05 November 2024 Climate change governance: A board's responsibility under the Guernsey Code of Corporate Governance
In today's rapidly evolving business landscape, the integration of sustainability into corporate governance is no longer optional but it's essential.
The 2022 update to the Guernsey Financial Services Commission (GFSC) Code of Corporate Governance has amplified this imperative, particularly emphasising the need for boards to consider climate change in their risk management strategies. This article explores the critical role that board directors play in adhering to these guidelines and the importance of proactive climate risk assessments.
The GFSC Code of Corporate Governance
The GFSC Finance Sector Code of Corporate Governance, specifically under section 5.2.1, mandates that boards must consider the impact of climate change. It states:
"The Board should consider the impact of climate change on the firm’s business strategy and risk profile and, where appropriate in the judgement of the board, make timely climate change related disclosures."
This directive underscores the importance of incorporating climate-related assessments into the overall governance framework to mitigate potential risks and enhance the resilience of the business.
The rising liability for directors
One of the significant concerns highlighted in the recent discussions around the GFSC code update is the personal liability of directors. In the event of a fund losing value due to unmitigated climate-related risks, directors may face personal liability claims if it cannot be shown that a climate risk assessment was conducted. This scenario is relevant for funds investing in any investment sector (including high-impact sectors like renewables, which are not climate-risk-free as some might assume), where the volatility and regulatory landscape are constantly shifting.
Understanding climate-related risks
To effectively comply with the GFSC Code, boards must have a comprehensive understanding of the various climate-related risks. These include:
1. Policy and regulatory changes
Governments worldwide are enacting stricter climate policies to meet net-zero emissions targets.
For renewable energy projects, this could mean changes in subsidies, carbon pricing, and permitting processes, all of which could impact financial viability.
2. Market risks
Energy demand shifts, stranded assets, and energy price volatility are significant market risks that boards must account for in their governance strategies.
3. Technological disruption
The rapid advancement of technology in the renewable sector could render older technologies obsolete, necessitating continuous investment in innovation.
4. Reputation risk
Failing to meet high Environmental, Social, and Governance (ESG) standards could damage a firm's reputation and lead to accusations of greenwashing.
5. Legal and liability risks
Legal actions related to climate impact are on the rise. Projects perceived to harm the environment could result in lawsuits or fines.
6. Supply chain risks
The reliance on global supply chains for renewable energy projects exposes firms to disruptions from geopolitical tensions and climate events.
7. Physical climate risks (long-term)
Extreme weather events and long-term climate changes can directly affect renewable energy infrastructure, especially those in vulnerable locations.
8. Investor pressure and divestment
Increased scrutiny from investors on ESG metrics could impact capital flow and investment.
Acute risks, as listed above, may occur suddenly and have a significant impact, leading to investor outflows, particularly if a lack of consideration leads to a loss of investor confidence.
Proactive climate risk management
While the complexity of these risks might seem daunting, the solution lies in proactive and routine climate risk assessments. As highlighted, carrying out these assessments does not have to be overly challenging or costly. With initial guidance, directors can integrate climate risk evaluations into their regular governance processes effectively.
Oak and FutureTracker
Oak partners with FutureTracker to calculate, mitigate, and reduce carbon emissions. However, the toolkit that Oak and FutureTracker can offer is broad. Oak has expertise in corporate governance and policy creation, and in conjunction with FutureTracker, we offer access to a comprehensive GFSC climate risk app and advisory service to support boards in this critical endeavour. Our goal is to equip boards with the tools and knowledge necessary to conduct thorough climate risk assessments, fostering self-sufficiency in subsequent years without the need for expensive advisory work.
Conclusion
The GFSC Code of Corporate Governance has rightly placed climate change at the forefront of risk management. For boards of directors, this is an opportunity to demonstrate leadership and resilience in the face of the most pressing existential risk of our century. By embedding climate risk assessments into their governance frameworks, boards can safeguard their firms' future and contribute to a more sustainable and responsible business environment.
Get in touch with James Tracey or your usual Oak contact to find out more information and see how we can help your fund with climate change corporate governance.
