Climate Change and Entity Management

Lauren Mcmenemy

The plight of the planet has come into sharp focus in recent years, with political activists' stunts getting widespread media attention. What does this have to do with compliance and governance? Well, the noise has seen regulators around the world turning their sights on matters of climate change and sustainability.

And, of course, once the regulators start looking seriously at a movement, that means companies must do the same. When it comes to climate change and entity management, there is a slew of new regulations leading to investor pressures and, of course, consumer expectations. Brand value can now live or die by a company's reaction to environmental issues, as social media can amplify any step in the right or the wrong direction.

Why has climate change become such a pressing issue for compliance managers?

But why now? Why are ESG (environmental, social and governance) matters becoming so urgent? There are various reasons why climate change and entity management have become so important to governance, risk and compliance (GRC) programs, and it's important to understand these reasons before you start to build your own strategy to deal with the issue.

Political action

From the more traditional movements such as Greenpeace to the new and much more radical groups like Extinction Rebellion, political activism has led to governments and regulators placing more focus on sustainability and climate change. A number of European governments, including that of the UK, have announced that they intend to introduce policies to achieve net zero emissions by 2050.

Investor pressure

Following on from this regulatory interest, investors are following suit. Some asset managers are now looking closely at the ESG factors and performance of investee companies and potential investments. An organization's attitude to climate change and entity management can dictate its investment levels.

Regulatory requirements

The regulators themselves are still working on a definitive approach, but the European Commission published non-binding guidelines on reporting climate-related disclosures, which has led to member states considering their own positions. For example, the UK government has its Green Finance Strategy and the Companies (Director's Report) and Limited Liability Partnerships (Energy and Carbon Report) regulations. Changes to EU law are expected to impact pension funds, private equity funds and investment managers over time, as these entities will need to disclose their approach to sustainability-related financial risks and how this links with remuneration policies.

Access to financing

Likewise, investors, banks and insurers may choose to reduce their exposure to businesses with certain types of high-carbon assets or those that are at risk of climate-related litigation. Certain sectors will need to clean up their act or risk losing access to financing.

Disputes and litigation

Climate change cases have now been brought in more than 25 countries and continue to grow in volume ' and the main target after governments are those companies that have high levels of carbon emissions. It's important to understand and track these ESG factors to be able to assess potential litigation risks.

Stakeholder expectations

The revised UK Corporate Governance Code emphasizes that the board should set a strategy for long-term success that is also sustainable, and new reporting requirements will focus attention on how directors are carrying out this statutory duty. This attention is leading stakeholders to demand their boards take ESG seriously.

How can legal operations better manage their approach to climate change and entity management?

Planning should start now, but take a long-term approach to climate change and entity management matters. There are few quick wins when it comes to sustainability, but corporates need to show they are working toward solutions.

Starting now, organizations must consider matters of governance and stakeholders and make sure climate change and ESG matters are both on the board's agenda. All directors must remain up-to-date on the company's approach to ESG, but it is worth considering whether one director should be appointed as ESG and climate change lead, and whether these issues should be incorporated into the terms of reference of a board committee.

It's also important to quickly understand the current state. Entities should form a cross-functional team comprising business unit managers, the reporting team, investor relations and sustainability at a minimum and gather evidence as to what they already do and disclose in relation to climate change and entity management. They should also research all key stakeholders and identify their own approaches to ESG, and listen to investors about expectations. Once they've identified expectations vs. reality, they should create a strategy to address the gaps.

That's the immediate need, but over the next 12 months, entities should be doing more research and planning. They should perform risk assessments and scenario analyses to assess exposure to transitional, litigation and physical climate risks, and assess any commercial opportunities arising from energy transitions. They must understand the organization's exposure to different policy outcomes, and make sure climate-related risks are built into all enterprise risk processes.

Just doing this work is not enough, of course. Entities must build a communications and reporting strategy to both keep investors and regulators up-to-date with progress and keep employees informed of their responsibilities. They should keep monitoring and responding to changing requirements ' this is a constantly moving situation; regulators are updating guidelines and new investors will bring new expectations to the table.

Finally, within the next 18 months to two years, entities must consider what opportunities the ESG agenda presents for their business ' could a shift in brand values and behavior bring new customers? They should continue to incorporate ESG and climate change issues into governance, entity management and business strategy, and identify relevant climate-focused metrics in emerging guidance to ensure they can develop related data for reporting. It's also worth tracking reporting guidance on climate change issues and trends in activist campaigns.

Leverage cloud-based technology to improve communication and reporting

That's a lot of research, scenario planning, monitoring of data and risk assessments to get done, so entities need to ensure their entity data is relevant and up-to-date, and that the way they communicate across the business and with stakeholders is fit for purpose.

Given that climate change and entity management is relatively new and emerging as a regulatory requirement, entities' legal operations and compliance teams must remain flexible and adaptable to the regulatory environment, which means relying on outdated models of entity management, such as spreadsheets and manual tracking, could cause issues for climate change and entity management matters.

Entity management software, such as Diligent Entities, helps to build a single source of truth for all entity data. By creating a central repository for information, documents, data, communications and reporting workflows, you can ensure the right people get the right information at the right time for compliance, governance and risk management. To make this important work more streamlined and secure, Diligent Entities integrates seamlessly with board portal Diligent Boards, data benchmarking platform Diligent Assurance and a secure file-sharing platform to create the Governance Cloud, an all-in-one GRC ecosystem that helps to create best-in-class governance.

Get in touch and request a demo to see how Diligent Entities and the wider suite of GRC software can help your legal operations to streamline compliance and be ready to report on sustainability issues using real-time entity data.

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Lauren McMenemy

Experienced journalist Lauren McMenemy has been writing about compliance and governance for several years, and has covered finance, professional services, healthcare, technology, energy and entertainment.