What is Climate Governance?

What Is Climate Governance?

Climate governance is the set of rules and regulations that a corporate or governing body adopts in order to manage its approach to the risks and opportunities of climate change. Potential financial losses as a result of climate change could reach more than $23 trillion by 2050. However, investment opportunities from mitigations and adaptations to climate change are also predicted to generate trillions. Ideally, climate governance structures help choose where and how to invest resources for the best outcomes of resilience and growth.

Climate Governance for Local and National Government

Climate governance within governmental systems is ideally a collaborative, participatory process between public officials, individuals, business, NGOs, and global or national stakeholders. Governmental climate governance has often been applied through Multilateral Environmental Agreements (MEAs), international frameworks intended to limit the impact of climate change, such as the Paris Agreement or UNFCCC. Despite these frameworks, many governments with the access to technology, expertise, and funds to adopt governance measures have failed to amass the political will to fulfill climate and emissions targets.

Many point to the lack of accountability mechanisms to reinforce agreements, especially those made at the international level. In the Paris Agreement, parties are held accountable through an “enhanced transparency framework” that requires countries to submit emissions inventories. Yet using existing political systems to address the emerging issues of climate change mitigation and adaptation has come across significant institutional barriers such as:

• Complexity of creating effective global agreements among countries with different priorities and levels of development
• Changes in policy due to governmental turnover and general short term focus of governmental actions
• Difficulty communicating the meaning of scientific uncertainty in climate change models and complexity of attributing large scale climate threats to individual emissions patterns
• Public resistance to investment in mitigation and apprehension to adverse consequences of mitigation actions
• Private and corporate interests that oppose adaptive changes, particularly in the energy, agricultural, and transportation industries

To address these issues, an increasingly diverse range of climate governance solutions are being applied across all institutional levels. Many U.S. states have stepped up actions to support emissions reductions, enact renewable energy legislation, and push for clean energy solutions. The U.S. Climate Alliance of 24 states and Puerto Rico is a prominent state-level organization working towards these goals.

Cities and local authorities are applying climate solutions that were previously applied only at the national level, often generating upwards political pressure for national governments to take more aggressive action on climate issues. One leading example is the C40 group. Established in 2005, the group is a network of nearly 100 influential cities with the collaborative goal of halving the emissions of member cities in a decade. The adoption of climate actions plans has been an important tool to efficiently direct funds and actions towards solving community climate issues.

Climate Risks and Corporate Governance

Climate change is a significant risk to certain corporate assets and profits, especially for companies in the energy and real estate sectors with large holdings in areas at risk of extreme weather or sea level rise. Identifying, measuring, and dealing with climate risks through effective climate governance is therefore the responsibility of board members and corporate governance structures. Climate risk is one of the elements in the broader “ESG” categories of environment, social and governance factors used to measure susceptibility to non-traditional financial risks in investing.

Adopting climate governance measures helps a company properly assess risks, set targets for mitigation strategies, and communicate climate risk to shareholders. Many governments are also starting to put in place regulations requiring the disclosure of corporate climate risk through frameworks such as the Task Force for Climate-related Financial Disclosures (TCFD). Despite this, companies may find adopting climate governance difficult because of other pressing priorities, the complexity of the impacts of climate change, or corporate strategies that are centered around short-term goals.

The World Economic Forum has released a set of Climate Governance Principles to guide boards in the process of adopting these measures. The Principles work towards the goals of gaining corporate awareness of climate issues, inserting climate considerations into governance processes, and mitigating and building resilience to climate risks. Here are those guiding principles:

1. Climate Accountability on Boards: Responsibility for the long-term success of a company relies on accounting for climate-related shifts in the business landscape. Therefore, identifying and acting on climate risks and opportunities should be the duty of board members.
2. Command of the subject: Boards should be composed of a combination of individuals with sufficient knowledge and experience with climate issues to make informed decisions. Consulting with external experts can help fill gaps in knowledge.
3. Board Structure: Climate considerations should be integrated into the structure of boards and committees in a way that gives them sufficient attention.
4. Material Risk and Opportunity Assessment: A materiality assessment is the process of engaging stakeholders to determine how important ESG issues like climate change are to them and the company. It’s important to determine material risks and opportunities on short and long term time scales.
5. Strategic Integration: Incorporate climate considerations across all organizational decision-making processes.
6. Incentivization: Boards should engage incentives to reward outcomes that match climate goals in the long and short term. This could potentially include goals or targets within the incentivisation model.
7. Reporting and Disclosure: It is important to ensure consistent and transparent disclosure of all essential climate risks and related decisions, especially in instances where climate reporting is mandatory. Companies may report data according to voluntary reporting frameworks like TCDF and CDP.
8. Exchange: Regularly engage with peer institutions, stakeholders, investors, local and national government agencies and policymakers to stay up to date with the latest climate-related information and regulatory requirements.

Conclusion

Climate change and the resulting threats to property and infrastructure are a growing issue across governmental and corporate governance structures. In the last couple decades, institutional structures and regulatory bodies of climate governance have emerged in corporate and governmental systems globally. Mandates and policy decisions have been made through existing governing bodies; additionally, new structures and principles have emerged to more fully ensure accountability, transparency, and engagement on climate issues.

Read More About Climate Governance

• March 2022 SEC Climate Risk Disclosure Proposal
• Mortgage and Commercial Loan Lending and Climate Risk