Kuala Lumpur, 19 November 2021 – With COP26 having drawn to a close, the Climate Governance Initiative (CGI) can look back on these two weeks with a mix of hope and relief, thrown in with concern for the opportunities missed, and a renewed determination to play our part as board members in confronting the challenges that lie ahead. As governments struggle to find consensus, business must now the lead.
The Glasgow Climate Pact reflects important signs of progress. The world has clearly recognised the urgency of the climate crisis, and tens of thousands of actors – national governments working with businesses, financial and other civil institutions, and regional governments – came together to set new ambitions. Some crucial taboos were broken, including acknowledging the need to wean the global economy off its dependence on fossil fuels.
We welcome the promise to end and reverse deforestation by 2030, supported by 133 world leaders representing 90% of the world’s forests, and the backing lent by financial institutions with $8.7 trillion of assets under management, who have pledged to take immediate action. But we also recognise the many significant challenges and the persistent ‘ambition gap’ that separates us from the 1.5°C target. COP confirmed that this must remain our North Star, and while the Glasgow Climate Pact has kept that target on the table, achieving it is by no means guaranteed.
Boards must lead to reach Net-Zero by 2050
The Climate Conference ended with a call for each country to raise its climate ambitions further to meet its Paris commitments by the end of 2022. With industry and finance sharing the stage with policy makers, COP26 has made clear the role that business must play, and this leadership must come straight from the boardroom. Urgent, near-term action is what is needed now to reduce emissions of greenhouse gas emissions by half in this decade if we are to reach net zero by 2050. We, as board directors, have the power to drive the necessary change and close the ambition gap that still remains.
“What comes next for boards is to turn our net-zero or even carbon negative pledges into business plans and our promise into action,” said Michele Kythe Lim, President & CEO of Institute of Corporate Directors Malaysia. “For boards to lead a successful net-zero or even carbon negative transition, every director must have adequate climate knowledge to weigh in on the potential impacts climate change might have on the business. For companies to reach such targets, boards must be able to make intelligent yet hard choices because achieving climate goals would involve fundamental shifts in business models in terms of capital allocation, supply chain management, cost optimisation, digitalisation, organisational culture and many other aspects of the business.”
According to a research ICDM conducted in collaboration with Russell Reynolds Associates and Bursa Malaysia, environmental, social and governance (ESG) expertise is amongst the most needed but least present competencies on Malaysian boards. There is therefore an urgent need for directors to upskill and boards to refresh their composition to bring in the required skills for effective climate governance.
“It is abundantly clear that the costs of inaction are significantly more than the costs of action but, despite the increased ambition recently demonstrated in the Nationally Determined Contributions, which signatories to the Paris Agreement are required to submit, and industry-wide commitments [most noticeably Glasgow Financial Alliance for Net Zero or GFANZ with an eye-watering $130trn of assets backing it], all of the stated intentions need to be translated into legislation or policies, almost none of the assets are net zero today or fossil fuel free while new fossil infrastructure is still being supported and financed, most famously the auction of a colossal 81 million acres to be leased by the US government for oil and gas production in the Gulf of Mexico, just 4 days after COP26 in Glasgow,” said Datin Seri Sunita Mei-Lin Rajakumar, Founder Chairman of Climate Governance Malaysia.
“In this existential crisis, non-executive directors, who form the majority of the board of directors, in accordance with best practices of corporate governance, need to be sufficiently climate literate to guide the direction of travel of the business they are accountable for as well as grapple with the forward-looking concepts of double materiality – where issues material to environmental and social objectives may develop financial consequences over time – and dynamic materiality – ‘what appears financially immaterial today can quickly prove to be business-critical tomorrow’,” added Datin Seri Sunita Mei-Lin Rajakumar.
“What we need at the moment is climate-competent boards with forward-thinkers who can make credible strategies to help companies achieve net zero or even carbon negative targets and thrive in a regenerative economy,” added Michele Kythe Lim.
World Economic Forum Climate Governance Principles help boards accelerate action
Despite some clear progress, the CGI shares the frustrations expressed by some regarding the failure to set fully Paris-aligned targets. We as board directors have the power to play our part in delivering on humanity’s goals and closing the still-yawning ambition gap that remains. Boards that follow the eight Principles for Effective Climate Governance published by the World Economic Forum will accelerate their company’s journey to close this gap, de-risk the transition and increase the opportunities for their business. The Principles guide boards in understanding their responsibilities, identifying risks and opportunities, as well as driving corporate strategy, aligning incentives, ensuring meaningful exchanges with key stakeholders, and effective reporting.