Climate Governance Study 2024: A compass for company directors

The Climate Governance Study 2024, a comprehensive report by the Australian Institute of Company Directors (AICD), delves into the evolving landscape of climate governance and the hurdles directors face in implementing effective ESG (Environmental, Social, and Governance) strategies.

The intention of this study was to act as a ‘temperature check,’ assessing how perspectives and actions on climate governance have evolved among the Australian director community since 2021. The report reveals that the stakeholder landscape is becoming more varied, with increasing pressure from regulators and policymakers serving as both a catalyst and a hindrance to climate transitions. In this context, the study also delivers a practical message to policymakers and investors.

Here’s what we learnt.

Prioritising climate governance

One of the standout findings of the Climate Governance Study 2024 is the high priority directors place on climate governance. According to the report:

• 80% of directors are concerned about climate change as a material risk
• 60% believe their boards should pay more attention to climate governance
• 50% view nature and biodiversity as significant risks to their organisations

These statistics underscore the growing recognition among directors that climate change is not just an environmental issue but a critical business risk. The report recommends that directors champion long-term outcomes, viewing the transition to net zero as a strategic opportunity rather than merely a risk. It also emphasises the need for a holistic approach, integrating climate and nature considerations into the company’s strategy, risk management, and performance metrics.

From ambition to execution

While there is a clear recognition of the importance of climate governance, the transition from ambition to execution remains a significant challenge. The report highlights that:

• 43% of listed companies and a quarter of unlisted companies have a transition plan and targets
• 32% of directors (rising to 35% for listed companies) have reconsidered their organisational strategy in response to climate risks and opportunities

To overcome these execution challenges, the report advocates for a whole-of-organisation approach. This involves embedding climate goals across the business, ensuring that the CFO plays a central role in climate risk analysis, and linking executive pay to climate performance. Directors are encouraged to develop credible, science-based transition plans validated by external bodies and to regularly review and track progress to avoid accusations of greenwashing.

Navigating stakeholder expectations

Directors often find themselves pulled in different directions by various stakeholders. The study reveals that:

• 24% of directors (rising to 35% for listed companies) face short-term financial pressures from investors and shareholders that hinder climate governance efforts
• 53% of listed directors report increasing regulatory pressure, up from 37% in 2021

Building a strong business case for transition and clear communication of the costs and investments required are crucial. Directors need to engage regularly with stakeholders, understand their diverse perspectives, and secure their support for long-term climate strategies. This involves balancing short-term financial demands with the need for sustainable, long-term growth.

Policy and regulation: A double-edged sword

Policy and regulation play a pivotal role in shaping climate governance, serving as both a driver and a barrier. The report indicates that:

• 42% of directors cite Australian policy uncertainty as the top barrier to effective climate governance
• 72% of directors expect to be subject to mandatory climate reporting and feel ‘somewhat’ or ‘well’ prepared

To navigate this complex regulatory landscape, directors are encouraged to build industry coalitions and collaborate across value chains. Using mandatory climate reporting as a strategic platform rather than merely a compliance exercise can help organisations reassess their climate strategies and elevate their ambitions. Directors should also actively work to understand evolving policy landscapes and explore external assurance options to build confidence in their climate plans and mitigate liability risks.

Evolving board approaches to climate change

Board approaches to climate governance are continually evolving. The study finds that:

• 26% of directors have invested in formal climate education, up from 18% in 2021
• 45% are confident in their board’s competence on climate issues, though confidence among listed directors has decreased from 63% to 51% since 2021

To elevate governance focus, boards are reviewing and updating their governance structures to ensure they are fit for purpose. This includes holding joint meetings with relevant board committees and incorporating climate and sustainability into the regular board calendar. Investing in climate change capability across the organisation, including at the board level, is essential. Directors should also ensure alignment between executive pay and the organisation’s climate and sustainability goals.

The path forward

The Climate Governance Study 2024 provides valuable insights into the challenges and opportunities facing company directors as they navigate the complexities of ESG issues.

Directors are increasingly prioritising climate governance, but translating ambition into action remains a significant hurdle.

Adopting a holistic approach, building strong business cases for transition, navigating stakeholder expectations, leveraging policy and regulation strategically, and continually evolving governance practices require significant levels of co-ordination and planning.

At C6 ESG, we understand the critical role directors play in driving climate action and are committed to supporting them in this journey. By providing products, education, and a platform for collaboration, we aim to empower directors to lead their organisations with foresight and responsibility, ensuring that they are well-equipped to meet the challenges of climate governance and contribute to a sustainable and resilient world.