factors, including environmental concerns. may need to be discounted.
This obligation requires all large UK companies to make statements on their websites and in their annual reports explaining how their directors have considered these factors when acting to promote the company’s success. It has received particular attention in recent years following the introduction of the requirement to announce the Premium listed companies are required to apply and report on the UK Corporate Governance Code 2018, as well as annual reports on how stakeholders are considered in board discussions and decision-making. should be explained. In addition, the Companies Act requires companies to report on key risks and key non-financial performance indicators, including information related to environmental issues.
Very large private companies are in a similar position, having to adopt and report against corporate governance codes. The Waits Corporate Governance Principles for Large Private Enterprises, drafted by a working group chaired by Sir James Waits, is a government-approved code used for these purposes. The Principles encourage companies to consider environmental issues in their risk management systems and to assess and monitor how their activities affect current and future stakeholders.
Impact of TCFD on Governance
TCFD is about financial reporting. However, to be meaningfully reported, companies must have appropriate governance practices both for the performance of their reported actions, including policies and procedures, and for the collection and quality assurance of the data and information required to analyze and present those actions. It is necessary to develop a framework for I will explain the results. As such, governance is at the heart of our recommendations.
When reporting on governance, organizations are asked to describe board oversight and management’s role in assessing and managing climate-related risks and opportunities. It is not intended to be a separate and independent obligation from the board’s existing statutory duties, but is part of the organization’s current governance framework.
The Board may choose to create a separate Climate or Sustainability Committee or appoint a Chief Responsible Officer for climate or sustainability issues to the Board. Alternatively, you can set up a risk or audit committee to take responsibility. There is no “right” way and it depends a lot on the risks identified. A challenge for boards is how to effectively monitor their activities. For example, consideration should be given to how often the committee reports to the committee and whether climate-related issues are permanent agenda items or are considered with some regularity.
New internal operational and reporting procedures may be required. However, this does not necessarily require a change in how an organization’s governance operates. Rather, climate risk assessments should be integrated with established practices.
The set of TCFD Recommendations is incorporated into and relies on an organization’s corporate governance framework. For example, the recommendations are: Identify and describe risks and their implications for business, strategy and financial planning. Establish and disclose the metrics used to assess climate-related risks and opportunities and how they relate to strategy. And then test the strategy’s resilience and then explain.
Response to infrastructure companies
As part of the Net-Zero Infrastructure Industry Coalition, Pinsent Masons is a new guide designed to help infrastructure companies implement the recommendations made by the TCFD and take advantage of the opportunities presented by doing so. highlights the evolution of climate-related financial disclosures. This guide is intended to support asset owners, contractors, consultants, financiers, investors and suppliers, regardless of how mature their organization is regarding his TCFD compliance. Good governance is at the heart of guidance.
Good governance relies more than ever on developing and maintaining mechanisms for effective information flow between the board and its committees, and between senior management and non-executive directors. Adopting the TCFD Framework provides an opportunity for infrastructure companies to revisit these mechanisms to ensure they are fit for purpose and enable TCFD disclosures.
A written record of the Board’s decisions is very important as a basis for future reporting. Corporate governance and culture are two sides of the same coin. Corporate governance seeks to incorporate sound business practices, whereas culture is a company’s approach to and willingness to drive its agenda.
A culture that supports a governance structure not only benefits the company itself, leading to better relationships with its shareholders, but also benefits the wider range of stakeholders whose interests the board should consider. . Coupled with a culture of climate change concern, reporting in line with the TCFD will be a natural consequence.
