A flare stack lights the sky from the Imperial Oil refinery in Edmonton on Dec. 28, 2018.Jason Franson/The Canadian Press
Michelle de Cordova & Sarah Keyes, principals with ESG Global Advisors
There is no question that shifting to a net-zero emissions economy without compromising our quality of life is a massive undertaking. Corporate directors have a critical role to play in ensuring companies get it right.
The Liberal government recently tabled the Canadian Net-Zero Emissions Accountability Act, which will bind Canada to achieve “net-zero” greenhouse gas emissions by 2050. Leading companies are also making net-zero commitments. For Canadian firms, the current lack of certainty about the national road map toward 2050 presents one challenge.
Another is the 30-year time horizon – a generation away in human terms. From the perspective of chief executives with global average tenure of five years, it is as many as six “generations” into the future. With few exceptions, the present incumbents will be long gone at the final reckoning. Board directors typically outlast CEOs, but not by much: Average director tenure in Canada is just over seven years. So even for a director, the realization of a 2050 net-zero target may lie four “generations” ahead.
Directors have a duty to act in the best interests of the corporation. Accordingly, they should play a critical role in ensuring companies achieve their long-term strategic goals, including the transition to net-zero emissions. However, a recent global survey for Focusing Capital on the Long Term (FCLTGlobal), a coalition of investors and companies co-founded by Canada Pension Plan Investments, found that only 20 per cent of directors served at companies where both the board and management were focused on the “long term” – defined as longer than two years for management and five years for the board. In another survey, executives cited boards as a key source of pressure toward short-termism, alongside investors and compensation that creates incentives for short-term results. All parties agree that short-termism is detrimental to long-term value creation, but they can’t seem to move beyond it.
Nevertheless, boards need to confront the fact that climate change represents a systemic risk with the potential to affect almost every industry. Climate risk is not just about GHG emissions: It includes physical risks to operations from extreme weather events, changing weather patterns and sea levels, and transition risks from emerging policy and legal requirements, technological developments, shifts in market demand for products, and reputational concerns.
Amidst a culture of short-termism, what first steps could boards take today to begin addressing a long-term issue that remains shrouded in uncertainty?
Undertake board education: Boards should develop and maintain an understanding of the full scope of climate risks and opportunities, and how the company could be impacted over different time horizons.
Apply a net-zero emissions lens to long-term projects: In carbon-intensive sectors of the Canadian economy such as utilities, real estate, mining and energy, directors routinely make decisions on capital-intensive projects with a lifespan in excess of 30 years. Boards should ensure that the evaluation of these proposals includes a robust analysis of the potential climate change-related effects as well as the potential return on investment.
Integrate climate change to the board agenda: To achieve net-zero by 2050, climate change will need to be included in discussions of strategy, risk management, performance and reporting for the next 30 years.
Align disclosure with the Task Force on Climate-related Financial Disclosures (TCFD): TCFD is the best-practice reporting framework for disclosure on climate-related risks and opportunities. The Governance and Risk Management recommendations are a starting point to begin communicating the company’s approach to climate risks and opportunities.
Consider qualitative scenario analysis: The least-adopted TCFD recommendation is to explore the resilience of the company’s strategy under different climate scenarios. Scenario analysis has become a key tool for assessing climate risk, but quantitative methodologies are in early stages of development, making robust valuation of risks a challenging proposition. Qualitative analysis can be a stepping stone to gain better understanding of potential effects and opportunities and encourage long-term thinking.
The North Star for navigating Canada’s low-carbon economic transition has been identified: net-zero emissions by 2050. Canada’s resource sectors have incredible capacity for innovation and collaboration, which will need to be harnessed to meet that commitment. While comprehensive climate strategies will take time to develop, current directors need to act now to ensure that Canadian companies are positioned to thrive in the global transition to a net-zero economy. Every journey starts with a single step.
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