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How to Set Up Effective Climate Governance on Corporate Boards 3
Foreword
Executive Summary
Global Context
Climate Governance Principles and Guiding Questions
Outlook and Conclusion
Appendices:
1. Legal perspective
2. Investor perspective
3. Design of the principles and consultation process
4. Glossary of terms
Contributors
Endnotes
5
6
7
11
18
19
19
21
22
23
25
26
Contents
4 How to Set Up Effective Climate Governance on Corporate Boards
How to Set Up Effective Climate Governance on Corporate Boards 5
Foreword
Climate change is visibly disrupting business. It is driving unprecedented physical impacts, such as
rising sea levels and increased frequency of extreme weather events. At the same time, policy and
technology changes that seek to limit warming and reduce the associated physical impacts can
also cause disruption to business. As with any form of disruption, climate change is creating and will
continue to create risks and opportunities for business in a diverse number of ways.
This disruptive relationship between climate change and business is already receiving increased
attention. This has been prompted by the Paris Agreement, the emergence of climate-related
legislation, the recommendations of the Financial Stability Board’s Task Force on Climate-Related
Financial Disclosures (TCFD) and, most recently, the heightened awareness of physical impacts and
risks detailed in the Special Report of the Intergovernmental Panel on Climate Change (IPCC) on
Global Warming 1.5°C.
In light of this attention, investors, regulators and other stakeholders are challenging companies to
demonstrate an integrated, strategic approach to addressing climate-change risks and opportunities.
An important element in ensuring that climate risks and opportunities are appropriately addressed
is the important duty that boards of directors have for long-term stewardship of the companies
they oversee. However, to govern climate risks and opportunities effectively, boards need to be
equipped with the right tools to make the best possible decisions for the long-term resilience of their
organizations.
The goal of this work is to propose tools that can be useful for the board of directors to steer
climate risks and opportunities: the governance principles are designed to increase directors’
climate awareness, embed climate considerations into board structures and processes and improve
navigation of the risks and opportunities that climate change poses to business. By providing a
compass to enable more effective climate governance, this initiative strives to contribute to the
Forum’s Compact for responsive and responsible leadership and to sound an urgent call to action for
purposeful stewardship from and for the most prominent custodians in corporations: their board of
directors.
Dominic
Waughray,
Managing Director
Centre for Global
Public Goods,
Member of the
Managing Board,
World Economic
Forum
Jon Williams,
Partner,
Sustainability and
Climate Change,
PwC
The vision and action of Directors, CEOs and senior-level executives
is fundamental to addressing the risks posed by climate change and
delivering a smooth transition to a low-carbon economy. Materials, such
as this new World Economic Forum report, that support Boards and
Executives understand how to deliver on the TCFD can help foster a
virtuous circle of adoption, where more and better information creates
imperatives for others to adopt TCFD and for everyone to up their game in
terms of the quality of the disclosures made.
Mark Carney, Governor, Bank of England and former Chair, Financial Stability Board
6 How to Set Up Effective Climate Governance on Corporate Boards
Executive Summary
The links between climate change and business
are becoming increasingly evident and inextricable.
Business decisions and actions will slow or accelerate
climate change, and climate change will drive risks and
opportunities for business. Increasingly, board directors
are expected to ensure that climate-related risks and
opportunities are appropriately addressed. However, limited
practical guidance is available to help board directors
understand their role in addressing these risks and
opportunities.
On the one hand, good governance should intrinsically
include effective climate governance. To this point, climate
change is simply another issue that drives financial risk
and opportunity, which boards inherently have the duty
to address with the same rigour as any other board topic.
On the other hand, climate change is a new and complex
issue for many boards that entails grappling with scientific,
macroeconomic and policy uncertainties across broad time
scales and beyond board terms. In this regard, general
governance guidance is not necessarily sufficiently detailed
or nuanced for effective board governance of climate issues.
This work seeks to provide useful guidance to boards,
acknowledging that climate governance is both integral
to basic good governance and fraught with complexity.
The result is a set of principles and questions to guide
the development of good climate governance – 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.
The principles and guidance build on existing corporate
governance frameworks, such as the International
Corporate Governance Network’s (ICGN) Global
Governance Principles, as well as other climate risk and
resilience guidelines, such as the recommendations of
the Financial Stability Board’s Task Force on Climate-
Related Financial Disclosures (TCFD). The drafting process
involved extensive consultation with over 50 executive
and non-executive board directors, as well as important
organizational decision-makers, including chief executives,
and financial and risk officers. Input was also gained from
experts from professional and not-for profit organizations.
This consultation took place through a series of face-toface
and phone interviews over the course of four months,
helping to shape and test the principles and guiding
questions.
This paper opens with details on the global climate
context, addressing changing regulations and increasing
expectations of boards in the climate arena. The bulk of
the paper presents the eight climate governance principles
and their associated guidance. The eight principles are
not presented in order of priority or in a fixed sequence,
but do follow a logical flow and build upon each other. For
example, principles 1–4 lay the foundation for Principle 5,
and principles 6–8 help facilitate the endurance of attention
to climate-change issues in the long term. To make these
principles practical and applicable, each principle is
accompanied by a set of guiding questions that will help
a company identify and fill potential gaps in its current
approach to governing climate. The paper is also supported
by chapters that provide additional technical legal and
investor context in the Appendix.
–– Principle 1 – Climate accountability on boards
–– Principle 2 – Command of the subject
–– Principle 3 – Board structure
–– Principle 4 – Material risk and opportunity assessment
–– Principle 5 – Strategic integration
–– Principle 6 – Incentivization
–– Principle 7 – Reporting and disclosure
–– Principle 8 – Exchange
This initiative sought to make these principles both
broadly applicable and practically useful for organizations.
However, these principles should not be taken as universally
applicable to all companies across sectors and jurisdictions.
Moreover, they do not intend to be specifically prescriptive
in any way. Rather, the hope is that they will serve as tools
to help elevate the strategic climate debate and drive holistic
decision-making that includes careful consideration of the
links between climate change and business.
As business leaders, we have an important
role to play in ensuring transparency around
climate-related risks and opportunities, and I
encourage a united effort to improve climate
governance and disclosure across sectors and
regions.
Bob Moritz, Global Chairman, PwC
How to Set Up Effective Climate Governance on Corporate Boards 7
Global Context
Climate policy, science and economics
Leaders from 184 nations have ratified the Paris Agreement
and pledged to take action to keep global temperature rise
“well below” 2°C above pre-industrial levels, and to pursue
efforts to limit the increase to 1.5°C. This agreement is
the outcome of more than two decades of diplomacy and
serves as a landmark in signalling a global transition to a
low-carbon economy.
The agreement came into force on 4 November 2016. To
date, it has been ratified by 184 Party countries1.
These countries are now in the process of implementing
their national climate plans (known as nationally determined
contributions or “NDCs”) that they submitted voluntarily
under the Paris Agreement. Implementation of these NDCs
requires countries to enact policies and legislation to curb
emissions. Under the Paris Agreement, countries are also
expected to “ratchet up” the ambition of their NDCs over
time to stay well below the 2°C warming limit (current
NDCs limit warming to only 2.6°C–3.2°C),2 see glossary for
details.
Temperature anomaly from 1961-1990 average, Global
Global average land-sea temperature anomaly relative to the 1961-1990 average temperature in degrees Celcius
(°C). The red line represents the median average temperature change, and grey lines represent the upper and lower
95% confidence intervals.
1850 1860 1880 1900 1920 1940 1960 1980 2000 2017
-0.4 
-0.2 
0 
0.2 
0.4 
0.6 
0.8 
Upper
Median
Lower
Source: Hadley Centre (HadCRUT4) OurWorldInData.org/co2-and-other-greenhouse-gas-emissions • CC BY-SA
Figure 1: Global temperature anomaly from
1850-1990 average
Despite the Paris ambitions and latest warnings3 of
catastrophes associated with 1.5°C of warming4, global
temperatures continue to rise, as seen in Figure 1. Without
swift economic transformation, chances of keeping warming
below 2°C diminish and risks of physical climate-change
impacts increase.5
Many of these impacts are already being seen, including
increased incidents of heatwaves, fires, storms and
flooding.6 In fact, financial losses from extreme weather
events in 2017 reached an all-time annual record of $320
billion.7
In light of this scientific and economic evidence, many
risk experts and business leaders are beginning to
understand the diversity and seriousness of the risks
climate change will pose. In fact, over the past five years,
corporate leaders have consistently rated climate change
and extreme weather as the top macroeconomic risks
over the next ten years in terms of both impact and
likelihood in the World Economic Forum’s annual Global
Risks Report8 (see Figure 2).
8 How to Set Up Effective Climate Governance on Corporate Boards
Figure 2: Global Risk Map 2009-2019 (Impact) It is estimated that between now and 2100, the potential
financial losses arising from climate change could run
from $4.2 trillion to as much as $43 trillion9, versus a
total global stock of manageable assets worth $143
trillion. At the same time, climate-change adaptation
and mitigation are also predicted to generate investment
opportunities worth up to $26 trillion between now and
2030.10
How to Set Up Effective Climate Governance on Corporate Boards 9
Disclosure, regulatory and investor trends
and the implications for business
Despite the growing recognition that climate change will
cause disruption to business as usual, reliable information
detailing how companies manage climate-related risks
and opportunities has been “hard to find, inconsistent and
fragmented”.11
In response to this, the Financial Stability Board established
the Task Force on Climate-Related Financial Disclosures
(TCFD) in 2015 to develop guidance for companies in
disclosing clear, comparable and consistent information on
the financial risks and opportunities presented by climate
change. The final recommendations, released in June 2017,
were designed to mainstream consideration of climate risk
into business and investment decision-making to facilitate
efficient allocation of capital and to enable a smooth
transition to a low-carbon economy.
The recommendations categorize the climate risks into:
transition risks (risks that arise from the transition to a lowcarbon
economy such as policy shifts) and physical risks
(risks that arise from the physical impacts of a changing
climate such as increased extreme weather events).
The TCFD also recognizes the business opportunities
associated with the transition to a low-carbon economy and
adaptation to the impacts of climate change.
Figure 3: Climate-related risks, opportunities and financial impact (according to TCFD)
1
Governance Strategy Risk Management Metrics & Targets
Resource Efficiency
Energy Source
Markets / Products / Services
Policy and Legal
Technology
Market
Risks (Transition & Physical)
Reputation Resilience
Strategic Planning /
Risk Management
Financial Impact
Acute Physical Risks
Chronic Physical Risks
Opportunities
Cash Flow
Income Statement Statement Balance Sheet
Revenues /
Expenditures
Assets & Liabilities
Capital & Financing
Figure 3: Climate-related risks, opportunities and financial impact
The TCFD emphasizes governance as a foundational
building block of effective climate risk and opportunity
management. Without effective climate governance
structures in place, a company will struggle to make climateinformed
strategic decisions, manage climate-related risks
and establish and track climate-related metrics and targets
in the short, medium or long term.
As of September 2018, the recommendations of the TCFD
had received widespread business support from over 500
organizations, including 457 companies with a combined
market capitalization of $7.9 trillion. Within this, there are
287 financial services firms responsible for assets of nearly
$100 trillion, equivalent to more than 50% of the global
capital markets.12 Moreover, according to the 2018 TCFD
status report, the World Federation of Exchanges is taking
the TCFD recommendations into account in revising its
Environmental, Social and Governance (ESG) Guidance &
Metrics.13
10 How to Set Up Effective Climate Governance on Corporate Boards
Despite the fact that disclosure against the
recommendations of the TCFD remains voluntary,
mandatory disclosure of climate risk is emerging as a vital
area of regulatory focus. Regulators, listing authorities
and public companies in many major jurisdictions, have
expressed support for the TCFD recommendations as
a useful framework for disclosure and are paying close
attention to their uptake.14 Appendix 1 provides further
details on climate-change regulation and disclosure of
climate risks.
Investors are also scrutinizing companies’ efforts to manage
climate-related risks and opportunities. This is driven by a
recognition that climate change will have inevitable impacts
on investment returns, and that investors need to consider
climate change as a new return variable.15
The world’s largest asset managers are putting particular
emphasis on climate-smart governance for their portfolio
companies. For instance, BlackRock expects their corporate
boards to have “demonstrable fluency in how climate
risk affects the business and management’s approach to
adapting the long-term strategy and mitigating the risk”.16
State Street Global Advisors issued a Climate Change Risk
Oversight Framework for Corporate Directors, setting out
its expectations that corporate board members evaluate
climate risk and preparedness.17 Pension funds are also
increasingly focusing on effective climate governance.
Appendix 2 provides further details on the investor
perspective and expectations.
Implications for corporate boards
While current disclosure, regulatory and investor trends are
driving increased corporate attention to climate change,
many boards are struggling to address the related risks and
opportunities in a holistic way. The executive and nonexecutive
directors interviewed for this report gave a variety
of reason for this, which can be broadly summarized as
follows:
–– Competing priorities – Climate competes with a
plethora of other emerging and strategic risks that
must be addressed by the board (e.g. industry change,
technology and business-model disruption, changing
global economic conditions, cybersecurity etc.). Boards
have limited time and capacity to equally review and
address all of these strategic topics.
–– Complexity of climate change – Climate change is a
complex and inherently systemic issue. The risks are
diverse, uncertain and often not yet visible in some
markets. Moreover, the extent of the impacts will depend
on important external drivers such as the emergence of
disruptive technologies and climate regulation, which are
particularly difficult to model. This makes climate change
an extremely difficult risk and opportunity to manage.
–– Short-term time horizon and focus – Companies are
under constant pressure to deliver short-term results, to
meet investor expectations on a quarterly basis. Climate
change poses longer-term risks that extend beyond the
considerations of the typical business planning cycle, a
phenomenon Bank of England Governor Mark Carney
coined as the “Tragedy of the Horizon”.18
In addition to, and despite these challenges, board directors
are faced with a fundamental principle: they have a duty to
understand and prudently manage the potential risks and
threats of the companies they oversee, no matter what the
time horizon. Failure to act on and disclose relevant risks or
threats may expose them or their companies to legal action
(see Appendix 1 for details).
Yet there remains a dearth of guidance to assist directors
in their duty to understand and act on climate change.
Aware of this gap, this report offers guiding principles and
questions as a foundational framework for organizations
seeking to effectively govern climate-related risks and
opportunities. The principles are intended to enhance the
discussions on climate competence of directors to the
extent that climate risk considerations become embedded in
normal board processes. This should enable better-informed
investment decision-making, more systemic thinking and an
integrated approach to crafting and implementing business
strategy that is informed by consideration of climate impacts
in both the short and long term.
How to Set Up Effective Climate Governance on Corporate Boards 11
Figure 4: Guiding principles for effective climate governance on corporate boards
Climate Governance Principles and Guiding Questions
SUBJECT
COMMAND
INCENTIVIZATION
CLIMATE
ACCOUNTABILITY
STRATEGIC
INTEGRATION
BOARD
STRUCTURE
REPORTING &
DISCLOSURE
EXCHANGE
MATERIALITY
ASSESSMENT
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.
1 – CLIMATE
ACCOUNTABILITY
For details on director duties and trends in climate-change
regulation and litigation, see Appendix 1.
Given that the board is accountable to shareholders for
the long-term health of the organization it governs, the
board should also be responsible to shareholders for
overseeing effective management of climate-related risks
and opportunities. As a foreseeable financial issue within
mainstream investment and planning horizons, climate
change should enliven directors’ governance duties in the
same way as any other issue presenting financial risks.
The inherent uncertainty associated with how climate
change will affect any organization makes it a challenging
risk and opportunity for board directors to effectively govern.
For example, the Paris Agreement signals a transition to a
net zero emissions economy in the second half of the 21st
century, whereas current domestic policies signal a much
slower transition in most cases. While the information that
directors have available is far from perfect, they remain
accountable for identifying potential risks and opportunities
and using the best available information to make informed
decisions that will leave their companies resilient in the face
of a variety of different policy and economic outcomes.
Guiding questions
1. Do your board directors consider the risks and
opportunities associated with climate change to be an
integral part of their accountability for the long-term
stewardship of the organization?
2. To what extent are climate risks and opportunities
incorporated into your board’s understanding of
directors’ duties?
12 How to Set Up Effective Climate Governance on Corporate Boards
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
2 – SUBJECT by an awareness and understanding of climate-related threats and opportunities.
COMMAND
Climate change is a disruptor to business as usual. As
with any form of disruption, boards should be composed
of directors who collectively have sufficient awareness
and understanding of the ways in which climate change
may affect the business. Sufficient awareness at the
board level will also set the tone for the organization and
drive greater awareness for senior management and staff.
Executive and non-executive directors can contribute to
good climate governance in different ways. While nonexecutive
directors are not operationally responsible
for the business, they may bring specific knowledge
to certain subject matter or perspectives in relation
to the risks and opportunities of climate change.
Executive directors, on the other hand, are operationally
accountable and should have greater insight into how
climate risks and opportunities are managed within the
organization:
Board composition and agenda
1. To what extent does your board have a robust
awareness and understanding of how climate change
may affect the company?
2. What steps has your board taken to test that its
composition allows for informed and differentiated
debate as well as objective decision-making on climate
issues?
3. Has an assessment of climate-competence gaps taken
place? If so, who is conducting such gap analysis and
what recommendations does it contain?
4. Who is responsible for climate change at board level and
are these individuals in positions that will allow them to
influence board decisions (e.g. committee chairs)?
Maintaining and enhancing climate competence
Even once a board has a sufficient composition of
directors who bring the required skills to address climate
at the company, measures should be taken to maintain
and enhance the board’s command of the subject – to
further diversify the perspectives and allow for richer
discussions and reviews on climate issues:
5. What steps is your board taking to ensure it remains
sufficiently educated about the relevant climate-related
risks and opportunities for its business?
6. Has your board considered whether it would benefit
from the advice of external experts? If so, has the board
considered which experts would be most well suited?
7. How can your board plan for succession to ensure
that climate awareness does not stop if an important
individual or a vocal climate champion leaves the
organization or the board? What kind of skills do you
incorporate into the desired profile for a new board
director?
Climate change is one of the most urgent
challenges facing the world today. With a
mere twelve years to save the planet, now is
the time for corporate directors to step up, be
courageous and ensure the long-term resilience
of their organisations for the good of society
through effective climate governance.
Katherine Garrett-Cox, Chief Executive Officer, Gulf International Bank UK;
Member of the Supervisory Board, Deutsche Bank
It took us much too long – more than 30 years
– to bring women on boards, we cannot afford
losing another 30 years before climate gets on
the board agenda.
David Crane, former CEO of NRG Energy and B-team Leader
3. Do your board directors undertake decisions that are
informed by the best available information on climate
risks and opportunities (see Principle 4)?
4. Do your directors feel confident in their abilities to
explain their decisions as informed by the best available
information on climate risks and opportunities?
5. Does the board conduct internal performance reviews?
Is accountability for climate risks and opportunities
considered during internal evaluations of the board?
6. Are independent performance audits undertaken? If so,
do these include climate considerations?
How to Set Up Effective Climate Governance on Corporate Boards 13
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.
3 – BOARD
STRUCTURE
To maintain oversight of the company’s climate resilience
and governance, a board should determine how to most
effectively embed climate into its board and committee
structures.
Given that board structures vary across jurisdictions
(e.g. one-tier vs two-tier boards – see glossary for
definition), there are numerous ways to embed climate
into these structures. Regardless of the board structure,
the approach to embedding climate considerations
should enable sufficient attention and scrutiny to
climate as a financial risk and opportunity. The selected
structure should also allow for effective connection
and communication with the relevant members of the
executive management.
Guiding questions
1. Has your board determined how to effectively integrate
climate considerations into the board committee
structures? Are they integrated into (an) existing
committee(s)? Or, are they addressed by a dedicated
specific climate/sustainability committee?
2. How does your board ensure that climate
considerations are given sufficient attention across
the board (e.g. being discussed in the audit, risk,
nomination or remuneration committees)?
3. How can executive and non-executive directors
play complementary roles in meeting the board’s
accountability with regards to climate?
4. Has the way your board embedded climate allow
for effective interaction with relevant members of the
executive management (e.g. if climate is embedded in
the risk committee, does this committee ensure that
climate is also addressed by the Chief Risk Officer)?
5. Has the board considered appointing a climate expert,
or creating an informal or ad-hoc climate advisory
committee of internal and external experts?
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.
4 – MATERIALITY
ASSESSMENT
Assessment purpose
Climate change has the potential to drive material (see
glossary for definition) impacts for any type of company.
However, the materiality of these impacts will be unique to each
company, depending on a number of factors, including sector,
size and jurisdiction of operation. Therefore, the materiality of
climate-related risk and opportunities in the short, medium and
long term should be assessed at the company and understood
by the board. This materiality should then inform the level of
action and response to climate change at the company:
1. Is climate considered in company-wide assessments of
material risks and opportunities in the short, medium and
long term?
2. How does your board verify that the company has
embedded effective materiality assessment processes in
relation to climate risks and opportunities?
As climate change presents an unprecedented
challenge to our society and businesses, we
need all hands on deck to steer our companies
through what needs to be an orderly transition.
Committed Boards can play a crucial role to
make the 2015 Paris commitments a reality.
Emma Marcegaglia, Chairman of the Board, Eni
14 How to Set Up Effective Climate Governance on Corporate Boards
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.
5 – STRATEGIC
INTEGRATION
Integration into strategic decision-making
Once the board is aware of the extent to which climate
change might drive material risks and opportunities for
its operations, it can begin to integrate climate-change
considerations into the organization’s strategy.
How a company positions itself on short-term decisions
(e.g. investment project decisions) will have long-term and
potentially profound implications for the resilience of the
organization. When decisions with long-term implications
are taken without consideration of how climate might alter
the future business landscape, they may be taken with
no explicit regard for important risks. Moreover, the longterm
resilience of an organization may require fundamental,
strategic changes in some organizations’ business models,
which will take significant time to be implemented.
Given the highly uncertain and variable nature of how
climate change will affect the business landscape over
different time frames, strategic decision-making should be
informed by scenario analyses (for further details see the
glossary) and the results of these scenarios integrated into
strategic planning decisions. Boards should be confident
that the strategic decisions they take will not compromise
the resilience of the organization under any future climate
scenario.
1. Does your corporate strategy include a holistic climate
strategy informed by scenario analysis, i.e. climate risk
mitigation and adaptation as well as business continuity
and opportunities?
2. Are climate considerations incorporated into the strategic
planning, business models, financial planning and other
decision-making processes?
Organizational integration
Climate considerations should be integrated across the
organization – particularly, into the firm’s “three lines of
defence”20 (see glossary) – to help identify and allocate
coordinated ownership for climate risks and improve the
quality of reporting to the board.
3. How does your board ensure that the company’s response
to climate change is aligned to the materiality and
proportionality of the issue to the business?
Assessment process: time horizons and scenario analysis
As climate change is expected to affect the business
landscape over a longer term than most typical company
budgeting and reporting cycles, it can lead some companies to
overlook risks or opportunities that may become material in the
medium to long term.
4. Are short-, medium- and long-term time frames considered
in materiality assessments at your organization? Are
the definitions of these time frames appropriate for your
organization specifically (depending on the sector, size,
investment time frames etc. of your organization)?
5. How are climate-related materiality assessments
conducted? Are they integrated into budget or operating
cycle planning?
Given the highly uncertain and variable nature of how climate
change will affect the business landscape over these time
frames (in terms of policy, technology, extreme weather etc.),
materiality assessments should contain scenario analyses
(see glossary for definition) to understand potential major
business risks and opportunities under different time horizons
and climate outcomes. These materiality assessments and
scenarios should be updated sufficiently frequently and on an
ongoing basis.19
6. Are different climate scenarios being included to inform
the assessment of climate change materiality at your
organization?
7. How often are climate-related scenario analyses repeated?
Does your board feel this frequency is proportionate to the
climate risk exposure of the company (i.e. do they take
place sufficiently frequently)? Do your investors share the
board view?
8. Are climate scenarios conducted in such a way that the
results can be used to inform the company’s or board’s
action or response to climate issues?
A reliable and universal carbon price would
substantially advance the climate debates in
board and executive rooms.
Alison Martin, Group Chief Risk Officer, Zurich Insurance Group
How to Set Up Effective Climate Governance on Corporate Boards 15
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.
3. Is climate integrated into the “three lines of defence” and
the Enterprise Risk Framework (ERM) for the company?
Further, the board should feel confident that the organization
is positioned to effectively identify, mitigate, manage and
monitor material climate-related risks. Executive directors will
have a more involved role to play in organizational integration.
4. How does the board ensure that climate risks and
opportunities are identified, mitigated, managed and
monitored across the company?
5. Does the board feel confident that sufficient resources
(e.g. staff, technology) have been dedicated to the
identification, mitigation, management and monitoring of
material climate-related risks?
6 – INCENTIVIZATION
Integration of climate incentives
Incentivization should be designed to align the interests of
executive directors to the long-term health and resilience of
the company. Given that corporate management is typically
incentivized on a vast number of topics, the board should
consider how incentivization in regards to climate issues
could be integrated into the existing incentives. In some
cases, companies may be required to reassess current
management schemes to ensure that incentives are not
offered for inappropriate risks that put the future value of the
company in jeopardy.21
1. Is the company’s management incentivization scheme
designed to promote and reward sustainable value
creation over time?
2. Are any climate targets and/or goals integrated into
management’s incentivization model?
3. If so, how do these targets and/or goals relate to other
management incentives? Are there any inconsistencies
or contradictions in relation to the other incentives?
4. If variable incentives are extended to non-executive
directors, do these include incentives related to climate
and avoid potential conflicts of interest?
Assessment of climate incentives
Companies have begun to include climate-related targets
and indicators, such as carbon emissions indicators or
external ESG (environmental, social, governance) ratings in
their management incentive schemes. The appropriateness
and applicability of climate-related targets and indicators will
vary from company to company, depending on a number
of factors, including the materiality of climate change to
the company (see Principle 4). If implementing incentives
tied to targets or indicators, organizations should seek to
make them appropriate, proportionate and specific to each
organization. The effectiveness of targets and indicators
should be carefully considered before implementation and
be monitored after implementation to assess suitability.
5. Which climate KPIs (key performance indicators), targets,
goals and/or achievements does the board incorporate
into the management incentivization models (e.g. related
to carbon emissions, science-based targets or inclusion
in climate indices)?
6. What are the benefits and limitations of using these KPIs,
targets, goals and achievements?
7. How does the board assess the suitability (ex ante) and
measure the effectiveness (ex post) of climate-based
performance incentives?
If investors challenge your climate strategy that
suggests it is not deeply enough embedded in
your corporate strategy.
Ann-Kristin Achleitner, Member of the supervisory boards of Engie,
Deutsche Börse, Linde and Munich Re
16 How to Set Up Effective Climate Governance on Corporate Boards
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.
7 – REPORTING &
DISCLOSURE
Voluntary vs mandatory disclosure
When integrating climate considerations into disclosures,
companies should incorporate mandatory requirements
and voluntary climate-related reporting frameworks,
such as the recommendations of the TCFD. In many
jurisdictions, existing company and securities laws
already require companies to report on climate change
where it is a material financial risk to their business.22
(see Appendix 1 for details).
1. Does your organization report on the material financial
risks and opportunities associated with climate
change?
2. Does your organization operate in jurisdictions with
mandatory climate-related reporting? Is the board aware
and informed about potential mandatory climate-related
reporting requirements?
3. Does the organization report against relevant
voluntary climate-related reporting frameworks in your
jurisdiction (e.g. CDP, TCFD)? If not, has the board
considered the potential risks associated with failing to
do so (see Appendix 1)?
4. How does your board hold management accountable
for implementing the regulatory requirements for
climate-relevant disclosure and for maintaining
oversight of emerging regulation?
5. How does your board fulfil its duty in relation to the
signing or attestation of its climate disclosures in
annual reports or financial filings (see Principle 1 and
Appendix 1)?
How and what to disclose?
Some companies express apprehension about disclosing
climate-related information. This is driven mainly
by concerns that detailed disclosures could reveal
commercially sensitive information or make the company
vulnerable to future legal action. In fact, accurate and
decision-useful climate disclosures made to investors and
other stakeholders should help mitigate risks of failing
to disclose relevant information about a company (see
Appendix 1).
6. Does the board feel confident that the level of climaterelated
disclosure is proportionate to the materiality
of climate-related risks and opportunities at the
company and complies with any mandatory reporting
requirements?
7. Does the board feel prepared to explain its disclosures
on climate in response to investor-led challenges?
8. Is the company reporting on areas where progress has
been insufficient and/or where things have not gone
to plan (consistent with national corporate governance
codes)?
9. Do disclosures include information about the
company’s industry and policy engagement on climate
change?
Where to disclose
Given that climate risks and opportunities should be
integrated into strategic decision-making (see Principle
5), those climate considerations should also be an
integral element of disclosure. Some companies treat
climate change and sustainability as standalone issues
and will often publish a “sustainability report” that
stands separate to the annual report or financial filings.
However, given that climate change has the potential
to create financial impacts throughout an organization,
integrated reporting (see glossary) can be an effective
tool for communicating a clear and concise picture of risk
and opportunity.23 The aim of integrated reporting is to
increase the quality of reporting rather than the volume of
reporting.
10. Does your organization have integrated reporting in
place?
11. If not, are there internal or external expectations to
pursue integrated reporting in the future?
With the right climate risk reporting and
disclosure in place, you achieve both board
attention, focus and ambition.
Jim Snabe, Chairman of the Supervisory Board of Siemens AG and
Chairman of the Board of A.P. Moller-Maersk Group
How to Set Up Effective Climate Governance on Corporate Boards 17
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.
8 – EXCHANGE
External exchange includes engagement within
industry groups as well as transparent climate-policy
engagement. Companies should maintain awareness for
the consistency of their messaging across all types of
external engagement.
Guiding questions
1. How does the board ensure that the company
develops and encourages climate dialogue and
methodology sharing among industry peers, investors,
regulators and other stakeholders?
2. How does your board maintain its awareness about
good climate-governance practices?
3. Does your company organize stakeholder dialogues
on this matter and encourage the participation and
inclusion of all relevant stakeholders (customers,
regulators, NGOs, academia etc.)?
4. Is the board kept regularly informed of, does it
approve, and does it supervise consistent conduct
of the company’s industry and public policy
engagement?
Finally, working together with investors to understand
their concerns and priorities, should help drive progress
towards effective climate governance (see also Appendix
2 on investor expectations):
5. How does the board ensure that climate risks and
opportunities are being adequately discussed with
investors, where legal and governance arrangements
allow for such a dialogue?
18 How to Set Up Effective Climate Governance on Corporate Boards
I would encourage all companies to discuss
with their Boards the genuine role and purpose
of our companies in society: do take the time
to focus on the ‘why’ and do not jump too fast
to the ‘how’ and so shaping our sustainabilityagenda.
Feike Sijbesma, Chief Executive Officer, Royal DSM
Outlook and Conclusion
The guiding principles and questions outlined in this report
are designed to be widely applicable across organizations,
sectors and jurisdictions. However, there is no one-sizefits-
all approach to good climate governance, and there
are, of course, limitations to this report. For example,
interviewees for this project represent a set of leaders who
are particularly vocal and engaged regarding climate change
and business, as opposed to a cross-section of leaders with
divergent perspectives on climate change. Furthermore, the
consultation process represents a geographic bias towards
European and North American businesses. (See Appendix 3
for details of the consultation process.)
Aware of these limitations, the Forum plans to extend this
work, through industry and regional deep-dives, to provide a
more encompassing picture. As part of extending this work,
the Forum may also seek to elaborate climate-governance
case studies on its website and facilitate director training on
good climate governance.
Despite these limitations, the authors hope that the guiding
principles will spark increased awareness, attention and
debate in regards to climate governance in the future. As the
world becomes increasingly technology-enabled, boards will
experience improved access to the information necessary
to permit better climate governance on a technical level. For
example, increased speed and capacity for data collection
and analysis will allow for more complex and nuanced
materiality and scenario analyses and better information with
which to make decisions.
Finally, while enjoying these benefits of technological
advancements, organizations should not lose sight of
the value of human and purposeful leadership. Boards
and senior management are responsible for setting the
tone at the top, and acting as custodian stewards for
profit, people and the planet. A culture of attentive and
responsible governance in the face of climate change and
other business disruptions is likely to generate trust with
employees, investors and other stakeholders, which will
make the duty of governing climate risk ultimately more
compelling and satisfying.
Figure 5: Climate governance principles and organizational purpose
How to Set Up Effective Climate Governance on Corporate Boards 19
Appendices
Appendix 1 – Legal perspective
By Ellie Mulholland,
Director, Commonwealth Climate
and Law Initiative
Director duty
As a foreseeable financial issue within mainstream
investment and planning horizons, climate change now
enlivens directors’ governance duties in the same way
as any other issue presenting financial risks. Shareholder
resolutions are increasingly brought – and not just in energy
companies – to change investment and disclosures relating
to climate risks.
Directors’ duties are expressed in statute, regulatory
instruments and case law and differ across jurisdictions
in the precise expectations of conduct and the discretion
accorded to directors. While not all are “fiduciary” duties
in the strict legal sense, corporate governance laws
generally reflect core fiduciary principles that directors have
obligations of trust and loyalty, and must act with care, skill
and diligence.
The existing directors’ duties regimes in many jurisdictions,
including the UK and US, are conceptually capable of being
applied to corporate governance failures in the identification,
assessment, oversight and disclosure of climate risks.24
In the EU, consultation is underway on whether rules that
require directors to act in the company’s long-term interest
need to be clarified to meet the goals of the European
Commission’s Action Plan on Sustainable Finance.25
Conduct that will satisfy or contravene directors’ duties or
disclosure obligations with regards to the impacts of climate
change on business and related investment decisions will
depend on the unique circumstances of the company and
the decision-making context.
Directors who are not prepared for this step change
in expectations in the governance of climate-related
risks and opportunities may find themselves exposed,
particularly directors of companies that operate in sectors
which are highly vulnerable to the physical or economic
transition risks associated with climate change. Claims
may be brought by shareholders, or by creditors, in the
case of bankruptcy preceded by stock buybacks or
dividends where the valuation of assets is too high, or the
valuation of liabilities is too low. However, it is important
not to overstate the practical likelihood of litigation. There
are procedural, evidentiary and cost-related barriers to
claim against directors, particularly in the absence of
evidence of bad faith.
Climate change regulation and disclosure of climate risks
There is an ever-increasing volume of climate-change
legislation and policies across the globe. All of the parties
to the Paris Agreement have at least one law that explicitly
addresses climate change or the transition to a lowcarbon
economy26 and there are now over 1,500 laws
worldwide covering energy, transport, land use and climate
resilience. Many of these laws have the potential to affect
the operations of companies across all sectors of the
economy, but particularly those that are highly vulnerable
to the impacts of climate change: financial services,
energy, materials and buildings, agriculture, food and forest
products, and transportation.
Mandatory disclosure of climate risk is emerging as a vital
area of regulatory focus. France has a law that expressly
requires asset managers, pension funds and insurers
to disclose climate risks, creating pressure on investee
companies and insureds to report.27 Issuers are required
to disclose material risks, which may include climate
risks. Regulatory authorities in the US, UK, Canada and
Australia have confirmed that existing disclosure laws
require disclosure of material climate-related financial risks.28
This guidance came as early as 2010 in the US, 29 but has
received little enforcement attention from the SEC since.
Regulators, listing authorities and public companies in many
major jurisdictions have expressed support for the TCFD
recommendations as a useful framework for disclosure and
are paying close attention to their uptake.30 In 2018, UK
regulators (Prudential Regulation Authority and Financial
Conduct Authority) set out proposals for managing climatechange
risks and boosting green finance. In 2019, the EU
will revise the guidelines on climate-related information for
the Non-Financial Reporting Directive31 and it is likely that
further legislative initiatives for mandatory climate disclosures
are on the horizon.
Trends in climate litigation
Courts are increasingly asked to adjudicate on issues
relating to climate change. There are now over 1,000 cases
worldwide that “raise issues of law or fact regarding the
science of climate change and climate change mitigation
and adaptation efforts”.32 Strategic or high-profile “climate
litigation” seeking to hold governments, corporations and
private actors accountable for climate-related commitments,
to fill perceived gaps in mitigation and adaptation efforts, or
to challenge the approval of fossil fuel projects, has been
the object of increasing attention. This strategic climate
litigation has the potential to act as both a material driver,
and consequence, of the low-carbon transition.33
20 How to Set Up Effective Climate Governance on Corporate Boards
Court cases linking climate change and human rights are
emerging. Significant cases include the Dutch Urgenda
decision, which was upheld on appeal in October 2018,
and the People’s Climate Case underway against the EU
Parliament and Council. The Commission on Human Rights
of the Philippines is holding an inquiry into the human rights
impacts of climate change, including the role of 47 of the
world’s largest fossil fuel and cement companies.
While the majority of cases are against governments,
corporations and individuals are defendants in a small but
significant number of cases. These claims are often framed
as torts or failure to meet a duty of care, such as: a failure
to mitigate emissions (which seeks to establish liability for
emissions and the associated climate change impacts),
a failure to adapt (which alleges a failure to adequately
manage the physical or economic transition risks associated
with climate change or from inaccurate disclosure of related
exposures), and transition-specific regulatory compliance
(which arises from laws and standards introduced to
implement the economic transition).34
Energy companies have been the initial target for strategic
climate litigation against corporations. These cases are
often compared to the successful litigation against tobacco
companies. Although there are difficulties in establishing
legal causation, there have been significant advances in
the scientific understanding of the relationship between
emissions and climate change, including extreme weather
events. As the impacts of climate change continue to grow,
it is likely that the volume of such litigation will continue to
increase.
How to Set Up Effective Climate Governance on Corporate Boards 21
Second, investors expect boards to demonstrate a solid
competence on climate change. Much of the focus has
been on recruiting directors who demonstrate the right
expertise on this issue, but there has also been a call for
increasing the fluency of the overall board is this area.42
Third, investors also ask boards to integrate climate-change
considerations into their decision-making. The growing
investor focus on two-degree scenario planning is intended
to feed into board deliberations on the impact of climate
change on business strategy and risk. Boards are likely to
also drive performance by linking climate-change goals with
executive pay.
Finally, investors demand that companies provide more
transparency on the role of the board in climate-change
oversight and decision-making. This transparency can be
demonstrated both through public reporting, for instance,
using the TCFD framework, but also through board
engagement with major shareholders.
Appendix 2 – Investor perspective
By Veena Ramani,
Program Director of the Capital
Market Systems, Ceres
How investors define climate governance in their fiduciary
duty capacity
Climate change poses a material risk to investor portfolios.
The latest investor research has reinforced the idea that
climate change may have a material effect on investment
returns, and that investors need to consider this issue as
a new return variable.35 A growing number of investors are
starting to address this risk through investment decisions
and engagement actions.
These decisions and actions have taken a few forms. A
growing number of global investors36 have committed to
divest from coal, oil and gas companies in the face of risks,
while others are embracing the investment opportunities
of climate-change solutions.37 More investors are engaging
with companies in climate-change efforts than ever before.
Proposals for sustainability issues, like climate change,
accounted for over half of the shareholder proposals
submitted during the recent proxy seasons in the US,38 with
some of the largest global investors helping to deliver the
first majority resolutions on climate change. As a part of the
CA100+ initiative,39 over 300 global investors collectively
representing $32 trillion in assets are engaging with the
largest greenhouse gas-emitting companies in the world
on their climate-change systems and performance. Finally,
financial institutions responsible for assets of nearly $100
trillion, or over 50% of the value of global capital markets,
have publically supported the TCFD and are engaging with
the companies they lend to or invest in to implement the
recommendations.
As investors assess how well companies are positioned
in the face of climate change, they are increasingly paying
attention to the climate governance systems of the
companies in question as a predictor of performance. A
company that puts smart governance systems in place to
proactively identify, assess and manage climate risks is likely
to prove resilient in the face of climate-change impacts.
Investors are paying particularly close attention to the role
of the board as a part of this interest in climate change
and sustainability overall. A 2017 survey by CFA Institute40
revealed that financial analysts believe board accountability
is the most important sustainability issue in their investment
analysis and decision-making.
So, what do investors expect from their corporate investees
and their boards in particular?
First, investors increasingly ask companies to put formal
mandates in place for climate-change oversight, for
instance, through charter incorporation. Having such
systems in place would allow for material sustainability
issues such as climate change to be discussed
systematically and in depth.41
22 How to Set Up Effective Climate Governance on Corporate Boards
4
31%
13% 10%
10%
8%
8%
7%
3% 4% 4% Law
Board Member
(independent)
Finance / Audit
Chief Executive Officer
Policy & Gov.
Affairs
Chief Sustainability
Officer
Chairman
Chief Financial Officer
Chief Investment
Officer
Academic
3%
Chief Risk Officer
4% 6%
6%
6%
8%
8%
29%
Energy / Oil & Gas 33%
Agriculture, Food &
Consumer Goods Academic
Financial Services
Legal
Chemicals, Materials &
Construction
other
Engineering, Transport
& Shipping
Contributors by role / function: Contributors by industry / sector:
Appendix 3 – Design of the principles and
consultation process
The guiding principles outlined in this paper were designed
by the World Economic Forum, in close consultation with
over 50 individual experts – in particular with corporate
directors, chief executives and chairs, and chief risk, legal
and financial officers as well as sustainability, climate and
corporate governance experts. While this consultation
process captured a wide variety of expert perspectives, the
authors would like to acknowledge that most interviewees
were from a set of sectors (including financial services,
energy and industrials) that have a driving role to play in the
transition to a global low-carbon economy. The authors
would also like to acknowledge that the consultation focus
on European and North American business does represent
a geographic bias and further consultation across a greater
diversity of geographies is an important next step.
The primary purpose of these principles is to equip directors
of listed companies with a first set of guiding principles to
facilitate their oversight of management of relevant climate
issues. Nevertheless, these principles should be also useful
to the executive management and the underlying functions
listed in the paragraph above. Therefore, the principles and
Figure 6: Outreach statistics
accompanying questions may be used as guidance for
boards to reflect on the strategic climate governance and
management within their organizations.
The principles have been designed bearing in mind that
climate governance will be relevant to different types of
companies in different ways. An individual company’s
approach to governing climate will vary depending on a
number of factors such as company type and size, industry
affiliation and jurisdiction or geography. Different companies
will also be at different stages along the journey of
integrating climate considerations into governance, meaning
that each principle and guiding question will be more or less
applicable to each individual organization.
The proposed eight principles were not presented in order
of priority or in a fixed sequence, but should follow a logical
flow. For example, principles 1–4 shall lay the foundation for
principle 5 and principles 6–8 help facilitate the endurance
of attention to climate change issues longer term. To make
these principles practical and applicable, each principle
was accompanied by a set of guiding questions that may
help a company identify and fill potential gaps in its current
approach to governing climate.
How to Set Up Effective Climate Governance on Corporate Boards 23
Integrated reporting: The International Integrated Reporting
Council (IIRC) defines integrated reporting as “concise
communication about how an organization’s strategy,
governance, performance and prospects, in the context of
its external environment, lead to the creation of value over
the short, medium and long term”.44 It communicates the full
range of factors that affect the ability of an organization to
create value over time, ensuring more efficient and financial
sustainable allocation of capital.45 The more that integrated
thinking is embedded into an organization’s operations,
the better it will be able to identify potential risks and
opportunities: for example, those related to technological
or climate changes. Integrated reporting brings greater
cohesion and efficiency to the reporting process, improving
internal processes and, as a result, decision-making. This
benefits stakeholders who are affected by an organization’s
ability to create value, as well as the ability of the
organization to respond to their needs.
Materiality assessment: A materiality assessment enables a
company to understand and identify the most important issues
for itself and its various stakeholders. Such assessment of
criticality shall inform the firm’s strategy and approach to risk
and opportunity management, while helping the company to
identify potential trends that could affect the ability to create
value in the long term. It is essential for the organization to
prioritize the areas of interest, and to focus time and resources
on the most material topics. Assessing climate-related risks
and opportunities should not be different from any other
material issue an organization faces. Given that climate change
will affect different businesses in different ways across a range
of time scales, it is important for organizations to identify any
material ways in which climate change may affect the business
across short-, medium- and long-term time frames.
Scenario analysis: Climate-scenario analysis is a tool used to
understand the potential climate-related risks and opportunities
a company faces, and the implications these may have on
their business in the future. It enables organizations to consider
their strategic resilience and management response options
to a range of future states.46 Climate-scenario analysis is
important for organizations to undertake, particularly given
the extent of uncertainty around the severity and timing of
the most significant climate change impacts. It is essential
to prompt longer-term strategic thinking so that businesses
can adequately incorporate the potential effects of climate
change into their strategic planning processes.47 This provides
multiple benefits: improving the organization’s understanding
of climate-related risks and opportunities, as well as informing
stakeholders about how the organization is responding to
these changes. However, it is important for organizations to
understand that, while these scenario analyses can be used
as tools to consider different potential future outcomes, they
are not forecasts or predictions – and are as strong as their
assumptions.
Given the policy signals associated with the Paris Agreement,
the TCFD recommends “organizations use, as a minimum, a
2°C scenario and consider using other scenarios most relevant
to the organization’s circumstances (…)”.48 The selection
of other scenarios should be informed by which scenarios
might present the greatest challenges to the organization. If
conducting scenario analyses related to NDCs, organizations
should bear in mind that these have been designed with a
ratchet mechanism such that emission reductions become
more ambitious over time. However, in reality, progress
towards, and changes to, these NDCs will obviously depend
on the national political contexts.
Appendix 4 – Glossary of terms
One-tier vs two-tier board structure: A one-tier board is
comprised of both executive and non-executive directors.
It is associated with greater interaction among board
members, greater exposure of non-executive directors to
direct information about the company, lighter administrative
burdens and faster decision-making processes. However,
as the single board is tasked with both managing and
supervising the company, it is more difficult for these types
of boards to guarantee the independence of non-executive
directors. Moreover, this structure allows for chairperson
and CEO duality, which is generally not recommended by
corporate governance practice.
Conversely, on a two-tier board there is a clear separation
between management and supervision or oversight.
Executive and non-executive directors serve on separate
boards (i.e. the supervisory board is composed exclusively
of non-executive directors while the management board
is composed exclusively of executive directors). This clear
distinction allows for greater independence of non-executive
directors and mandates the separation of chairperson and
CEO roles. However, disadvantages of this structure include
delayed or limited flow of information to non-executive
directors, increased administrative budget and delayed
decision-making processes.
2°C warming limit: Such limit has been widely
considered the threshold beyond which there will be
severe, widespread and irreversible damage. Yet the
latest broad scientific analysis from the Intergovernmental
Panel on Climate Change (IPCC) concludes that the risks
associated with 1.5°C are likely to be far more severe
than 2°C of global warming.43 (Figure 7).
Figure 7: 2100 warming projections
24 How to Set Up Effective Climate Governance on Corporate Boards
Three lines of defence: as outlined by the chartered Institute
of Internal Auditors (IIA)49: The board provides direction
to senior management by setting the organization’s risk
appetite. It also seeks to identify the principal risks facing the
organization. Thereafter, the board assures itself on an ongoing
basis that senior management is responding appropriately
to these risks. The board delegates primary ownership and
responsibility for operating risk management and control to
the CEO and senior management. It is management’s task to
provide leadership and direction to the employees in respect of
risk management, and to control the organization’s overall risktaking
activities in relation to the agreed level of risk appetite. To
ensure the effectiveness of an organization’s risk-management
framework, the board and senior management need to be able
to rely on adequate line functions – including monitoring and
assurance functions – within the organization. The IIA endorses
the three lines of defence model as a way of explaining the
relationship between these functions and as a guide to how
responsibilities should be divided:
1. The first line of defence – functions that own and
manage risk
2. The second line of defence – functions that oversee or
specialize in risk management, compliance
3. The third line of defence – functions that provide
independent assurance, above all internal audit
External Audit
Regulator
Governing Body / Audit Comittee
Senior Management
Management
Controls
Internal
Control
Measures
Financial Controller
Compliance
Inspection
Security
Risk Management
Quality
Internal Audit
1st Line of Defence 2nd Line of Defence 3rd Line of Defence
Figure 8: Three lines of defence model
How to Set Up Effective Climate Governance on Corporate Boards 25
Contributors
The views expressed in this White Paper are those of the authors below and do not necessarily represent the views of the
World Economic Forum or its members and partners, nor those of PwC and the numerous contributors.
The authors would like to sincerely thank each individual contributor for their valuable comments, insights and guidance in
the creation of this White Paper.
A special thanks goes also to our project advisor PwC – particularly to the Sustainability and Climate Change practice as
well as the Corporate Governance team; and to our Forum colleagues Pedro Gomez, Head of Oil and Gas Industry, and
Caterina Cilfone, Project Specialist, Climate Initiatives, who provided valuable support throughout the preparation of this
White Paper.
Project team
–– Dominik Breitinger, Project Lead, Climate Governance and Finance, Global Leadership Fellow, World Economic Forum
–– Emily Farnworth, Head of Climate Change Initiatives, World Economic Forum
–– Marisa Donnelly, Manager, PwC
–– Jonathan Grant, Director, PwC
–– Devina Shah, Associate, PwC
–– Jon Williams, Partner, PwC
26 How to Set Up Effective Climate Governance on Corporate Boards
Endnotes
1. U.S. Global Change Research Program, Fourth National Climate Assessment, Volume II 2018: https://nca2018.
globalchange.gov/chapter/1/ (link as of Dec 4)
2. The Intergovernmental Panel on Climate Change, Special Report: Global Warming of 1.5 °C, 2018: https://www.ipcc.
ch/sr15/chapter/summary-for-policy-makers/ (link as of Dec 4)
3. United Nations Framework Convention on Climate Change, 2018, The Paris Agreement Status of Ratification: https://
unfccc.int/process/the-paris-agreement/status-of-ratification (accessed 29/11/18). (link as of Dec 4)
4. Climate Action Tracker, 2018, Temperatures: https://climateactiontracker.org/global/temperatures/ (accessed
29/11/18). (link as of Dec 4)
5. PwC, 2018, The Low Carbon Economy Index 2018: https://www.pwc.co.uk/lowcarboneconomy (accessed
29/11/18). (link as of Dec 4)
6. World Resources Institute, 2018, Extreme Weather: What’s Climate Change Got to Do With It? https://www.wri.org/
blog/2017/09/extreme-weather-whats-climate-change-got-do-it (accessed 29/11/18). (link as of Dec 4)
7. Munich RE, 2018, 2017 Year in Figures: https://www.munichre.com/topics-online/en/2018/01/2017-year-in-figures
(accessed 29/11/18). (link as of Dec 4)
8. World Economic Forum, Global Risk Report 2019
9. Economist Intelligence Unit, 2018, The Cost of Inaction: Recognising the Value at Risk from Climate Change: https://
www.eiuperspectives.economist.com/sites/default/files/The%20cost%20of%20inaction_0.pdf (link as of Dec 4)
10. New Climate Economy, 2018, Unlocking the Inclusive Growth Story of the 21st Century: Accelerating Climate Action
in Urgent Times: https://newclimateeconomy.report/2018/wp-content/uploads/sites/6/2018/09/NCE_2018Report_
FINAL.pdf (link as of Dec 4)
11. Bank of England, 2018, A Transition in Thinking and Action speech by Mark Carney: https://www.bankofengland.
co.uk/-/media/boe/files/speech/2018/a-transition-in-thinking-and-action-speech-by-mark-carney.pdf (accessed
29/11/18). (link as of Dec 4)
12. Task Force on Climate-Related Financial Disclosures, 2018, Press Release Status Report: https://www.fsb-tcfd.org/
wp-content/uploads/2018/09/Press-Release-TCFD-2018-Status-Report_092518_FINAL.pdf (accessed 29/11/18).
(link as of Dec 4)
13. Task Force on Climate-Related Financial Disclosures, 2018, 2018 Status Report: https://www.fsb-tcfd.org/wpcontent/
uploads/2018/08/FINAL-2018-TCFD-Status-Report-092518.pdf (accessed 29/11/18). (link as of 4/12/18)
14. TCFD, TCFD Supporters as of the One Planet Summit September 2018: https://www.fsb-tcfd.org/tcfd-supporters/
(accessed 29/11/18). (link as of 4/12/18)
15. Mercer, 2015, Investing in a Time of Climate Change: https://www.mercer.com/content/dam/mercer/attachments/
global/investments/mercer-climate-change-report-2015.pdf (accessed 29/11/18). (link as of 4/12/18)
16. BlackRock, 2018, BlackRock Investment Stewardship Engagement Priorities for 2018: https://www.blackrock.com/
corporate/literature/publication/blk-stewardship-2018-priorities-final.pdf (accessed 29/11/18). (link as of Dec 4)
17. State Street Global Advisors, 2016, Climate Change Risk Oversight Framework for Directors: https://www.ssga.
com/investment-topics/environmental-social-governance/2018/06/climate-change-risk-oversight_jun%202018.pdf
(accessed 29/11/18). (link as of Dec 4)
18. BIS Central Bankers’ Speeches, 2015, Mark Carney: Breaking the Tragedy of the Horizon – Climate Change and
Financial Stability: https://www.bis.org/review/r151009a.pdf (accessed 29/11/18). (link as of Dec 4)
How to Set Up Effective Climate Governance on Corporate Boards 27
19. Task Force on Climate-Related Financial Disclosures, 2017, Technical Supplement: The Use of Scenario Analysis
in Disclosure of Climate-related Risks and Opportunities: https://www.fsb-tcfd.org/publications/final-technicalsupplement/
(accessed 29/11/18). (link as of Dec 4)
20. The International Institute of Internal Auditors, 2013, IIA Position Paper: The Three Lines of Defense in Effective Risk
Management and Control: https://global.theiia.org/standards-guidance/Public%20Documents/PP%20The%20
Three%20Lines%20of%20Defense%20in%20Effective%20Risk%20Management%20and%20Control.pdf (accessed
29/11/18). (link as of Dec 4)
21. Hermes Investment, 2017, US Corporate Governance Principles: https://www.hermes-investment.com/ukw/wpcontent/
uploads/sites/80/2017/10/US-CG-Principles-Oct-2017.pdf (accessed 29/11/18). (link as of Dec 4)
22. Baker McKenzie, 2017, Recommendations of the Task Force on Climate-related Financial Disclosures: Country
Reviews: https://f.datasrvr.com/fr1/717/47909/TCFD_Baker_McKenzie_PRI_full_report_2017.pdf (accessed
29/11/18). (link as of Dec 4)
23. Integrated Reporting, 2016, Value of Board Level Insights: Purpose Beyond Profit: http://integratedreporting.org/
resource/creating-value-cfo-leadership-in-ir/ (accessed 29/11/18). (link as of Dec 4)
24. CCLI, 2018, Directors’ Liability and Climate Risk: National Legal Papers for Australia, Canada, South Africa and the
United Kingdom: https://ccli.ouce.ox.ac.uk/publications/ (accessed 29/11/18). (link as of Dec 4)
25. European Commission, 2018, EU Action Plan on Sustainable Finance: https://ec.europa.eu/info/publications/180308-
action-plan-sustainable-growth_en (accessed 29/11/18). (link as of Dec 4)
26. Grantham Research Institute on Climate Change and the Environment and Sabin Center for Climate Change Law,
2018, Climate Change Laws of the World database: http://www.lse.ac.uk/GranthamInstitute/legislation/ (accessed
29/11/18). (link as of Dec 4)
27. Article 173 of the French Energy Transition for Green Growth Law.
28. UK Financial Conduct Authority, 2018, DP18/8 Climate Change and Green Finance: https://www.fca.org.uk/
publication/discussion/dp18-08.pdf (accessed 29/11/18); Bank of England, 2018, Enhancing Banks’ and Insurers’
Approaches to Managing the Financial Risks from Climate Change: https://www.bankofengland.co.uk/prudentialregulation/
publication/2018/enhancing-banks-and-insurers-approaches-to-managing-the-financial-risks-from-climatechange
(accessed 29/11/18); Ontario Securities Commission, 2018, CSA Staff Notice 51-354: Report on Climate
Change-Related Disclosure Project: http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20180405_51-354_disclosureproject.
htm#N (accessed 29/11/18); Australian Securities and Investment Commission, 2018, Report 593: Climate
Risk Disclosure by Australia’s Listed Companies: https://download.asic.gov.au/media/4871341/rep593-published-20-
september-2018.pdf (accessed 29/11/18). (link as of Dec 4)
29. SEC, 2010, Commission Guidance Regarding Disclosure Related to Climate Change: https://www.sec.gov/rules/
interp/2010/33-9106.pdf (accessed 29/11/18). (link as of Dec 4)
30. TCFD, 2018, TCFD supporters: https://www.fsb-tcfd.org/tcfd-supporters/ (accessed 29/11/18). (link as of Dec 4)
31. European Commission, 2018, EU Action Plan on Sustainable Finance, Action 9: https://ec.europa.eu/info/
publications/180308-action-plan-sustainable-growth_en (accessed 29/11/18). (link as of Dec 4)
32. UNEP, 2017, Status of Climate Change Litigation: http://wedocs.unep.org/bitstream/handle/20.500.11822/20767/
climate-change-litigation.pdf?sequence=1&isAllowed=y (accessed 29/11/18). (link as of Dec 4)
33. The Two Degrees Investing Initiative (2Dii) and MinterEllison, The Carbon Boomerang: Litigation as a Driver and
Consequence of the Energy Transition, September 2017, http://et-risk.eu/carbon_boomerang/ (accessed 29/11/18).
(link as of Dec 4)
34. ibid.
35. Mercer, 2015, Climate Change Report 2015: https://www.mercer.com/content/dam/mercer/attachments/global/
investments/mercer-climate-change-report-2015.pdf (accessed 29/11/18). (link as of Dec 4)
28 How to Set Up Effective Climate Governance on Corporate Boards
36. The Guardian, 2018, Fossil Fuel Divestment Funds Rise to $6tn: https://www.theguardian.com/environment/2018/
sep/10/fossil-fuel-divestment-funds-rise-to-6tn (accessed 29/11/18). (link as of Dec 4)
37. Ceres, 2018, Clean Trillion in Sight: https://www.ceres.org/CleanTrillionInSight (accessed 29/11/18). (link as of Dec 4)
38. Pionline, 2018, Environmental Social Issues Big in Proxy Season: https://www.pionline.com/article/20180709/
PRINT/180709889/environmental-social-issues-big-in-proxy-season (accessed 29/11/18). (link as of Dec 4)
39. Climate Action 100, 2018: http://www.climateaction100.org/ (accessed 29/11/18). (link as of Dec 4)
40. CFA Institute, 2017, ESG Survey 2017: https://www.cfainstitute.org/en/research/survey-reports/esg-survey-2017
(accessed 29/11/18). (link as of Dec 4)
41. Ceres, 2018, How Corporate Boards Engage Sustainability Performance: https://www.ceres.org/resources/reports/
view-top-how-corporate-boards-engage-sustainability-performance (accessed 29/11/18). (link as of Dec 4)
42. Ceres, 2018, Lead from the Top: https://www.ceres.org/resources/reports/lead-from-the-top (accessed 29/11/18).
(link as of Dec 4)
43. Intergovernmental Panel on Climate Change, 2018, Report: http://www.ipcc.ch/report/sr15/ (accessed 29/11/18).
(link as of Dec 4)
44. Integrated Reporting, 2015, The International IR Framework: http://integratedreporting.org/wp-content/
uploads/2015/03/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf (accessed 29/11/18). ((link as of Dec 4)
45. Integrated Reporting, 2018, The IIRC: http://integratedreporting.org/the-iirc-2/ (accessed 29/11/18). (link as of Dec 4)
46. TCFD, 2017, Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-Related Risks and
Opportunities: https://www.fsb-tcfd.org/publications/final-technical-supplement/ (accessed 29/11/18). (link as of Dec
4)
47. PwC, 2018, Getting Started with Climate Scenario Analysis: https://www.pwc.co.uk/sustainability-climate-change/
assets/pdf/getting-started-with-climate-scenario-analysis.pdf (accessed 29/11/18). (link as of Dec 4)
48. TCFD, 2017, Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-Related Risks and
Opportunities: https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Technical-Supplement-062917.
pdf (accessed 29/11/18). (link as of Dec 4)
49. Chartered Institute of Internal Auditors, 2018, Governance of Three Lines of Defence: https://www.iia.org.uk/
resources/audit-committees/governance-of-risk-three-lines-of-defence/ (accessed 29/11/18). (link as of Dec 4)
How to Set Up Effective Climate Governance on Corporate Boards 29
30 How to Set Up Effective Climate Governance on Corporate Boards
How to Set Up Effective Climate Governance on Corporate Boards 31
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How to Set Up Effective Climate Governance on Corporate Boards 3
Foreword
Executive Summary
Global Context
Climate Governance Principles and Guiding Questions
Outlook and Conclusion
Appendices:
1. Legal perspective
2. Investor perspective
3. Design of the principles and consultation process
4. Glossary of terms
Contributors
Endnotes
5
6
7
11
18
19
19
21
22
23
25
26
Contents
4 How to Set Up Effective Climate Governance on Corporate Boards
How to Set Up Effective Climate Governance on Corporate Boards 5
Foreword
Climate change is visibly disrupting business. It is driving unprecedented physical impacts, such as
rising sea levels and increased frequency of extreme weather events. At the same time, policy and
technology changes that seek to limit warming and reduce the associated physical impacts can
also cause disruption to business. As with any form of disruption, climate change is creating and will
continue to create risks and opportunities for business in a diverse number of ways.
This disruptive relationship between climate change and business is already receiving increased
attention. This has been prompted by the Paris Agreement, the emergence of climate-related
legislation, the recommendations of the Financial Stability Board’s Task Force on Climate-Related
Financial Disclosures (TCFD) and, most recently, the heightened awareness of physical impacts and
risks detailed in the Special Report of the Intergovernmental Panel on Climate Change (IPCC) on
Global Warming 1.5°C.
In light of this attention, investors, regulators and other stakeholders are challenging companies to
demonstrate an integrated, strategic approach to addressing climate-change risks and opportunities.
An important element in ensuring that climate risks and opportunities are appropriately addressed
is the important duty that boards of directors have for long-term stewardship of the companies
they oversee. However, to govern climate risks and opportunities effectively, boards need to be
equipped with the right tools to make the best possible decisions for the long-term resilience of their
organizations.
The goal of this work is to propose tools that can be useful for the board of directors to steer
climate risks and opportunities: the governance principles are designed to increase directors’
climate awareness, embed climate considerations into board structures and processes and improve
navigation of the risks and opportunities that climate change poses to business. By providing a
compass to enable more effective climate governance, this initiative strives to contribute to the
Forum’s Compact for responsive and responsible leadership and to sound an urgent call to action for
purposeful stewardship from and for the most prominent custodians in corporations: their board of
directors.
Dominic
Waughray,
Managing Director
Centre for Global
Public Goods,
Member of the
Managing Board,
World Economic
Forum
Jon Williams,
Partner,
Sustainability and
Climate Change,
PwC
The vision and action of Directors, CEOs and senior-level executives
is fundamental to addressing the risks posed by climate change and
delivering a smooth transition to a low-carbon economy. Materials, such
as this new World Economic Forum report, that support Boards and
Executives understand how to deliver on the TCFD can help foster a
virtuous circle of adoption, where more and better information creates
imperatives for others to adopt TCFD and for everyone to up their game in
terms of the quality of the disclosures made.
Mark Carney, Governor, Bank of England and former Chair, Financial Stability Board
6 How to Set Up Effective Climate Governance on Corporate Boards
Executive Summary
The links between climate change and business
are becoming increasingly evident and inextricable.
Business decisions and actions will slow or accelerate
climate change, and climate change will drive risks and
opportunities for business. Increasingly, board directors
are expected to ensure that climate-related risks and
opportunities are appropriately addressed. However, limited
practical guidance is available to help board directors
understand their role in addressing these risks and
opportunities.
On the one hand, good governance should intrinsically
include effective climate governance. To this point, climate
change is simply another issue that drives financial risk
and opportunity, which boards inherently have the duty
to address with the same rigour as any other board topic.
On the other hand, climate change is a new and complex
issue for many boards that entails grappling with scientific,
macroeconomic and policy uncertainties across broad time
scales and beyond board terms. In this regard, general
governance guidance is not necessarily sufficiently detailed
or nuanced for effective board governance of climate issues.
This work seeks to provide useful guidance to boards,
acknowledging that climate governance is both integral
to basic good governance and fraught with complexity.
The result is a set of principles and questions to guide
the development of good climate governance – 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.
The principles and guidance build on existing corporate
governance frameworks, such as the International
Corporate Governance Network’s (ICGN) Global
Governance Principles, as well as other climate risk and
resilience guidelines, such as the recommendations of
the Financial Stability Board’s Task Force on Climate-
Related Financial Disclosures (TCFD). The drafting process
involved extensive consultation with over 50 executive
and non-executive board directors, as well as important
organizational decision-makers, including chief executives,
and financial and risk officers. Input was also gained from
experts from professional and not-for profit organizations.
This consultation took place through a series of face-toface
and phone interviews over the course of four months,
helping to shape and test the principles and guiding
questions.
This paper opens with details on the global climate
context, addressing changing regulations and increasing
expectations of boards in the climate arena. The bulk of
the paper presents the eight climate governance principles
and their associated guidance. The eight principles are
not presented in order of priority or in a fixed sequence,
but do follow a logical flow and build upon each other. For
example, principles 1–4 lay the foundation for Principle 5,
and principles 6–8 help facilitate the endurance of attention
to climate-change issues in the long term. To make these
principles practical and applicable, each principle is
accompanied by a set of guiding questions that will help
a company identify and fill potential gaps in its current
approach to governing climate. The paper is also supported
by chapters that provide additional technical legal and
investor context in the Appendix.
–– Principle 1 – Climate accountability on boards
–– Principle 2 – Command of the subject
–– Principle 3 – Board structure
–– Principle 4 – Material risk and opportunity assessment
–– Principle 5 – Strategic integration
–– Principle 6 – Incentivization
–– Principle 7 – Reporting and disclosure
–– Principle 8 – Exchange
This initiative sought to make these principles both
broadly applicable and practically useful for organizations.
However, these principles should not be taken as universally
applicable to all companies across sectors and jurisdictions.
Moreover, they do not intend to be specifically prescriptive
in any way. Rather, the hope is that they will serve as tools
to help elevate the strategic climate debate and drive holistic
decision-making that includes careful consideration of the
links between climate change and business.
As business leaders, we have an important
role to play in ensuring transparency around
climate-related risks and opportunities, and I
encourage a united effort to improve climate
governance and disclosure across sectors and
regions.
Bob Moritz, Global Chairman, PwC
How to Set Up Effective Climate Governance on Corporate Boards 7
Global Context
Climate policy, science and economics
Leaders from 184 nations have ratified the Paris Agreement
and pledged to take action to keep global temperature rise
“well below” 2°C above pre-industrial levels, and to pursue
efforts to limit the increase to 1.5°C. This agreement is
the outcome of more than two decades of diplomacy and
serves as a landmark in signalling a global transition to a
low-carbon economy.
The agreement came into force on 4 November 2016. To
date, it has been ratified by 184 Party countries1.
These countries are now in the process of implementing
their national climate plans (known as nationally determined
contributions or “NDCs”) that they submitted voluntarily
under the Paris Agreement. Implementation of these NDCs
requires countries to enact policies and legislation to curb
emissions. Under the Paris Agreement, countries are also
expected to “ratchet up” the ambition of their NDCs over
time to stay well below the 2°C warming limit (current
NDCs limit warming to only 2.6°C–3.2°C),2 see glossary for
details.
Temperature anomaly from 1961-1990 average, Global
Global average land-sea temperature anomaly relative to the 1961-1990 average temperature in degrees Celcius
(°C). The red line represents the median average temperature change, and grey lines represent the upper and lower
95% confidence intervals.
1850 1860 1880 1900 1920 1940 1960 1980 2000 2017
-0.4 
-0.2 
0 
0.2 
0.4 
0.6 
0.8 
Upper
Median
Lower
Source: Hadley Centre (HadCRUT4) OurWorldInData.org/co2-and-other-greenhouse-gas-emissions • CC BY-SA
Figure 1: Global temperature anomaly from
1850-1990 average
Despite the Paris ambitions and latest warnings3 of
catastrophes associated with 1.5°C of warming4, global
temperatures continue to rise, as seen in Figure 1. Without
swift economic transformation, chances of keeping warming
below 2°C diminish and risks of physical climate-change
impacts increase.5
Many of these impacts are already being seen, including
increased incidents of heatwaves, fires, storms and
flooding.6 In fact, financial losses from extreme weather
events in 2017 reached an all-time annual record of $320
billion.7
In light of this scientific and economic evidence, many
risk experts and business leaders are beginning to
understand the diversity and seriousness of the risks
climate change will pose. In fact, over the past five years,
corporate leaders have consistently rated climate change
and extreme weather as the top macroeconomic risks
over the next ten years in terms of both impact and
likelihood in the World Economic Forum’s annual Global
Risks Report8 (see Figure 2).
8 How to Set Up Effective Climate Governance on Corporate Boards
Figure 2: Global Risk Map 2009-2019 (Impact) It is estimated that between now and 2100, the potential
financial losses arising from climate change could run
from $4.2 trillion to as much as $43 trillion9, versus a
total global stock of manageable assets worth $143
trillion. At the same time, climate-change adaptation
and mitigation are also predicted to generate investment
opportunities worth up to $26 trillion between now and
2030.10
How to Set Up Effective Climate Governance on Corporate Boards 9
Disclosure, regulatory and investor trends
and the implications for business
Despite the growing recognition that climate change will
cause disruption to business as usual, reliable information
detailing how companies manage climate-related risks
and opportunities has been “hard to find, inconsistent and
fragmented”.11
In response to this, the Financial Stability Board established
the Task Force on Climate-Related Financial Disclosures
(TCFD) in 2015 to develop guidance for companies in
disclosing clear, comparable and consistent information on
the financial risks and opportunities presented by climate
change. The final recommendations, released in June 2017,
were designed to mainstream consideration of climate risk
into business and investment decision-making to facilitate
efficient allocation of capital and to enable a smooth
transition to a low-carbon economy.
The recommendations categorize the climate risks into:
transition risks (risks that arise from the transition to a lowcarbon
economy such as policy shifts) and physical risks
(risks that arise from the physical impacts of a changing
climate such as increased extreme weather events).
The TCFD also recognizes the business opportunities
associated with the transition to a low-carbon economy and
adaptation to the impacts of climate change.
Figure 3: Climate-related risks, opportunities and financial impact (according to TCFD)
1
Governance Strategy Risk Management Metrics & Targets
Resource Efficiency
Energy Source
Markets / Products / Services
Policy and Legal
Technology
Market
Risks (Transition & Physical)
Reputation Resilience
Strategic Planning /
Risk Management
Financial Impact
Acute Physical Risks
Chronic Physical Risks
Opportunities
Cash Flow
Income Statement Statement Balance Sheet
Revenues /
Expenditures
Assets & Liabilities
Capital & Financing
Figure 3: Climate-related risks, opportunities and financial impact
The TCFD emphasizes governance as a foundational
building block of effective climate risk and opportunity
management. Without effective climate governance
structures in place, a company will struggle to make climateinformed
strategic decisions, manage climate-related risks
and establish and track climate-related metrics and targets
in the short, medium or long term.
As of September 2018, the recommendations of the TCFD
had received widespread business support from over 500
organizations, including 457 companies with a combined
market capitalization of $7.9 trillion. Within this, there are
287 financial services firms responsible for assets of nearly
$100 trillion, equivalent to more than 50% of the global
capital markets.12 Moreover, according to the 2018 TCFD
status report, the World Federation of Exchanges is taking
the TCFD recommendations into account in revising its
Environmental, Social and Governance (ESG) Guidance &
Metrics.13
10 How to Set Up Effective Climate Governance on Corporate Boards
Despite the fact that disclosure against the
recommendations of the TCFD remains voluntary,
mandatory disclosure of climate risk is emerging as a vital
area of regulatory focus. Regulators, listing authorities
and public companies in many major jurisdictions, have
expressed support for the TCFD recommendations as
a useful framework for disclosure and are paying close
attention to their uptake.14 Appendix 1 provides further
details on climate-change regulation and disclosure of
climate risks.
Investors are also scrutinizing companies’ efforts to manage
climate-related risks and opportunities. This is driven by a
recognition that climate change will have inevitable impacts
on investment returns, and that investors need to consider
climate change as a new return variable.15
The world’s largest asset managers are putting particular
emphasis on climate-smart governance for their portfolio
companies. For instance, BlackRock expects their corporate
boards to have “demonstrable fluency in how climate
risk affects the business and management’s approach to
adapting the long-term strategy and mitigating the risk”.16
State Street Global Advisors issued a Climate Change Risk
Oversight Framework for Corporate Directors, setting out
its expectations that corporate board members evaluate
climate risk and preparedness.17 Pension funds are also
increasingly focusing on effective climate governance.
Appendix 2 provides further details on the investor
perspective and expectations.
Implications for corporate boards
While current disclosure, regulatory and investor trends are
driving increased corporate attention to climate change,
many boards are struggling to address the related risks and
opportunities in a holistic way. The executive and nonexecutive
directors interviewed for this report gave a variety
of reason for this, which can be broadly summarized as
follows:
–– Competing priorities – Climate competes with a
plethora of other emerging and strategic risks that
must be addressed by the board (e.g. industry change,
technology and business-model disruption, changing
global economic conditions, cybersecurity etc.). Boards
have limited time and capacity to equally review and
address all of these strategic topics.
–– Complexity of climate change – Climate change is a
complex and inherently systemic issue. The risks are
diverse, uncertain and often not yet visible in some
markets. Moreover, the extent of the impacts will depend
on important external drivers such as the emergence of
disruptive technologies and climate regulation, which are
particularly difficult to model. This makes climate change
an extremely difficult risk and opportunity to manage.
–– Short-term time horizon and focus – Companies are
under constant pressure to deliver short-term results, to
meet investor expectations on a quarterly basis. Climate
change poses longer-term risks that extend beyond the
considerations of the typical business planning cycle, a
phenomenon Bank of England Governor Mark Carney
coined as the “Tragedy of the Horizon”.18
In addition to, and despite these challenges, board directors
are faced with a fundamental principle: they have a duty to
understand and prudently manage the potential risks and
threats of the companies they oversee, no matter what the
time horizon. Failure to act on and disclose relevant risks or
threats may expose them or their companies to legal action
(see Appendix 1 for details).
Yet there remains a dearth of guidance to assist directors
in their duty to understand and act on climate change.
Aware of this gap, this report offers guiding principles and
questions as a foundational framework for organizations
seeking to effectively govern climate-related risks and
opportunities. The principles are intended to enhance the
discussions on climate competence of directors to the
extent that climate risk considerations become embedded in
normal board processes. This should enable better-informed
investment decision-making, more systemic thinking and an
integrated approach to crafting and implementing business
strategy that is informed by consideration of climate impacts
in both the short and long term.
How to Set Up Effective Climate Governance on Corporate Boards 11
Figure 4: Guiding principles for effective climate governance on corporate boards
Climate Governance Principles and Guiding Questions
SUBJECT
COMMAND
INCENTIVIZATION
CLIMATE
ACCOUNTABILITY
STRATEGIC
INTEGRATION
BOARD
STRUCTURE
REPORTING &
DISCLOSURE
EXCHANGE
MATERIALITY
ASSESSMENT
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.
1 – CLIMATE
ACCOUNTABILITY
For details on director duties and trends in climate-change
regulation and litigation, see Appendix 1.
Given that the board is accountable to shareholders for
the long-term health of the organization it governs, the
board should also be responsible to shareholders for
overseeing effective management of climate-related risks
and opportunities. As a foreseeable financial issue within
mainstream investment and planning horizons, climate
change should enliven directors’ governance duties in the
same way as any other issue presenting financial risks.
The inherent uncertainty associated with how climate
change will affect any organization makes it a challenging
risk and opportunity for board directors to effectively govern.
For example, the Paris Agreement signals a transition to a
net zero emissions economy in the second half of the 21st
century, whereas current domestic policies signal a much
slower transition in most cases. While the information that
directors have available is far from perfect, they remain
accountable for identifying potential risks and opportunities
and using the best available information to make informed
decisions that will leave their companies resilient in the face
of a variety of different policy and economic outcomes.
Guiding questions
1. Do your board directors consider the risks and
opportunities associated with climate change to be an
integral part of their accountability for the long-term
stewardship of the organization?
2. To what extent are climate risks and opportunities
incorporated into your board’s understanding of
directors’ duties?
12 How to Set Up Effective Climate Governance on Corporate Boards
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
2 – SUBJECT by an awareness and understanding of climate-related threats and opportunities.
COMMAND
Climate change is a disruptor to business as usual. As
with any form of disruption, boards should be composed
of directors who collectively have sufficient awareness
and understanding of the ways in which climate change
may affect the business. Sufficient awareness at the
board level will also set the tone for the organization and
drive greater awareness for senior management and staff.
Executive and non-executive directors can contribute to
good climate governance in different ways. While nonexecutive
directors are not operationally responsible
for the business, they may bring specific knowledge
to certain subject matter or perspectives in relation
to the risks and opportunities of climate change.
Executive directors, on the other hand, are operationally
accountable and should have greater insight into how
climate risks and opportunities are managed within the
organization:
Board composition and agenda
1. To what extent does your board have a robust
awareness and understanding of how climate change
may affect the company?
2. What steps has your board taken to test that its
composition allows for informed and differentiated
debate as well as objective decision-making on climate
issues?
3. Has an assessment of climate-competence gaps taken
place? If so, who is conducting such gap analysis and
what recommendations does it contain?
4. Who is responsible for climate change at board level and
are these individuals in positions that will allow them to
influence board decisions (e.g. committee chairs)?
Maintaining and enhancing climate competence
Even once a board has a sufficient composition of
directors who bring the required skills to address climate
at the company, measures should be taken to maintain
and enhance the board’s command of the subject – to
further diversify the perspectives and allow for richer
discussions and reviews on climate issues:
5. What steps is your board taking to ensure it remains
sufficiently educated about the relevant climate-related
risks and opportunities for its business?
6. Has your board considered whether it would benefit
from the advice of external experts? If so, has the board
considered which experts would be most well suited?
7. How can your board plan for succession to ensure
that climate awareness does not stop if an important
individual or a vocal climate champion leaves the
organization or the board? What kind of skills do you
incorporate into the desired profile for a new board
director?
Climate change is one of the most urgent
challenges facing the world today. With a
mere twelve years to save the planet, now is
the time for corporate directors to step up, be
courageous and ensure the long-term resilience
of their organisations for the good of society
through effective climate governance.
Katherine Garrett-Cox, Chief Executive Officer, Gulf International Bank UK;
Member of the Supervisory Board, Deutsche Bank
It took us much too long – more than 30 years
– to bring women on boards, we cannot afford
losing another 30 years before climate gets on
the board agenda.
David Crane, former CEO of NRG Energy and B-team Leader
3. Do your board directors undertake decisions that are
informed by the best available information on climate
risks and opportunities (see Principle 4)?
4. Do your directors feel confident in their abilities to
explain their decisions as informed by the best available
information on climate risks and opportunities?
5. Does the board conduct internal performance reviews?
Is accountability for climate risks and opportunities
considered during internal evaluations of the board?
6. Are independent performance audits undertaken? If so,
do these include climate considerations?
How to Set Up Effective Climate Governance on Corporate Boards 13
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.
3 – BOARD
STRUCTURE
To maintain oversight of the company’s climate resilience
and governance, a board should determine how to most
effectively embed climate into its board and committee
structures.
Given that board structures vary across jurisdictions
(e.g. one-tier vs two-tier boards – see glossary for
definition), there are numerous ways to embed climate
into these structures. Regardless of the board structure,
the approach to embedding climate considerations
should enable sufficient attention and scrutiny to
climate as a financial risk and opportunity. The selected
structure should also allow for effective connection
and communication with the relevant members of the
executive management.
Guiding questions
1. Has your board determined how to effectively integrate
climate considerations into the board committee
structures? Are they integrated into (an) existing
committee(s)? Or, are they addressed by a dedicated
specific climate/sustainability committee?
2. How does your board ensure that climate
considerations are given sufficient attention across
the board (e.g. being discussed in the audit, risk,
nomination or remuneration committees)?
3. How can executive and non-executive directors
play complementary roles in meeting the board’s
accountability with regards to climate?
4. Has the way your board embedded climate allow
for effective interaction with relevant members of the
executive management (e.g. if climate is embedded in
the risk committee, does this committee ensure that
climate is also addressed by the Chief Risk Officer)?
5. Has the board considered appointing a climate expert,
or creating an informal or ad-hoc climate advisory
committee of internal and external experts?
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.
4 – MATERIALITY
ASSESSMENT
Assessment purpose
Climate change has the potential to drive material (see
glossary for definition) impacts for any type of company.
However, the materiality of these impacts will be unique to each
company, depending on a number of factors, including sector,
size and jurisdiction of operation. Therefore, the materiality of
climate-related risk and opportunities in the short, medium and
long term should be assessed at the company and understood
by the board. This materiality should then inform the level of
action and response to climate change at the company:
1. Is climate considered in company-wide assessments of
material risks and opportunities in the short, medium and
long term?
2. How does your board verify that the company has
embedded effective materiality assessment processes in
relation to climate risks and opportunities?
As climate change presents an unprecedented
challenge to our society and businesses, we
need all hands on deck to steer our companies
through what needs to be an orderly transition.
Committed Boards can play a crucial role to
make the 2015 Paris commitments a reality.
Emma Marcegaglia, Chairman of the Board, Eni
14 How to Set Up Effective Climate Governance on Corporate Boards
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.
5 – STRATEGIC
INTEGRATION
Integration into strategic decision-making
Once the board is aware of the extent to which climate
change might drive material risks and opportunities for
its operations, it can begin to integrate climate-change
considerations into the organization’s strategy.
How a company positions itself on short-term decisions
(e.g. investment project decisions) will have long-term and
potentially profound implications for the resilience of the
organization. When decisions with long-term implications
are taken without consideration of how climate might alter
the future business landscape, they may be taken with
no explicit regard for important risks. Moreover, the longterm
resilience of an organization may require fundamental,
strategic changes in some organizations’ business models,
which will take significant time to be implemented.
Given the highly uncertain and variable nature of how
climate change will affect the business landscape over
different time frames, strategic decision-making should be
informed by scenario analyses (for further details see the
glossary) and the results of these scenarios integrated into
strategic planning decisions. Boards should be confident
that the strategic decisions they take will not compromise
the resilience of the organization under any future climate
scenario.
1. Does your corporate strategy include a holistic climate
strategy informed by scenario analysis, i.e. climate risk
mitigation and adaptation as well as business continuity
and opportunities?
2. Are climate considerations incorporated into the strategic
planning, business models, financial planning and other
decision-making processes?
Organizational integration
Climate considerations should be integrated across the
organization – particularly, into the firm’s “three lines of
defence”20 (see glossary) – to help identify and allocate
coordinated ownership for climate risks and improve the
quality of reporting to the board.
3. How does your board ensure that the company’s response
to climate change is aligned to the materiality and
proportionality of the issue to the business?
Assessment process: time horizons and scenario analysis
As climate change is expected to affect the business
landscape over a longer term than most typical company
budgeting and reporting cycles, it can lead some companies to
overlook risks or opportunities that may become material in the
medium to long term.
4. Are short-, medium- and long-term time frames considered
in materiality assessments at your organization? Are
the definitions of these time frames appropriate for your
organization specifically (depending on the sector, size,
investment time frames etc. of your organization)?
5. How are climate-related materiality assessments
conducted? Are they integrated into budget or operating
cycle planning?
Given the highly uncertain and variable nature of how climate
change will affect the business landscape over these time
frames (in terms of policy, technology, extreme weather etc.),
materiality assessments should contain scenario analyses
(see glossary for definition) to understand potential major
business risks and opportunities under different time horizons
and climate outcomes. These materiality assessments and
scenarios should be updated sufficiently frequently and on an
ongoing basis.19
6. Are different climate scenarios being included to inform
the assessment of climate change materiality at your
organization?
7. How often are climate-related scenario analyses repeated?
Does your board feel this frequency is proportionate to the
climate risk exposure of the company (i.e. do they take
place sufficiently frequently)? Do your investors share the
board view?
8. Are climate scenarios conducted in such a way that the
results can be used to inform the company’s or board’s
action or response to climate issues?
A reliable and universal carbon price would
substantially advance the climate debates in
board and executive rooms.
Alison Martin, Group Chief Risk Officer, Zurich Insurance Group
How to Set Up Effective Climate Governance on Corporate Boards 15
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.
3. Is climate integrated into the “three lines of defence” and
the Enterprise Risk Framework (ERM) for the company?
Further, the board should feel confident that the organization
is positioned to effectively identify, mitigate, manage and
monitor material climate-related risks. Executive directors will
have a more involved role to play in organizational integration.
4. How does the board ensure that climate risks and
opportunities are identified, mitigated, managed and
monitored across the company?
5. Does the board feel confident that sufficient resources
(e.g. staff, technology) have been dedicated to the
identification, mitigation, management and monitoring of
material climate-related risks?
6 – INCENTIVIZATION
Integration of climate incentives
Incentivization should be designed to align the interests of
executive directors to the long-term health and resilience of
the company. Given that corporate management is typically
incentivized on a vast number of topics, the board should
consider how incentivization in regards to climate issues
could be integrated into the existing incentives. In some
cases, companies may be required to reassess current
management schemes to ensure that incentives are not
offered for inappropriate risks that put the future value of the
company in jeopardy.21
1. Is the company’s management incentivization scheme
designed to promote and reward sustainable value
creation over time?
2. Are any climate targets and/or goals integrated into
management’s incentivization model?
3. If so, how do these targets and/or goals relate to other
management incentives? Are there any inconsistencies
or contradictions in relation to the other incentives?
4. If variable incentives are extended to non-executive
directors, do these include incentives related to climate
and avoid potential conflicts of interest?
Assessment of climate incentives
Companies have begun to include climate-related targets
and indicators, such as carbon emissions indicators or
external ESG (environmental, social, governance) ratings in
their management incentive schemes. The appropriateness
and applicability of climate-related targets and indicators will
vary from company to company, depending on a number
of factors, including the materiality of climate change to
the company (see Principle 4). If implementing incentives
tied to targets or indicators, organizations should seek to
make them appropriate, proportionate and specific to each
organization. The effectiveness of targets and indicators
should be carefully considered before implementation and
be monitored after implementation to assess suitability.
5. Which climate KPIs (key performance indicators), targets,
goals and/or achievements does the board incorporate
into the management incentivization models (e.g. related
to carbon emissions, science-based targets or inclusion
in climate indices)?
6. What are the benefits and limitations of using these KPIs,
targets, goals and achievements?
7. How does the board assess the suitability (ex ante) and
measure the effectiveness (ex post) of climate-based
performance incentives?
If investors challenge your climate strategy that
suggests it is not deeply enough embedded in
your corporate strategy.
Ann-Kristin Achleitner, Member of the supervisory boards of Engie,
Deutsche Börse, Linde and Munich Re
16 How to Set Up Effective Climate Governance on Corporate Boards
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.
7 – REPORTING &
DISCLOSURE
Voluntary vs mandatory disclosure
When integrating climate considerations into disclosures,
companies should incorporate mandatory requirements
and voluntary climate-related reporting frameworks,
such as the recommendations of the TCFD. In many
jurisdictions, existing company and securities laws
already require companies to report on climate change
where it is a material financial risk to their business.22
(see Appendix 1 for details).
1. Does your organization report on the material financial
risks and opportunities associated with climate
change?
2. Does your organization operate in jurisdictions with
mandatory climate-related reporting? Is the board aware
and informed about potential mandatory climate-related
reporting requirements?
3. Does the organization report against relevant
voluntary climate-related reporting frameworks in your
jurisdiction (e.g. CDP, TCFD)? If not, has the board
considered the potential risks associated with failing to
do so (see Appendix 1)?
4. How does your board hold management accountable
for implementing the regulatory requirements for
climate-relevant disclosure and for maintaining
oversight of emerging regulation?
5. How does your board fulfil its duty in relation to the
signing or attestation of its climate disclosures in
annual reports or financial filings (see Principle 1 and
Appendix 1)?
How and what to disclose?
Some companies express apprehension about disclosing
climate-related information. This is driven mainly
by concerns that detailed disclosures could reveal
commercially sensitive information or make the company
vulnerable to future legal action. In fact, accurate and
decision-useful climate disclosures made to investors and
other stakeholders should help mitigate risks of failing
to disclose relevant information about a company (see
Appendix 1).
6. Does the board feel confident that the level of climaterelated
disclosure is proportionate to the materiality
of climate-related risks and opportunities at the
company and complies with any mandatory reporting
requirements?
7. Does the board feel prepared to explain its disclosures
on climate in response to investor-led challenges?
8. Is the company reporting on areas where progress has
been insufficient and/or where things have not gone
to plan (consistent with national corporate governance
codes)?
9. Do disclosures include information about the
company’s industry and policy engagement on climate
change?
Where to disclose
Given that climate risks and opportunities should be
integrated into strategic decision-making (see Principle
5), those climate considerations should also be an
integral element of disclosure. Some companies treat
climate change and sustainability as standalone issues
and will often publish a “sustainability report” that
stands separate to the annual report or financial filings.
However, given that climate change has the potential
to create financial impacts throughout an organization,
integrated reporting (see glossary) can be an effective
tool for communicating a clear and concise picture of risk
and opportunity.23 The aim of integrated reporting is to
increase the quality of reporting rather than the volume of
reporting.
10. Does your organization have integrated reporting in
place?
11. If not, are there internal or external expectations to
pursue integrated reporting in the future?
With the right climate risk reporting and
disclosure in place, you achieve both board
attention, focus and ambition.
Jim Snabe, Chairman of the Supervisory Board of Siemens AG and
Chairman of the Board of A.P. Moller-Maersk Group
How to Set Up Effective Climate Governance on Corporate Boards 17
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.
8 – EXCHANGE
External exchange includes engagement within
industry groups as well as transparent climate-policy
engagement. Companies should maintain awareness for
the consistency of their messaging across all types of
external engagement.
Guiding questions
1. How does the board ensure that the company
develops and encourages climate dialogue and
methodology sharing among industry peers, investors,
regulators and other stakeholders?
2. How does your board maintain its awareness about
good climate-governance practices?
3. Does your company organize stakeholder dialogues
on this matter and encourage the participation and
inclusion of all relevant stakeholders (customers,
regulators, NGOs, academia etc.)?
4. Is the board kept regularly informed of, does it
approve, and does it supervise consistent conduct
of the company’s industry and public policy
engagement?
Finally, working together with investors to understand
their concerns and priorities, should help drive progress
towards effective climate governance (see also Appendix
2 on investor expectations):
5. How does the board ensure that climate risks and
opportunities are being adequately discussed with
investors, where legal and governance arrangements
allow for such a dialogue?
18 How to Set Up Effective Climate Governance on Corporate Boards
I would encourage all companies to discuss
with their Boards the genuine role and purpose
of our companies in society: do take the time
to focus on the ‘why’ and do not jump too fast
to the ‘how’ and so shaping our sustainabilityagenda.
Feike Sijbesma, Chief Executive Officer, Royal DSM
Outlook and Conclusion
The guiding principles and questions outlined in this report
are designed to be widely applicable across organizations,
sectors and jurisdictions. However, there is no one-sizefits-
all approach to good climate governance, and there
are, of course, limitations to this report. For example,
interviewees for this project represent a set of leaders who
are particularly vocal and engaged regarding climate change
and business, as opposed to a cross-section of leaders with
divergent perspectives on climate change. Furthermore, the
consultation process represents a geographic bias towards
European and North American businesses. (See Appendix 3
for details of the consultation process.)
Aware of these limitations, the Forum plans to extend this
work, through industry and regional deep-dives, to provide a
more encompassing picture. As part of extending this work,
the Forum may also seek to elaborate climate-governance
case studies on its website and facilitate director training on
good climate governance.
Despite these limitations, the authors hope that the guiding
principles will spark increased awareness, attention and
debate in regards to climate governance in the future. As the
world becomes increasingly technology-enabled, boards will
experience improved access to the information necessary
to permit better climate governance on a technical level. For
example, increased speed and capacity for data collection
and analysis will allow for more complex and nuanced
materiality and scenario analyses and better information with
which to make decisions.
Finally, while enjoying these benefits of technological
advancements, organizations should not lose sight of
the value of human and purposeful leadership. Boards
and senior management are responsible for setting the
tone at the top, and acting as custodian stewards for
profit, people and the planet. A culture of attentive and
responsible governance in the face of climate change and
other business disruptions is likely to generate trust with
employees, investors and other stakeholders, which will
make the duty of governing climate risk ultimately more
compelling and satisfying.
Figure 5: Climate governance principles and organizational purpose
How to Set Up Effective Climate Governance on Corporate Boards 19
Appendices
Appendix 1 – Legal perspective
By Ellie Mulholland,
Director, Commonwealth Climate
and Law Initiative
Director duty
As a foreseeable financial issue within mainstream
investment and planning horizons, climate change now
enlivens directors’ governance duties in the same way
as any other issue presenting financial risks. Shareholder
resolutions are increasingly brought – and not just in energy
companies – to change investment and disclosures relating
to climate risks.
Directors’ duties are expressed in statute, regulatory
instruments and case law and differ across jurisdictions
in the precise expectations of conduct and the discretion
accorded to directors. While not all are “fiduciary” duties
in the strict legal sense, corporate governance laws
generally reflect core fiduciary principles that directors have
obligations of trust and loyalty, and must act with care, skill
and diligence.
The existing directors’ duties regimes in many jurisdictions,
including the UK and US, are conceptually capable of being
applied to corporate governance failures in the identification,
assessment, oversight and disclosure of climate risks.24
In the EU, consultation is underway on whether rules that
require directors to act in the company’s long-term interest
need to be clarified to meet the goals of the European
Commission’s Action Plan on Sustainable Finance.25
Conduct that will satisfy or contravene directors’ duties or
disclosure obligations with regards to the impacts of climate
change on business and related investment decisions will
depend on the unique circumstances of the company and
the decision-making context.
Directors who are not prepared for this step change
in expectations in the governance of climate-related
risks and opportunities may find themselves exposed,
particularly directors of companies that operate in sectors
which are highly vulnerable to the physical or economic
transition risks associated with climate change. Claims
may be brought by shareholders, or by creditors, in the
case of bankruptcy preceded by stock buybacks or
dividends where the valuation of assets is too high, or the
valuation of liabilities is too low. However, it is important
not to overstate the practical likelihood of litigation. There
are procedural, evidentiary and cost-related barriers to
claim against directors, particularly in the absence of
evidence of bad faith.
Climate change regulation and disclosure of climate risks
There is an ever-increasing volume of climate-change
legislation and policies across the globe. All of the parties
to the Paris Agreement have at least one law that explicitly
addresses climate change or the transition to a lowcarbon
economy26 and there are now over 1,500 laws
worldwide covering energy, transport, land use and climate
resilience. Many of these laws have the potential to affect
the operations of companies across all sectors of the
economy, but particularly those that are highly vulnerable
to the impacts of climate change: financial services,
energy, materials and buildings, agriculture, food and forest
products, and transportation.
Mandatory disclosure of climate risk is emerging as a vital
area of regulatory focus. France has a law that expressly
requires asset managers, pension funds and insurers
to disclose climate risks, creating pressure on investee
companies and insureds to report.27 Issuers are required
to disclose material risks, which may include climate
risks. Regulatory authorities in the US, UK, Canada and
Australia have confirmed that existing disclosure laws
require disclosure of material climate-related financial risks.28
This guidance came as early as 2010 in the US, 29 but has
received little enforcement attention from the SEC since.
Regulators, listing authorities and public companies in many
major jurisdictions have expressed support for the TCFD
recommendations as a useful framework for disclosure and
are paying close attention to their uptake.30 In 2018, UK
regulators (Prudential Regulation Authority and Financial
Conduct Authority) set out proposals for managing climatechange
risks and boosting green finance. In 2019, the EU
will revise the guidelines on climate-related information for
the Non-Financial Reporting Directive31 and it is likely that
further legislative initiatives for mandatory climate disclosures
are on the horizon.
Trends in climate litigation
Courts are increasingly asked to adjudicate on issues
relating to climate change. There are now over 1,000 cases
worldwide that “raise issues of law or fact regarding the
science of climate change and climate change mitigation
and adaptation efforts”.32 Strategic or high-profile “climate
litigation” seeking to hold governments, corporations and
private actors accountable for climate-related commitments,
to fill perceived gaps in mitigation and adaptation efforts, or
to challenge the approval of fossil fuel projects, has been
the object of increasing attention. This strategic climate
litigation has the potential to act as both a material driver,
and consequence, of the low-carbon transition.33
20 How to Set Up Effective Climate Governance on Corporate Boards
Court cases linking climate change and human rights are
emerging. Significant cases include the Dutch Urgenda
decision, which was upheld on appeal in October 2018,
and the People’s Climate Case underway against the EU
Parliament and Council. The Commission on Human Rights
of the Philippines is holding an inquiry into the human rights
impacts of climate change, including the role of 47 of the
world’s largest fossil fuel and cement companies.
While the majority of cases are against governments,
corporations and individuals are defendants in a small but
significant number of cases. These claims are often framed
as torts or failure to meet a duty of care, such as: a failure
to mitigate emissions (which seeks to establish liability for
emissions and the associated climate change impacts),
a failure to adapt (which alleges a failure to adequately
manage the physical or economic transition risks associated
with climate change or from inaccurate disclosure of related
exposures), and transition-specific regulatory compliance
(which arises from laws and standards introduced to
implement the economic transition).34
Energy companies have been the initial target for strategic
climate litigation against corporations. These cases are
often compared to the successful litigation against tobacco
companies. Although there are difficulties in establishing
legal causation, there have been significant advances in
the scientific understanding of the relationship between
emissions and climate change, including extreme weather
events. As the impacts of climate change continue to grow,
it is likely that the volume of such litigation will continue to
increase.
How to Set Up Effective Climate Governance on Corporate Boards 21
Second, investors expect boards to demonstrate a solid
competence on climate change. Much of the focus has
been on recruiting directors who demonstrate the right
expertise on this issue, but there has also been a call for
increasing the fluency of the overall board is this area.42
Third, investors also ask boards to integrate climate-change
considerations into their decision-making. The growing
investor focus on two-degree scenario planning is intended
to feed into board deliberations on the impact of climate
change on business strategy and risk. Boards are likely to
also drive performance by linking climate-change goals with
executive pay.
Finally, investors demand that companies provide more
transparency on the role of the board in climate-change
oversight and decision-making. This transparency can be
demonstrated both through public reporting, for instance,
using the TCFD framework, but also through board
engagement with major shareholders.
Appendix 2 – Investor perspective
By Veena Ramani,
Program Director of the Capital
Market Systems, Ceres
How investors define climate governance in their fiduciary
duty capacity
Climate change poses a material risk to investor portfolios.
The latest investor research has reinforced the idea that
climate change may have a material effect on investment
returns, and that investors need to consider this issue as
a new return variable.35 A growing number of investors are
starting to address this risk through investment decisions
and engagement actions.
These decisions and actions have taken a few forms. A
growing number of global investors36 have committed to
divest from coal, oil and gas companies in the face of risks,
while others are embracing the investment opportunities
of climate-change solutions.37 More investors are engaging
with companies in climate-change efforts than ever before.
Proposals for sustainability issues, like climate change,
accounted for over half of the shareholder proposals
submitted during the recent proxy seasons in the US,38 with
some of the largest global investors helping to deliver the
first majority resolutions on climate change. As a part of the
CA100+ initiative,39 over 300 global investors collectively
representing $32 trillion in assets are engaging with the
largest greenhouse gas-emitting companies in the world
on their climate-change systems and performance. Finally,
financial institutions responsible for assets of nearly $100
trillion, or over 50% of the value of global capital markets,
have publically supported the TCFD and are engaging with
the companies they lend to or invest in to implement the
recommendations.
As investors assess how well companies are positioned
in the face of climate change, they are increasingly paying
attention to the climate governance systems of the
companies in question as a predictor of performance. A
company that puts smart governance systems in place to
proactively identify, assess and manage climate risks is likely
to prove resilient in the face of climate-change impacts.
Investors are paying particularly close attention to the role
of the board as a part of this interest in climate change
and sustainability overall. A 2017 survey by CFA Institute40
revealed that financial analysts believe board accountability
is the most important sustainability issue in their investment
analysis and decision-making.
So, what do investors expect from their corporate investees
and their boards in particular?
First, investors increasingly ask companies to put formal
mandates in place for climate-change oversight, for
instance, through charter incorporation. Having such
systems in place would allow for material sustainability
issues such as climate change to be discussed
systematically and in depth.41
22 How to Set Up Effective Climate Governance on Corporate Boards
4
31%
13% 10%
10%
8%
8%
7%
3% 4% 4% Law
Board Member
(independent)
Finance / Audit
Chief Executive Officer
Policy & Gov.
Affairs
Chief Sustainability
Officer
Chairman
Chief Financial Officer
Chief Investment
Officer
Academic
3%
Chief Risk Officer
4% 6%
6%
6%
8%
8%
29%
Energy / Oil & Gas 33%
Agriculture, Food &
Consumer Goods Academic
Financial Services
Legal
Chemicals, Materials &
Construction
other
Engineering, Transport
& Shipping
Contributors by role / function: Contributors by industry / sector:
Appendix 3 – Design of the principles and
consultation process
The guiding principles outlined in this paper were designed
by the World Economic Forum, in close consultation with
over 50 individual experts – in particular with corporate
directors, chief executives and chairs, and chief risk, legal
and financial officers as well as sustainability, climate and
corporate governance experts. While this consultation
process captured a wide variety of expert perspectives, the
authors would like to acknowledge that most interviewees
were from a set of sectors (including financial services,
energy and industrials) that have a driving role to play in the
transition to a global low-carbon economy. The authors
would also like to acknowledge that the consultation focus
on European and North American business does represent
a geographic bias and further consultation across a greater
diversity of geographies is an important next step.
The primary purpose of these principles is to equip directors
of listed companies with a first set of guiding principles to
facilitate their oversight of management of relevant climate
issues. Nevertheless, these principles should be also useful
to the executive management and the underlying functions
listed in the paragraph above. Therefore, the principles and
Figure 6: Outreach statistics
accompanying questions may be used as guidance for
boards to reflect on the strategic climate governance and
management within their organizations.
The principles have been designed bearing in mind that
climate governance will be relevant to different types of
companies in different ways. An individual company’s
approach to governing climate will vary depending on a
number of factors such as company type and size, industry
affiliation and jurisdiction or geography. Different companies
will also be at different stages along the journey of
integrating climate considerations into governance, meaning
that each principle and guiding question will be more or less
applicable to each individual organization.
The proposed eight principles were not presented in order
of priority or in a fixed sequence, but should follow a logical
flow. For example, principles 1–4 shall lay the foundation for
principle 5 and principles 6–8 help facilitate the endurance
of attention to climate change issues longer term. To make
these principles practical and applicable, each principle
was accompanied by a set of guiding questions that may
help a company identify and fill potential gaps in its current
approach to governing climate.
How to Set Up Effective Climate Governance on Corporate Boards 23
Integrated reporting: The International Integrated Reporting
Council (IIRC) defines integrated reporting as “concise
communication about how an organization’s strategy,
governance, performance and prospects, in the context of
its external environment, lead to the creation of value over
the short, medium and long term”.44 It communicates the full
range of factors that affect the ability of an organization to
create value over time, ensuring more efficient and financial
sustainable allocation of capital.45 The more that integrated
thinking is embedded into an organization’s operations,
the better it will be able to identify potential risks and
opportunities: for example, those related to technological
or climate changes. Integrated reporting brings greater
cohesion and efficiency to the reporting process, improving
internal processes and, as a result, decision-making. This
benefits stakeholders who are affected by an organization’s
ability to create value, as well as the ability of the
organization to respond to their needs.
Materiality assessment: A materiality assessment enables a
company to understand and identify the most important issues
for itself and its various stakeholders. Such assessment of
criticality shall inform the firm’s strategy and approach to risk
and opportunity management, while helping the company to
identify potential trends that could affect the ability to create
value in the long term. It is essential for the organization to
prioritize the areas of interest, and to focus time and resources
on the most material topics. Assessing climate-related risks
and opportunities should not be different from any other
material issue an organization faces. Given that climate change
will affect different businesses in different ways across a range
of time scales, it is important for organizations to identify any
material ways in which climate change may affect the business
across short-, medium- and long-term time frames.
Scenario analysis: Climate-scenario analysis is a tool used to
understand the potential climate-related risks and opportunities
a company faces, and the implications these may have on
their business in the future. It enables organizations to consider
their strategic resilience and management response options
to a range of future states.46 Climate-scenario analysis is
important for organizations to undertake, particularly given
the extent of uncertainty around the severity and timing of
the most significant climate change impacts. It is essential
to prompt longer-term strategic thinking so that businesses
can adequately incorporate the potential effects of climate
change into their strategic planning processes.47 This provides
multiple benefits: improving the organization’s understanding
of climate-related risks and opportunities, as well as informing
stakeholders about how the organization is responding to
these changes. However, it is important for organizations to
understand that, while these scenario analyses can be used
as tools to consider different potential future outcomes, they
are not forecasts or predictions – and are as strong as their
assumptions.
Given the policy signals associated with the Paris Agreement,
the TCFD recommends “organizations use, as a minimum, a
2°C scenario and consider using other scenarios most relevant
to the organization’s circumstances (…)”.48 The selection
of other scenarios should be informed by which scenarios
might present the greatest challenges to the organization. If
conducting scenario analyses related to NDCs, organizations
should bear in mind that these have been designed with a
ratchet mechanism such that emission reductions become
more ambitious over time. However, in reality, progress
towards, and changes to, these NDCs will obviously depend
on the national political contexts.
Appendix 4 – Glossary of terms
One-tier vs two-tier board structure: A one-tier board is
comprised of both executive and non-executive directors.
It is associated with greater interaction among board
members, greater exposure of non-executive directors to
direct information about the company, lighter administrative
burdens and faster decision-making processes. However,
as the single board is tasked with both managing and
supervising the company, it is more difficult for these types
of boards to guarantee the independence of non-executive
directors. Moreover, this structure allows for chairperson
and CEO duality, which is generally not recommended by
corporate governance practice.
Conversely, on a two-tier board there is a clear separation
between management and supervision or oversight.
Executive and non-executive directors serve on separate
boards (i.e. the supervisory board is composed exclusively
of non-executive directors while the management board
is composed exclusively of executive directors). This clear
distinction allows for greater independence of non-executive
directors and mandates the separation of chairperson and
CEO roles. However, disadvantages of this structure include
delayed or limited flow of information to non-executive
directors, increased administrative budget and delayed
decision-making processes.
2°C warming limit: Such limit has been widely
considered the threshold beyond which there will be
severe, widespread and irreversible damage. Yet the
latest broad scientific analysis from the Intergovernmental
Panel on Climate Change (IPCC) concludes that the risks
associated with 1.5°C are likely to be far more severe
than 2°C of global warming.43 (Figure 7).
Figure 7: 2100 warming projections
24 How to Set Up Effective Climate Governance on Corporate Boards
Three lines of defence: as outlined by the chartered Institute
of Internal Auditors (IIA)49: The board provides direction
to senior management by setting the organization’s risk
appetite. It also seeks to identify the principal risks facing the
organization. Thereafter, the board assures itself on an ongoing
basis that senior management is responding appropriately
to these risks. The board delegates primary ownership and
responsibility for operating risk management and control to
the CEO and senior management. It is management’s task to
provide leadership and direction to the employees in respect of
risk management, and to control the organization’s overall risktaking
activities in relation to the agreed level of risk appetite. To
ensure the effectiveness of an organization’s risk-management
framework, the board and senior management need to be able
to rely on adequate line functions – including monitoring and
assurance functions – within the organization. The IIA endorses
the three lines of defence model as a way of explaining the
relationship between these functions and as a guide to how
responsibilities should be divided:
1. The first line of defence – functions that own and
manage risk
2. The second line of defence – functions that oversee or
specialize in risk management, compliance
3. The third line of defence – functions that provide
independent assurance, above all internal audit
External Audit
Regulator
Governing Body / Audit Comittee
Senior Management
Management
Controls
Internal
Control
Measures
Financial Controller
Compliance
Inspection
Security
Risk Management
Quality
Internal Audit
1st Line of Defence 2nd Line of Defence 3rd Line of Defence
Figure 8: Three lines of defence model
How to Set Up Effective Climate Governance on Corporate Boards 25
Contributors
The views expressed in this White Paper are those of the authors below and do not necessarily represent the views of the
World Economic Forum or its members and partners, nor those of PwC and the numerous contributors.
The authors would like to sincerely thank each individual contributor for their valuable comments, insights and guidance in
the creation of this White Paper.
A special thanks goes also to our project advisor PwC – particularly to the Sustainability and Climate Change practice as
well as the Corporate Governance team; and to our Forum colleagues Pedro Gomez, Head of Oil and Gas Industry, and
Caterina Cilfone, Project Specialist, Climate Initiatives, who provided valuable support throughout the preparation of this
White Paper.
Project team
–– Dominik Breitinger, Project Lead, Climate Governance and Finance, Global Leadership Fellow, World Economic Forum
–– Emily Farnworth, Head of Climate Change Initiatives, World Economic Forum
–– Marisa Donnelly, Manager, PwC
–– Jonathan Grant, Director, PwC
–– Devina Shah, Associate, PwC
–– Jon Williams, Partner, PwC
26 How to Set Up Effective Climate Governance on Corporate Boards
Endnotes
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How to Set Up Effective Climate Governance on Corporate Boards 27
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28 How to Set Up Effective Climate Governance on Corporate Boards
36. The Guardian, 2018, Fossil Fuel Divestment Funds Rise to $6tn: https://www.theguardian.com/environment/2018/
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How to Set Up Effective Climate Governance on Corporate Boards 29
30 How to Set Up Effective Climate Governance on Corporate Boards
How to Set Up Effective Climate Governance on Corporate Boards 31
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