Chapter Zero introduction Dr Carol Bell€¦ · A changing climate for business: an introduction to...

Chapter Zero introductionDr Carol BellChapter Zero steering committee

A changing climate for business: an introduction to climate riskPwC

September 2020


September 2020

Non-Executive Directors' BriefingSeptember 2020

3

A changing climate for

business: an introduction

to climate risk

Slido poll - please scan this image


September 2020

Agenda and objectives for the session

5

Topic

1. Climate 101 - a refresher

2. Regulatory updates and investor pressure

3. The Board’s role and responsibilities around climate risk

4. Net zero corporate commitments


September 2020

Focus of the session

6

Climate risk

Environmental Social & Governance (ESG)

Sustainable finance

The (regulatory-driven) requirement to identify and manage climate-related risks. In the UK this means the PRA has specific local regulatory expectations.

The broader ESG themes that are impacting the industry.

New products and services being developed to respond to the changes ESG factors bring.

Climate 101 - a refresher to climate science1


September 2020

All pathways limiting global warming to 1.5ºC imply deep emissions reductions, carbon dioxide removal... and significant upscaling of investment in mitigation options.”

IPCC Special ReportOctober

IPCC Special Report on 1.5 degrees

● Current warming since 1850-1900 is +1°C

● Broadly, impacts of 2°C are ‘substantially’ worse than 1.5°C e.g. food production, health, infrastructure, migration

● Poor & vulnerable are disproportionately affected

● All 1.5°C pathways require rapid emissions reductions (including carbon removal) to net zero

● The 12 years to 2030 (now only 10) are critical

8

https://www.degreesymbol.net/


September 20209

WEF’s Global Risks Report 2020 puts climate change at front and centre


September 2020

Significant action is needed to address climate risk

* Global carbon budgets refer to the global estimated budget of fossil fuel emissions taken from the IPCC Special Report on Global Warming of 1.5C. A series of assumptions underpin these carbon budgets, including the likelihood and uncertainties of staying within the temperature limits, and the use of carbon dioxide removal (CDR) technologies. Sources - BP, Energy Information Agency, World Bank, IMF, UNFCCC, National Government Agencies, PwC data and analytics. Notes - GDP is measured on a purchasing power parity (PPP) basis. The NDC pathway is an estimate of the decarbonisation rate needed to achieve the targets released by G20 countries. NDC's only cover the period to 2030, we extrapolate the trend in decarbonisation needed to meet the targets to 2100 for comparison.

10

Source: PwC Low Carbon Economy Index


September 2020

Climate-related financial risks are important for institutions to consider

“Companies that don’t adapt – including companies in the financial system – will go bankrupt without question. [But] there will be great

fortunes made along this path aligned with what society wants.”

Mark Carney, 2019 interview with Channel 4 News

Physical risk: chronic and acute impacts on operations and supply chains

Transition risk: changes in policy, market, technology as world shifts to low carbon economy

11

Acutephysical

riskChronic

physical risk

Policy,legal,

litigationrisk

Market,economic

risk

Reputationrisk

Climate risk and

opportunity

Physical risks

Transition risks

Technologyrisk

Financial opportunity

Chronic physical risk

https://www.channel4.com/news/mark-carney-capitalism-is-part-of-the-solution-to-tackling-climate-change

https://www.channel4.com/news/mark-carney-capitalism-is-part-of-the-solution-to-tackling-climate-change


September 2020

12

Business risksMap to illustrate Diageo sites in water-stressed areas (Diageo Annual Report 2018, p.15)

Regulatory updates and investor pressure2


September 2020

Moving climate change into the mainstream

The United Nations Net Zero Asset Owner Alliance, a group of 29 institutional investors representing nearly $5 Trillion of assets under management has committed to align portfolios with a 1.5°C scenario, aligned with the Paris Agreement

Regulatory momentum

Key drivers include:

Growing scrutiny and activism

Changing investor preferences and needs


September 2020

Increasing regulation and frameworks around sustainability and ESG

Paris AgreementTo achieve the climate and energy objectives agreed in Paris, including a 40% reduction in greenhouse gas emissions, approximately EUR 180 billion of additional investment will be required annually until 2030

FSB - TCFDThe FSB Task Force on Climate-related Financial Disclosures (TCFD) provides recommendations to companies on disclosure of climate-related financial risk to investors, lenders, insurers, and other stakeholders, as well as supplemental guidance for the Financial Sector

EU Action PlanThe European Commission (“EC”) established a High-Level Expert Group (“HLEG”) to develop a EU wide strategy on sustainable financing, and published a package of measures on 24 May 2018, implementing several key actions announced in its Action Plan on Sustainable Growth.

UN 2030 AgendaTo achieve the UN Sustainable Development Goals, both companies and institutional investors are being asked to contribute to the SDGs through their business activities, asset allocation and investment decisions.

>$145tncombined assets

of financial institution

signatories

https://www.unpri.org/investor-tools


September 2020

UK: Government expects listed companies and large asset owners to disclose in line with TCFD by 2022

Canada: Recent government report endorsed mandatory compliance with TCFD EU: 2019 update to the

Non-Financial Reporting Directive integrated the TCFD recommendationsAnd the Sustainable Finance Action Plan

Japan: TCFD Coalition, highest number of TCFD supporters (163)

UK: PRA supervisory statement on climate change came into force in October 2019 for banks and insurers

The global regulatory landscape is shifting rapidly

France: Article 173 of the Energy Transition and Green Growth Law – mandatory carbon disclosure for listed companies and carbon reporting for institutional investors

Australia: regulator APRA flagged its intention in March 2019 to increase scrutiny of climate risk management, AASB also increasing scrutiny

New Zealand: government is implementing mandatory climate-related financial disclosures under the Financial Reporting Act

Chile: the Chilean Sustainable Finance Working Group has initiated a push for mandatory climate change disclosure

USA: The Climate Risk Disclosure Act is gaining momentum & the SEC statement on climate risk

Hong Kong: SFC announced it would target mandatory environmental disclosure by 2020 aligned with TCFD

China: CSRC mandates that listed companies disclosure ESG risks by 2020


September 2020

Regulatory movement on climate risk in just 12 months

April 2019PRA publishes SS3/19 and PS11/19 setting out expectations for how banks should manage climate-related risks.

July 2019

UK Government published Green Finance Strategy, setting out that TCFD could be made mandatory by 2022.

December 2019EBA publishes sustainable finance action plan – focus on climate risk including plans for stress test

Bank of England publishes discussion paper on climate scenarios for use in2021 BES.

October 2019Deadline for banks to submit plans to PRA on climate risk and appoint SMF(s).

February 2020PRA provides feedback on firms’ climate risk plans.

1Timing of climate change BES will be confirmed in the summer, as per the BoE's 30 March 2020 announcement on the impact of COVID-19 on its supervisory activities

June 2019TCFD Status Report published, showing banks need to do more on disclosures.

17

Q2/Q3 2020*EBA to publish paper on developing a uniform definition of ESG risks and the potential inclusion of ESG risks in the SREP.

June 2020EBA publishes proposed technical standards on ESG-related Pillar 3 disclosures. Originally: H2 2020

Postponed to 2021*BoE will publish the final BES scenarios. Participating banks will then have 3-4 months to complete the exercise, avoiding overlapping with annual cyclical scenario.

Results publication postponed accordingly.

*Expected dates

May 2020ECB publishes draft guidance on how banks it supervises should manage climate-related and environmental risks.Includes specific expectations on market risk and liquidity risk, as well as credit and operational risk


September 2020

The UK PRA has identified its expectations for financial firms

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The PRA expects to see financial services providers take a strategic, holistic and long-term approach, considering how climate related risks might impact all aspects of the risk profile

The PRA has issued a Supervisory Statement (SS 3/19) on how banks and insurers should manage climate-related risks. Firms are expected to:

● Allocate responsibility for identifying and managing climate-related risk to a suitable Senior Management Function (SMF)

● Use stress testing and scenario analysis to inform risk identification

● Include material exposures to climate risks within the ICAAP (banks) or ORSA (insurers).

The PRA now expects firms to proceed at pace with implementing the actions laid out in the initial plans they submitted last October.

Are boards are engaged and

equipped?

Has climate change been embedded into risk management?

Is scenario analysis being used to

inform strategic decision making?

What is the approach to climate

risk disclosure?

01 02

03 04

https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2019/ss319.pdf?la=en&hash=7BA9824BAC5FB313F42C00889D4E3A6104881C44


September 2020

Pressure from investors is growing


September 2020

20

Globally, investors are becoming more and more aware of the risks and opportunities around ESG factors

Image: PRI Annual Report 2018

Principles for Responsible Investment (PRI) reached

2,232 signatories in 2018, a 21% increase on the previous calendar year. (unpri.org)

Over $30 trillion of assets were managed under sustainable investment strategies globally in 2018.

(Global Sustainable Investment Alliance)


September 202021

• An advisory body set up by the G20 to address concerns around insufficient disclosure of climate-related risks and opportunities for businesses.

• The Task Force is made up of 32 members, including PwC Partner Jon Williams, drawn from a range of industries and countries, with key perspectives as reporters of information or users of such information.

• The Task Force published its final recommendations in June 2017 which are intended to apply to all companies with listed debt or equity in the G20, and additionally to asset managers and asset owners (recognising that these organisations are typically unlisted).

• The UK government expects all listed companies and large asset owners to adopt and report in line with the TCFD recommendations by 2022. They will consider legislating such disclosure should this fail.

Introducing the Task Force on Climate-related Financial Disclosure

What is the TCFD?

1,300+Companies and organisations

support the TCFD

$148tnValue of financial assets

of financial institutions signed up to TCFD 48

Central banks encourage TCFD reporting


September 202022

1AWhat are the TCFD recommendations?

12

34

Governance

Disclose the extent of board and management’s oversight of climate-related risks and opportunities.

Risk Management

Disclose how the organizationidentifies, assesses, and managesclimate-related risks.

Strategy

Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material.

Metrics & Targets

Disclose the metrics and targetsused to assess and managerelevant climate-related risks andopportunities where suchinformation is material.

A

C

B

D

The Task Force has produced additional guidance that underpins these four broad recommendations. This can be found on the TCFD website. Refer to the Annex titled Implementing the Recommendations of the TCFD and a

Technical Supplement titled The Use of Scenario Analysis.

The TCFD disclosure recommendations are for all industries, as set out at a high-level below. There are also specific implementation guidance for banks outlining expected actions for the industry.

https://www.fsb-tcfd.org/publications/


September 202023

1ASpecific TCFD recommendations for the banking sector

The TCFD stresses that users of climate-related financial disclosures need to be able to distinguish among banks’ exposures and risk profiles so that they can make informed financial decisions.

Risks and opportunities ● Describe significant concentrations of credit exposure to

carbon-related assets

● Consider disclosing climate-related risks (transition and physical) in lending and other financial intermediary business activities.

Risk management ● Consider characterising climate-related risks in the

context of traditional banking industry risk categories such as credit risk, market risk, liquidity risk, and operational risk.

● Consider describing any risk classification frameworks used (e.g., the Enhanced Disclosure Task Force’s framework for defining “Top and Emerging Risks”).

Metrics and targets

● Provide the metrics used to assess the impact of (transition and physical) climate-related risks on their lending and other financial intermediary business activities in the short, medium, and long term.

○ Metrics provided may relate to credit exposure, equity and debt holdings, or trading positions, broken down by:

■ Industry■ Geography■ Credit quality■ Average tenor

● Provide the amount and percentage of carbon-related assets relative to total assets as well as the amount of lending and other financing connected with climate-related opportunities.

The Board’s role and responsibilities around climate risk3

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September 2020

The Role of Corporate Governance

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The Risk

• Long-term board stewardship responsibility to shareholders

• Large climate-driven shifts to business landscape are already in motion

• Many boards lack the focus on climate governance to scrutinise the actions of management effectively The Opportunity

• Competitive ‘first mover’ advantage for organisations with strong climate governance

• Greater ability to identify and mitigate emerging strategic & operational risks as they arise

• Greater ability to compete in new markets, e.g. low-carbon technology

The role of corporate governance represents risks and opportunities for the business


September 2020

Risk appetite statement addressing financial risks from climate change

• Considering whether the current and future financial impacts from climate change have been factored into the firm’s risk appetite

Overall board understanding and oversight of financial risks from climate change

• Agreeing a board level firm-wide strategic response

What are regulatory expectations for the Board? Expectations centre on the extent to which boards are strategically considering the distinctive elements of the financial risks

Firms need to demonstrate:

27

Clear and defined roles and responsibilities, including a SMF

• Reviewing board-level responsibilities to respond to, and manage, the financial risks from climate change


September 202028

Additionally Boards should consider:

How management information flows to the

board and relevant sub-committees on

exposure to financial risks from climate change

Oversight of changes in regulatory momentum in other jurisdictions

Engagement with wider initiatives on

climate-related financial disclosures

Acknowledging the need for engagement with

clients and counterparties to encourage disclosure

in wider economy


September 202029

“How to Set Up Effective Climate Governance on Corporate Boards: Guiding principles and questions”

Climate Governance Initiative

• A set of practical guiding principles and questions to guide the development of good climate governance.

• Designed to help board members practically assess and debate their organization’s approach to climate governance and frame their thinking about how to improve their approach.

• Builds on existing corporate governance frameworks as well as other climate risk and resilience guidelines.

• Drafting process involved extensive consultation with over 50 executive and non-executive board directors, among others.

• Increasing movement towards implementing these principles and


September 2020

World Economic ForumClimate Governance Principles

30

Net Zero Corporate Commitments4


September 2020

Introduction to Net Zero

32

Net Zero is fast becoming a priority area for many financial institutions.Covid-19 has shown how systemic risks can have exponential impacts across the entire economy, and how unprepared and vulnerable our systems can be for a crisis like this. Financial institutions need to emerge from this crisis stronger, more resilient and more sustainable than they were before.

2020 marks the start of a decade highlighted as crucial by the international scientific community for the achievement of Net Zero by 2050. The opportunity to combine the current rebuild with a Net Zero transition is significant, as financial institutions can advocate for ambitious transformations as they recover from the current crisis and unlock value creation opportunities at the same time.

As they reshape and navigate a post pandemic, transitioning world, financial institutions will need to:

● Strategically redirect capital flows towards a Net Zero future, understanding levers of value creation and destruction;

● Keep pace with evolving regulators, clients and beneficiaries’ expectations of risk management and stewardship; and,

● Safeguard corporate and asset resilience and price-in systemic risks including climate risks


September 2020

The core of the FS sector GHG footprint comes from its portfolio emissions

33

Scope 1 emissions: Direct emissions e.g. boilers in offices, company vehicles etc.

Scope 2 emissions: Purchased electricity

Scope 3 emissions: Indirect emissions e.g. from products sold, activities financed or assets under management

~1-2%

~1-2%

>97%

Financial institutions’ role in the net zero agenda lies in their position as providers of capital to the economy. Until now, GHG emission disclosures from financial institutions have focused mostly on direct impacts of their operations. More than 80% of financial institutions sharing their GHG footprint data with the Carbon Disclosure Project have focused exclusively on their operational GHG footprint. When scope 3 emissions is reported, this has a tendency to focus more on for instance supply chain and business travel emissions, rather than portfolio emissions.

Stakeholders are now expecting financial institutions to shift focus towards the climate impact of their portfolios (sometimes referred to as ‘financed emissions’ or ‘portfolio emissions’), where the vast majority of their emissions originate. Methodologies are emerging to help financial institutions understand, measure and report on their portfolios’ GHG footprint and alignment with Net Zero.

Financial institutions’ estimated GHG footprint, by source


September 2020

We’ve developed a proposition framework that supports clients across all aspects of Net Zero transformation

34

Climate Risk and Impact Baselining

Net Zero Strategy Development

Transparency and Reporting

Organisational Transformation

Climate Risk and Impact Baselining Identifying and prioritising climate risks and opportunities, understanding current state of performance against peers, and assessing the value implications and change initiatives needed to mitigate climate risks.

Organisational TransformationAlignment of the organisations operating model to the net zero strategy will enable your focus on the priority areas such as investment decision making, people and talent development, supply chain management, product and service design, R&D investment, infrastructure design and investment and customer experience to deliver net zero.

Net Zero Strategy DevelopmentUnderstanding and evaluating the strategic sustainability issues for your business, assessing the business case for change and sustainable investments and developing and implementing business strategies which have sustainable development issues at the core.

Transparency and ReportingTransparency in internal and external measurement and reporting is an increasingly important facet to businesses being able to attract and retain responsible investment as well as for managing the reputation of the business.

Pathway to Net Zero


September 2020

Size of the prize: energy investment 2020-2050

SDG’sUS$2.5tn

pa

RenewablesUS$5.4-7.8tn

to 2030


September 202036

Potential next steps to assess climate governance:What Next?

Get climate on the Board agenda

Understand your current alignment with regulatory recommendations

Assess the quality of current climate governance

Test strategic integration of climate change

01 02 03 04

APPENDICES

Glossary1


September 2020

Glossary (1/2)

39

ESG (Environmental, Social and Governance)

Approach which can be used to assess risk within a portfolio/investment approach based on environmental, social and governance criteria, or used to create opportunities for socially conscious investors.

IPCC The Intergovernmental Panel on Climate Change (IPCC) is an intergovernmental body of the United Nations, founded in 1988, which evaluates science of human-induced climate change, its economic impacts and risks as well as the possible response options.

NDC Nationally determined contributions (NDCs) are voluntary commitments to emission reductions by countries, which are submitted as part of the Paris Agreement to the United Nations Framework Convention on Climate Change (UNFCCC).

Net zero To be net zero means that any emissions emitted are balanced by absorbing an equivalent amount from the atmosphere.

NGFS - Network for Greening the Financial System

NGFS ia a group of central banks and supervisors who, on a voluntary basis, share best practices and contribute to the development of environment and climate risk management in the financial sector. It aims to strengthen the efforts of the financial sector in achieving the Paris climate agreement goals and identifies what measures are needed to manage climate risks.

Physical risks Physical risks relate to the chronic (e.g. sea level rise) and acute (e.g. storms) physical climate impacts that result from increased global warming. The severity of these risks will increase as average temperatures get higher e.g. 4C scenario.

Sustainable finance Sustainable finance typically refers to any form of financial service integrating ESG criteria into the business or investment decisions. Sustainable finance presents an opportunity to banks to support the transition to a low-carbon economy and help clients manage transition risk. Sustainable financing can include providing credit and lending facilities, as well as advisory services or access to capital markets.

http://www.ipcc.ch/

http://www.un.org/en/

http://www.ipcc.ch/organization/organization.shtml

https://www.ngfs.net/en/about-us/governance/origin-and-purpose


September 2020

Glossary (2/2)

40

TCFD (Task Force on Climate-Related Financial Disclosures)

The TCFD is a market-driven initiative set up by the G20 to develop a set of recommendations for voluntary and consistent climate-related financial risk disclosures It was set up to address concerns around insufficient disclosure of climate-related risks and opportunities for businesses and helps guide companies to provide information to its stakeholders.

Transition risks Transition risks are associated with the actions required to limit global warming such as increasing carbon price, increasing regulation and technology change. These risks will occur earlier if more action is taken now to limit climate change e.g. 2C scenario.

UNEP - United Nations Environment Programme

Global environmental authority that coordinates the United Nations’ environmental activities and assists developing countries in implementing environmentally sound policies and practices. UNEP have a specified initiative with the financial sector (UNEPFI) which aims to mobilise private sector finance for sustainable development. In 2018, UNEPFI conducted a TCFD pilot project with 16 of the world’s leading banks to further develop transition and physical assessment models and metrics to enable scenario-based, forward-looking assessment and disclosure of climate-related risks and opportunities.

https://www.tcfdhub.org/

https://www.unepfi.org/banking/tcfd/

PRA SS3/19 expectations2


September 202042

Firms need to demonstrate:

• Overall board understanding and oversight of financial risks from climate change

• Risk appetite statement addressing financial risks from climate change

• Clear and defined roles and responsibilities, including SMF

Common gaps/challenges

Acknowledging the need for training below Board levelIntegrating climate risk into the business will require a variety of business units to be upskilled to understand what climate risk is, what impacts can it have on the business, and how the business’ plans will affect their day-to-day roles. At the moment, few firms are showing appreciation of the need to assess who needs this training.

Group structures and how climate risk can/should be addressed across subsidiaries

This is a particular challenge for UK subsidiaries of overseas banks who are not regulated in the same way across the board. It is not clear how group-level programmes trickle down to subsidiary-level action.

PRA SS3/19 expectationsGovernance


September 2020

PRA SS3/19 expectationsRisk management

43

Common gaps/challenges

The distinctive risks of climate change to the businessThere is commonly little/no explanation of the methodology or process (such as materiality assessments) used to determine climate risks to a bank.

Creating an appropriate response to climate risk exposuresFirms should move beyond a basic description of the approach to identifying climate risks in the ICAAP to performing the analysis and identifying any material risks and disclosing these in the ICAAP. This should be conducted in a way that is proportionate to the size and complexity of the bank.

Metrics aligned to strategy and risk appetiteIn general, firms are not clear on which climate-related metrics may be most appropriate for the business.

Firms need to show that they have considered:

• How climate risks are addressed through existing risk management frameworks and in line with risk appetite

• Short and long-term risks from climate change as well as how these will affect the business model (using scenario analysis, stress testing and forward looking information)

• Material exposures to financial risks from climate change and an explanation how these have been determined (as part of ICAAP)

• Metrics to monitor progress against overall business strategy and risk appetite

• Mitigation of material financial risks

• Climate-related impacts on clients, counterparties, and organisations in which the firm invests or may invest

• Management information to the board and relevant sub-committees on exposure to financial risks from climate change


September 2020

PRA SS3/19 expectationsScenario analysis

44

Firms need to demonstrate that scenario analysis is:

• Used to inform strategic planning and explore the resilience of the firm

• Incorporating a range of climate outcomes are addressed, including both short and long-term horizons

• Used to understand the impact on solvency and liquidity and to determine whether mitigation actions are realistic and credible

• Used to explore the sensitivities in longer-term business plans as part of ICAAP

Common gaps/challengesConsidering multiple scenarios over multiple timescales

The PRA expects firms to consider disorderly and orderly transition scenarios, as well as multiple physical scenarios (e.g. 1.5C, 2C or 4C) over the short and long term (10+ years).

The use of forward looking information Firms will need to move beyond using current/ business-as-usual information in scenario analysis and start testing their longer-term business plans/strategy.

Scale of the data challengeFew firms have appreciated the challenge and extended timescales needed to obtain the internal and external data required to perform scenario analysis.


September 2020

Firms need to show consideration of: • How climate risks are integrated into governance and

risk management processes

• The growing likelihood that disclosure will be mandated in more jurisdictions, and prepare accordingly

• An appropriate approach to disclosure, reflective of the distinctive elements of financial risks from climate change

• Engagement with wider initiatives on climate-related financial disclosures

Common gaps/challengesAcknowledging the need for engagement with firms to encourage disclosure in wider economy

Firms can enhance disclosure in the wider economy by considering how to enhance their engagement methods/approaches in a way that also benefits them.

Oversight of changes in regulatory momentum in other jurisdictions

Given the global nature of all businesses, being proactive to impending/potential regulation will benefit all in the short to medium term.

45

PRA SS3/19 expectationsDisclosure

WEF Climate Governance Principles3


September 2020

What does this principle mean?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 long term 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.

Sample guiding questions:

• Do your board directors consider the risks and opportunities associated with climate change as an integral part of their accountability for the long-term stewardship of the organisation?

• Do your board directors feel confident in their abilities to explain their decisions as informed by the best available information on climate risks and opportunities? 47

Climate accountability on boards

Principle 1


September 2020

What does this principle mean?The board should ensure that its composition is sufficiently diverse in knowledge, skills, experience and background to effectively debate and take decisions informed by an awareness and understanding of climate-related threats and opportunities.


• 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?

• 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)?

• What steps is your board taking to ensure it remains sufficiently educated about the relevant climate-related risks and opportunities for its business?

48

Command of the (climate) subject

Principle 2


September 2020

What does this principle mean?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.


• 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?

• 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)? 49

Board structure

Principle 3


September 2020

What does this principle mean?The board should ensure that management assesses the short-, medium- and long-term 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.


• Is climate considered in company-wide assessments of material risks and opportunities in the short, medium and long term?

• 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?

• Are different climate scenarios being included to inform the assessment of climate change materiality at your organization?

50

Material risk and opportunity assessment

Principle 4


September 2020

What does this principle mean?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.


• 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?

• Are climate considerations incorporated into the strategic planning, business models, financial planning and other decision-making processes?

• How does the board ensure that climate risks and opportunities are identified, mitigated, managed and monitored across the company?

51

Strategic and organizational integration

Principle 5


September 2020

What does this principle mean?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.


• Is the company’s management incentivization scheme designed to promote and reward sustainable value creation over time?

• Are any climate targets and/or goals integrated into management’s incentivization model? . 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?

52

Incentivization

Principle 6


September 2020

What does this principle mean?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.


• Does your organization operate in jurisdictions with mandatory climate-related reporting? Is the board aware and informed about potential mandatory climate-related reporting requirements?

• Does the organization report against relevant voluntary climate-related reporting frameworks in your jurisdiction? If not, has the board considered the potential risks associated with failing to do so?

• Does the board feel confident that the level of climate-related disclosure is proportionate to the materiality of climate-related risks and opportunities at the company and complies with any mandatory reporting requirements?

53

Reporting and disclosure

Principle 7


September 2020

What does this principle mean?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.


• How does your board maintain its awareness about good climate-governance practices?• 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?• 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?54

Exchange

Principle 8

Thank you

© 2020 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

pwc.com

Jon WilliamsPartner, Sustainability & Climate [email protected]

Chapter Zero introduction Dr Carol Bell€¦ · A changing climate for business: an introduction to...

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