Photo by Lyudmila Chernetska on iStock
August 21, 2023
Authors
Key Points
- Boards need representation from the climate frontline if they are to take meaningful action on ESG.
- Activism on climate action is increasingly reaching the boardroom, alongside calls for change from regulators, investors, and customers.
- Business leaders can prioritize diversity in the representation and engagement of stakeholders at the highest levels of governance.
Boards and executives rarely hear directly from the communities most affected by climate change, who are seldom represented in the boardroom or included in stakeholder engagement. Given the extent of inequities that heighten their exposure to climate risk—low-income livelihoods across supply chains; lack of access to basic financial, legal, and public services; and a plethora of diversity divides—a voice in the boardroom might seem to come low on the list of priorities.
But a different perspective is gaining momentum: boardrooms and governing bodies need people from the climate frontline if they are to take meaningful action on ESG, both to reduce their exposure to climate risk and to address the increasingly recognized climate adaptation gap.
Current policies will push around 2 billion people out of the environmental and climatic conditions“climate niche” that best support human life by 2030, increasing to around 4 billion—an estimated third of the global population—by the end of the century, according to a recent study.
The climate adaptation gap refers to the understanding that those most vulnerable to climate impacts have the least means of increasing their own resilience. Not only do they lack the funds, access, and rights to invest in and safeguard their future, from building skills to adapt to workforce volatility to developing land and property to withstand climate impacts, they lack the influence to drive action that might mitigate risks.
The risks to these communities are risks to business. There are vulnerable workers and dependents across the supply chain from farms and plantations; extractive sites; factories; transport; to logistics. The more businesses can understand how these communities are affected, the better they can work with them to counter the risks. This is where a voice in boardrooms and executive leadership can make a difference.
The need coincides with growing calls for more representation at the highest levels of corporate governance, particularly of women and youth, and linked specifically to climate change. As one student wrote in a letter to the Financial Times: "Age diversity is extremely low among chief executives and across most boards of directors in listed companies. At the same time, our species is facing global grand challenges that are profoundly characterized by an intergenerational dimension.”
Changing Expectations from Regulators, Investors and Customers
Activism on climate action is increasingly reaching the boardroom—with calls for change from regulators, investors, customers and employees. In the EU, the Corporate Sustainability Due Diligence Directive, the Corporate Sustainability Reporting Directive (CSRD), the Green Taxonomy, and the Mandatory Human Rights Due Diligence Directive (HRDDD) are redefining the role of boards by obliging them to oversee climate, social impact, human rights and governance at their companies. In the US, the draft Securities and Exchange Commission rule will likely require disclosures on how the board is overseeing climate-related risks and opportunities, prompting a review of existing governance structures. And the recent International Sustainability Standards Board (ISSB) Sustainability Disclosure Standards also call for an increased board role in reviewing climate-related risks and opportunities.
Meanwhile, these regulatory requirements are surfacing deep tensions in how companies can best protect and serve all employees. For instance, pressure on reporting brought by recent EU legislation could have the catastrophic impact of squeezing smallholders, who lack the resources to meet new requirements, out of supply chains. Indonesia and Malaysia responded to the recent deforestation law by sending top officials to Brussels to seek fairer treatment for small palm oil farmers.
Beyond legal requirements, expectations of business directors are changing, with investors and other stakeholders demanding deeper board engagement and oversight, more transparency, and opportunities to engage with directors. The financial risks will also become more apparent with the increasing impact of climate change, as well as the challenges it presents to insurance.
Building Climate Resilience through Stakeholder Engagement
Business can enable credible action to build climate through diverse representation and engagement at the highest levels of governance, particularly on boards and Stakeholder Advisory Councils . The challenges of a just transition and achieving climate justice demand that businesses co-create solutions with frontline communities. For this, those leading the charge need a firsthand understanding of the risks and impacts. They also need a mindset change, widening their focus beyond near-term value generation to encompass long-term risk mitigation and adaptation, and beyond what’s material to their stakeholders today to monitor shifts that may appear distant but whose impacts could quickly escalate to render business-as-usual impossible.
This is not to underestimate the extent of change required. As David Korngold, Director of Business Transformation says: “Meaningful corporate engagement with stakeholders is set back by transactional or extractive relationships, overreliance on large global voices, and under-engagement with affected stakeholders—including fleeting interactions. Not only this, but engagement is often treated as the end-goal, rather than a means to co-create an equitable future.”
Recommendations for Business Leaders
Business leaders that act will not only get ahead of regulation, stakeholder expectations, and activism, but they will find themselves better positioned for effective leadership and resilience, thanks to expanded knowledge, competencies, and expertise. Key recommendations include:
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Prioritize diversity in the representation and engagement of stakeholders at the highest levels of governance
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Develop mechanisms to engage with affected stakeholders, whether through Stakeholder or External Advisory Councils or other direct dialogues in close collaboration with management
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Use engagements to listen to current issues, maximizing the opportunity to increase directors’ understanding of climate risk and enable thoughtful dialogue with affected parties
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Empower External Advisory Councils to amplify the voices of stakeholders and enhance their oversight
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Schedule regular meetings to cultivate highly engaged and committed standing groups
BSR has extensive experience engaging with boards and Stakeholder Advisory Councils, including on climate justice and adaptation. For more information, please contact the Sustainability Management team.
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