Corporate governance frameworks have a critical role to play in helping companies adapt to new climate requirements and contribute to climate objectives. The OECD’s Carmine Di Noia shares insights from a new report on climate change and its implications for corporate governance. The report was prepared to inform the review of the G20/OECD Principles of Corporate Governance and was discussed during a roundtable at the OECD’s 2022 Ministerial Meeting.
Rebuilding our economies in the aftermath of the COVID-19 crisis provides an important opportunity to transform production processes and consumption patterns in a way that mitigates the impact of climate change and environmental degradation. Both our own well-being and that of future generations depend on it.
As more and more countries and companies rise up to the challenge and commit to achieving net-zero emissions by 2050 in line with the Paris Agreement, the challenge now is to turn these commitments into tangible outcomes.
Governments have a fundamental role to play in this undertaking but they alone will not be able to ensure a just and orderly transition to net zero. Without contributions from the private sector, global efforts will fall short. Businesses have a critical role to play in the climate transition, in particular through innovation and investment. A successful transition will also require that companies address and manage the climate-related risks of their activities.
One way governments can help companies play their part in the transition is by ensuring that national corporate governance frameworks incentivise both companies and investors to address climate challenges. The G20/OECD Principles of Corporate Governance, the global standard for corporate governance, are currently being revised, notably to provide new guidance to help governments regulate different aspects of corporate sustainability, including the disclosure of climate-related information, the duties of boards, and the rights of shareholders.
To ensure that corporate governance frameworks are fit for the climate transition, they must also promote corporate access to market-based financing, which is essential for supporting the type of innovation and investment needed to achieve net zero. The revised Principles will also address this imperative.
The transition presents significant opportunities as well as risks for companies
A successful transition will require that companies regularly assess and disclose how they address climate change, as well as the risks climate change poses to the sustainability and resilience of their operations.
For investors, sustainability disclosure is essential to help investors better understand the risks they face and to more efficiently allocate capital towards the companies that may potentially be better able to thrive in a low-carbon environment.
A new OECD report on Climate Change and Corporate Governance finds that climate change is already considered to be a financially material risk for listed companies representing two-thirds of global market capitalisation.
The share of market capitalisation of climate risks
Not surprisingly then, a growing number of investors are focusing on sustainability issues and demanding better corporate sustainability disclosure.
Investment funds that label themselves as environmental, social and governance (ESG) compliant – or sustainable – received a record USD 600 billion in net inflows during 2021.
Net inflows to funds labelled as or focussing on ESG
Climate Change and Corporate Governance identifies three main challenges for corporate governance and sustainability:
- More reliable and comparable disclosure standards on sustainability information are needed – The ability of shareholders and stakeholders to effectively engage with companies on climate transition priorities will depend on them having access to high quality information on how companies are addressing climate-related risks and opportunities.
- Company boards need to take account of the interests of all stakeholders – Company boards must develop a good understanding of stakeholder interests – including employees, customers and local communities – to effectively address the risks and opportunities that a company faces in relation to its future sustainability. This is also the best way to create wealth for shareholders.
- Shareholder engagement is a vital driving force for changing business practices – The mechanisms to help shareholders assess companies’ climate transition strategies need to be developed further. As part of this, shareholders need to engage with company boards to ensure these strategies are followed.
Stewardship codes for institutional investors are one important means of encouraging such engagement, along with clear legal frameworks to foster co-operation among shareholders on sustainability and governance issues.
The new report draws attention to these and other instruments that shareholders, boards and stakeholders can use to strengthen the corporate sector’s role in limiting global warming.
The findings in the report feed into the ongoing review of the G20/OECD Principles of Corporate Governance. The Principles are being revised to support the corporate sector’s contribution to the net zero transition and to help companies become more dynamic and resilient to possible future shocks. A public consultation on draft revisions will be held in September 2022. All interested parties are invited to participate and contribute to the OECD’s and G20’s work on shaping corporate governance frameworks and policies that support the transition to a low-carbon economy.