Are Companies Prepared To Handle The Converging Risks Of COVID-19 And Climate Change?

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Dec 20, 2020
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Are Companies Prepared To Handle The Converging Risks Of COVID-19 And Climate Change?

Read the third of four summaries from the 2020 annual meeting of the Salzburg Global Corporate Governance Forum - Putting Directors to the Test: How Does Leadership Measure Up in a Time of Crisis? The Salzburg Global Corporate Governance Forum was held online for the first time in October 2020

The 2020 annual meeting of the Salzburg Global Corporate Governance Forum took place virtually this year due to the pandemic. At "Putting Directors to the Test: How Does Leadership Measure Up in a Time of Crisis?" from 9-10 October 2020, 58 participants spread across 18 time zones, mainly directors and principals of corporations on four continents supplemented by additional stakeholder voices, explored crisis response and leadership, addressing what it takes for a business to survive an existential threat, and how companies should tackle both the distinct issues and converging risks around income inequality, COVID-19, climate change, and broader issues of systemic inequality.  

This online program – sponsored by BNY Mellon, CLP Group, the Diligent Institute, and Elliott Management Corporation, with university partner Simon Fraser University Beedie School of Business, Centre for Corporate Governance and Sustainability – consisted of four highly-interactive modules that facilitated participants engaging in candid, in-depth, and practical discussions in a conversational non-webinar format over two days. The first discussion asked, "Are Companies Prepared To Handle The Converging Risks Of COVID-19 And Climate Change?"

Salzburg Global Seminar would like to thank the Forum's Advisory Committee members for their programmatic advice, insight, and support in leading these conversations. Members include Melissa Obegi (Chair), Stephanie Bertels, Walt Burkley, John J. Cannon III, Bharat N. Doshi, Christopher F. Lee, Simon M. Lorne, and Robert H. Mundheim.

Are Companies Prepared To Handle The Converging Risks Of COVID-19 And Climate Change?

There is now widespread acceptance that climate change presents both physical and transition risks to businesses. It represents a systemic risk to financial markets that affects all businesses irrespective of their industry or geography. In many jurisdictions, government bailouts have been tied to addressing societal expectations, including those related to climate change. The global pandemic has further shifted boardroom conversations about systemic risk and the role of companies in society.  

With the pandemic, public health and safety issues have dominated the corporate agenda alongside concerns about unprecedented declines in revenue from pandemic lockdowns. Many governments have responded with taxpayer-funded subsidies, but with strings attached. Under the CARES Act, US companies that take Paycheck Protection Program loans cannot pay dividends or buy back shares while the loans are outstanding. Australian companies receiving JobKeeper subsidies must commit to retaining employees. Countries in the European Union offered a range of loans and subsidies, each with its own criteria and restrictions. Companies and boards had to make choices about whether to take support.

Companies from a broad range of industries have been committing to doing their part to address the climate crisis.  In the last few months, we have seen significant developments around climate goal-setting. Early in the year, Microsoft announced a commitment to capturing an amount of carbon equivalent to what it calculates is all of the carbon it has emitted since it was founded in 1975.

The timeframe on climate commitments has also been accelerated. Amazon launched the corporate climate pledge where signatory companies agree to aim for net-zero by 2040, 10 years ahead of the Paris Agreement, through business change and innovations, including efficiency improvements, renewable energy, materials reductions, and other carbon emission elimination strategies. Walmart has recently pledged to hit zero emissions from its global operations by 2040 without using carbon offsets.

Another key trend has been a movement towards moving together. In the financial sector, one day after the launch of the UN Principles for Responsible Banking, 33 of the signatories (with over $13 trillion in assets) announced a Collective Commitment to Climate Action. This commitment includes signatories aligning their portfolios to reflect and finance the low-carbon, climate-resilient economy required to limit global warming to well below two, striving for 1.5 degrees Celsius. At the end of September, Morgan Stanley, historically a top financier of fossil fuels, became the first major bank to promise to reach net-zero financed emissions by 2050. September also saw all 13 airlines in the One World alliance unite behind a common target to achieve net-zero carbon emissions by 2050, becoming the first global airline alliance to do so.

The aviation industry has been under particular scrutiny concerning carbon emissions. Environmental conditions were added to the rescue packages for Air France and Austrian Airlines. These included ceasing routes of less than 3 hours, minimum ticket prices, and commitments to reduce carbon emissions by 30% by 2050.

The COVID-19 pandemic has stimulated Boards and a range of corporation, industry, and government actors to prepare for and address the threats of systemic risks like that of climate change. Corporate Boards and senior management teams are trying to assess their role, understand the cascade of new standards and requirements (in emissions, trade and prudential standards and securities laws) that have emerged, and evaluate the cost of systemic risk disruption that may impact company operations in the future. 

Key Questions

Considerations for right now:

  1. What are the local, global, current, and future implications of the new climate change-related regulatory and disclosure requirements (hard and soft requirements) and standards introduced by governments across the world?
  2. How do we distinguish between material and foreseeable risks and opportunities, and how does it relate to a Director’s obligations?
  3. When is it an obligation for Boards to act, and when is it permissive?
  4. Is the Board obligated to set specific goals?
  5. Have conceptions of a director’s fiduciary obligations evolved to reflect the greater level of care and diligence required to understand and respond to the risks posed by climate change?
  6. Where would you place climate change as a systemic risk in the context of your business and operations?
  7. How does materiality differ in the context of disclosure from that of business and planning?
  8. What kind of disruptions can companies expect because of climate change or weather-related events? How can that be managed and what kind of action can companies take?
  9. What are the different types of risks: systemic/general risks and idiosyncratic risks, etc.? How should the models assessing risk be framed?
  10. Have Boards identified the legal, compliance, human resource, and associated risks that may make the businesses vulnerable? Is there a holistic model that could be adopted?
  11. Could climate change shift some of the risks under “force majeure” class of risks to risks that should be anticipated?  What would be the effect of this shift on the company’s financials?
  12. How should the Board plan and prepare for distribution of risks, and what would the effect on pricing?
  13. How would you balance a one-off weather-related event with the profitability of business operations?  What would be the factors for considerations – low probability of the event, magnitude, and cost of impact?
  14. Is climate change hard to measure or quantify as a risk and impact?  Will the solution be available if the business goes through the exercise of quantification?
  15. Is proximity to the harm or event an appropriate way of framing the assessment?
  16. Is it easier for emerging businesses to consider ESG and climate change in their growth phase as opposed to larger corporations, that are attempting to rebuild and transform their existing systems?
  17. What appropriate metrics should big businesses use when undergoing the transformation process of decarbonization?  Does it depend on the industry or the growth of the company?
  18. What are the environmental costs of going online and delivery services?  If it is difficult to quantify, could we attempt to quantify the impact of the measures undertaken?
  19. How have other corporate and industry actors stepped in to address the risks, opportunities, and challenges presented by a discourse around climate change?
  20. Industries in coordination with industry groups have been pushing companies to set targets this year. What challenges and opportunities may arise from this: implementation, commonalities/distinctions across jurisdictions?
  21. Why are disclosures important, and what are the implications in the substantial variability in quality that exists?  How is this evolving?

Considerations for the future:

  1. Although complying with pandemic bailouts with climate-related conditions is critical amid a post-pandemic economic fallout, how will it evolve in the future?  How will companies evaluate the subsequent tradeoffs?
  2. How useful are scenario-based activities for planning and preparation?
  3. How should Corporate Boards account for regional and cultural differences and different interpretations and understanding of climate change?
  4. Have Boards elevated the emphasis on societal factors?
  5. If the intention is not to check boxes to review the progress but rather to engage meaningfully on climate-related compliances, are Boards looking at different models that exist in Europe and other parts of the world? (e.g., director compensation being tied to ESG goals in chemical companies). Can companies work with governments to foresee and adapt to the risks that may emerge?
  6. The COVID-19 pandemic has posed multiple priorities. How are Boards prioritizing the different issues, and how will that evolve in the future?
  7. Are Boards keeping an eye on the growing norms and principles that are rapidly developing in the field of business and human rights?
  8. Do directors have a duty to consider climate impact in assessing ostensible comparative advantage?  For example, manufacturing X is cheaper in Vietnam than in the United States, but will it involve far greater carbon emissions due to outmoded technology and lax regulation?
  9. What are the actions being taken in relation to climate change impacting business operations in the company’s supply chain?
  10. How can consumers be taught to make informed choices?


Have an opinion? 

We encourage readers to share your comments by joining in the discussion on LinkedIn

The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter

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