Climate change and the corporate board: Too hot not to handle?

Author:Elson, Charles M.

It is an issue that boards must deal with because many investors demand its consideration. Better yet, a board should consider climate change because it is the best interest of long-term shareholder value.

The boards responsibility for considering climate change and its associated issues as it evaluates corporate performance and strategy has become increasingly more important to a significant number of investors and advocates. For this reason, among others, the pressure to adopt effective board oversight and practices relating to these issues has become the proverbial elephant in the boardroom.

Most directors are aware of climate change as an issue, but many seem reluctant to discuss it on a periodic basis. Climate change and attendant sustainability practices, because of their perceived political edge, have to date been overlooked by many corporate directors. However, both political and potential regulatory pressure, combined with significant investor concern, is making these issues not only relevant but important topics that should be considered in the boardroom. What should be the appropriate response by a well-governed and diligent board? There are several factors to consider.

Although most traditionally considered the issue of climate change as social or political in nature, the argument made by climate change advocates has shifted to discussing its economic and risk-based implications. They have correctly argued that it may have serious implications for a number of industries. Therefore, this has become a legitimate business concern. Additionally, and perhaps more importantly, the government through its regulatory structure may compel corporate consideration of this issue. Of course, the broader question involves how far should boards go in examining the problem with its associated risks and how should they appropriately respond to it.

A specific skill set?

Some have suggested that the best way to approach effective oversight of the issue is to appoint a director to the board with environmental expertise. Of course, the notion of such a director with only this skill may be troubling to overall board function and broad-based management monitoring. Such a specific skill set may also be unnecessary, though obviously not unwelcome, to achieve effective board oversight in this sensitive area, depending on the industry involved. Effective directors come to the table with a multiplicity of monitoring skills and subject matter expertise...

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