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How to set up effective climate governance on corporate boards

This report launched in Davos by the World Economic Forum presents a set of principles and questions to assess the strength of corporate boards’ climate governance. It was designed to help the reader practically assess and debate their organization’s approach to climate governance and frame their thinking about how the latter could be made more robust.

Key points

Principle 1 – Climate accountability on boards
The board is ultimately accountable to shareholders for the long-term stewardship of the company. Accordingly, the board should be accountable for the company’s longterm resilience with respect to potential shifts in the business landscape that may result from climate change. Failure to do so may constitute a breach of directors’ duties.

Principle 2 – Command of the (climate) subject
The board should ensure that its composition is sufficiently diverse in knowledge, skills, experience and background to effectively debate and take decisions informed by an awareness and understanding of climate-related threats and opportunities.

Principle 3 – Board structure
As the stewards for long-term performance and resilience, the board should determine the most effective way to integrate climate considerations into its structure and committees.

Principle 4 – Material risk and opportunity assessment
The board should ensure that management assesses the short-, medium- and longterm materiality of climate-related risks and opportunities for the company on an ongoing basis. The board should further ensure that the organization’s actions and responses to climate are proportionate to the materiality of climate to the company.

Principle 5 – Strategic and organizational integration
The board should ensure that climate systemically informs strategic investment planning and decision-making processes and is embedded into the management of risk and opportunities across the organization.

Principle 6 – Incentivization
The board should ensure that executive incentives are aligned to promote the long-term prosperity of the company. The board may want to consider including climate-related targets and indicators in their executive incentive schemes, where appropriate. In markets where it is commonplace to extend variable incentives to non-executive directors, a similar approach can be considered.

Principle 7 – Reporting and disclosure
The board should ensure that material climate-related risks, opportunities and strategic decisions are consistently and transparently disclosed to all stakeholders – particularly to investors and, where required, regulators. Such disclosures should be made in financial filings, such as annual reports and accounts, and be subject to the same disclosure governance as financial reporting.

Principle 8 – Exchange
The Board should maintain regular exchanges and dialogues with peers, policy-makers, investors and other stakeholders to encourage the sharing of methodologies and to stay informed about the latest climate-relevant risks, regulatory requirements etc.