Best practices in climate transition governance Tina Mavraki, climate and ESG governance advisor

1. Articulate a clear strategic business case for climate. This involves arriving at a single-point commercial and balanced risk-reward strategy which integrates the organisation’s plans about how it will make money from climate for its clients and its own operations. The strategy and action plans are reflected congruently and consequentially in the organisation’s business KPIs, and its operating and internal control environment.
2. Come to terms with operating under a high degree of uncertainty. This implies marking the direction of travel firmly. At the same time, it requires shifting strategy iteratively and in degrees through the process of pivoting and utilizing horizon 1, 2, and 3 planning. This approach is in sharp contrast to the all-or-nothing and razor-sharp precision mindsets.
3. Display deliberate and proactive thought, people, and execution leadership. This entails cross-participation in decision making by business and risk. It also calls for short and medium-term investments in product and process-innovation. Finally,  it involves mining the organisation’s abundant primary and secondary performance and operational data with the purpose of making targeted interventions for recalibration and improvement.

Proposed governance interventions across the three lines of defence

First line of defence – the board

The board and the most senior executive body of the organisation invest in a sub-executive ESG and climate committee comprising of the most senior executive ranks. This is where business, risk, finance and operations jointly develop the organisation’s commitments, risk appetite statement, and short and medium-term group and divisional plans and targets. They create and cascade KPIs, roll out comprehensive policies, frameworks, and processes (including climate-weighted capital allocation, an internal carbon price, etc.), and devise reliable trade-off management mechanisms. They also cascade a comprehensive, congruent, and cognitively diverse executive governance structure, which has a sense of ownership and accountability at every level. Executive climate governance reaches out to the very front lines of the organisation (see product development, client and supply chain transition governance, etc.).

A central sustainability and climate function is a centre of excellence which supports executive governance in a decentralized fashion and with a commercial mindset. It integrates itself in each division via climate and business subject matter experts who act as agents of change at a fitting scale. These experts help to operationalize horizon 2 and 3 strategic interventions, and help to create a competitive climate franchise. At the same time, the central sustainability and climate function acts as a learning and feedback centre, processes external intelligence, and gears up the organisation for the future.

Second line of defence – risk and compliance

Climate becomes fully integrated into the organisation’s risk and compliance frameworks, thus creating a unified internal control environment, and a “single version of truth” for risk. A climate-adjusted risk culture permeates the organisation. Compliance, far from box-ticking, works proactively with business to save money from organisational conflicts and regulatory breaches. Being an effective business tool, it runs a shadow-profit account to measure its contribution to the bottom-line.

Data governance, with a designated executive data team and a board sub-committee, is a critical ally of the second line of defence. It enables informing and substantiating business and operational decisions, and supports effectiveness and efficiency interventions. It critically helps to capture the “tone in the middle”, seeing that climate execution is substantially driven by middle management.

Finally, the Chief Risk Officer has a permanent seat at the organisation’s board, in order to help balance risk and opportunity in the organisation.

Third line of defence – the internal audit function

The internal audit function defines an extensive auditable domain for climate, akin to that of the financial domain. It upgrades its capabilities and technological tools at scale. Critically, it runs open enquiries which form the beginning of engagement with executive management and command a high priority in executive committee agendas.

Back to the board – climate competencies, engagement, performance

The key to climate transition success is the tone and sponsorship at the top. Resolve and a genuine commitment to steering and monitoring are key enablers for climate transition success. NB. The board directors’ tenors are typically the longest senior tenors in the organisation. Consequently, board directors are the most equipped to address the “tragedy of the horizon” which organisations suffer from in  climate transition.

To this effect, best practice indicates that a board creates and discloses resident climate board competencies and has  deeper systematic engagement with the executive teams. It also suggests that  directors liaise directly with policy makers and regulators alongside executive management, and have closer and direct engagement with shareholders on director and officer appointments.. Moreover, organisations can learn from other successful practices observed in other industries, e.g., instituting a junior board.

Board performance is an equally strong success indicator. Setting annual board aspirations, and designating specific areas of focus for each director can raise the bar on board performance for climate transition. Best practice also suggests  tracking meeting effectiveness metrics like the number of executive failures and contentious issues discussed, and time allocation to steering vs monitoring..

A final note on climate governance – the role of culture:

Governance is not an all-encompassing solution to climate transition. Rather, governance can be better seen as “the cladding” of organisational intentionality, i.e., its purpose, values, and, effectively, its culture. “Culture does eat strategy for breakfast”. Consequently, an organisation can make conscious decisions to invest and track its cultural performance, to make it climate-fit.  Permeability of the narrative, momentum and resilience, are examples of metrics an organisation can track.

Conclusion – choose what suits best:

Governance for climate transition is evidently multi-faceted.  Each organisation can decide consciously which recommendations will assist it best in its long and uneven journey in climate transition.

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Tina Mavraki is a portfolio director of Mytilineos SA and FBX LLC, as well as a strategic advisor on climate and ESG governance to Whiteoak Global Advisors and the Children’s Investment Fund Foundation. Tina is a C-suite executive with 25 years of experience in global capital markets, private finance, and global supply chains, with a track record of building successful multi-billion dollar businesses globally. Tina is Chartered Director, member of the EU EcoDA Director Circles, and Fellow of Chapter Zero UK. She holds an MA and BA from Oxford University and a MSc in finance from London Business School.