Board Structure for Climate Governance

Given the impact of climate change across many industries and geographies, it has become a critical component of the board’s oversight of strategy and risk. Boards may need to reconsider how their governance structures enable them to fulfill these critical and evolving oversight responsibilities. The issue of board structure is one of the World Economic Forum’s guiding principles for effective climate governance, and this article outlines guidelines to implement this principle in the US context.

“As the stewards for long-term performance and resilience, the board should determine the most effective way to integrate climate considerations into its structure and committees.”

Principle 3, How to Set Up Effective Climate Governance on Corporate Boards
World Economic Forum

Current Practices in US Boards

The degree to which companies address climate change varies not only across industries, but also based on company size, geography, and other factors. For example, companies in industries such as energy, resource extraction, and heavy manufacturing have long been sensitive to climate concerns. This sensitivity may result from the realization that climate issues represent important strategic opportunities and risks, though it may also reflect investor expectations and the other factors referred to above—while companies in other industries may be less focused on those concerns.

As stewards for their companies’ performance and resilience, boards may be responsible for effectively overseeing the integration of climate considerations into their structure and associated responsibilities. In turn, corporate action on climate change may be influenced by governance structures, including how the board carries out its duties on this issue. However, climate risk is a relatively new item on board and committee agendas, and surveys show there is currently no one-size-fits-all approach.

Across public companies, 3 percent of the Russell 3000 companies have a board sustainability committee. The S&P 500 companies that are currently disclosing their climate risk governance approach have allocated responsibilities to various combinations of audit, compensation, and nominating and governance (see figure below).

Oversight responsibility for climate risk among companies disclosing governance structure

Source: 2021 – 2022 Deloitte S&P 500 proxy research
Note: Due to rounding, percentages may not total to 100%

Evolutions in Board Climate Oversight

The evolving regulatory and climate disclosure landscape in the US and around the world may drive forward the multicommittee approach to climate oversight. Overall, the right board oversight structure for climate is based on the organization’s stated climate goals (e.g., net-zero commitments) and developed with consideration of stakeholder concerns and climate regulations.

For example, California has set out legislation around climate-related disclosure requirements which will apply to private and public companies. At the federal level, on March 2024, the US Securities and Exchange Commission (“SEC”) released its final ruling regarding disclosure of various climate matters. The rule requires disclosure of board oversight of climate-related risks, including identifying the potential board committee responsible for such oversight and disclosure of the processes by which the board or committee is informed about such risks. The final rule does not prescribe whether the board or one or more committees should be responsible for such oversight. In other words, the SEC leaves this to the discretion of each company and its board.

Taken as a whole, the regulatory landscape is likely to drive boards to expand existing committee structures to distribute board climate oversight responsibilities across committees in new ways. For example:

• Decisions such as the approval of the organization’s overall climate transition goals are likely to be assigned to the full board.

• The US and global regulations set out increased requirements for disclosure and compliance, and, in turn, internal controls over climate-related data. Oversight of these processes, as with oversight of other financially related disclosures, will likely be assigned to board audit committees.

• Board compensation committees may be expected to be tasked to oversee decisions and processes around linking climate goals to executive compensation plans.

• Finally, nominating and governance committees will likely have a role in guiding the decisions around board structure for climate oversight and considering related factors such as any necessary changes to committee charters, board-skills reporting matrix, or consideration of board composition to effectively provide climate-related oversight.

Going forward, more boards may decide to establish a sustainability or climate committee. However, decisions around establishing a new board committee need to factor in management skill sets and whether the board can support and resource an additional committee. For example, does the organization have a well-resourced Chief Sustainability Officer? Is there a director on the board with the skills and experience to chair the committee?

Perhaps more notable in the US is the impact of company size on climate concerns. It is not surprising that large-cap companies and their board structures, particularly those in the industries referred to above, may be the subject of environmental scrutiny by investors and other stakeholders, including federal, state, and local governments. Consequently, large-cap companies may seek out the views of investors and others on climate change and, where applicable, implement those views in their policies or other actions. Similarly, investors and other stakeholders are more likely to initiate discussions with these companies—including their directors—on matters of concern, such as board structure. For these reasons, boards of these companies have long been sensitive to climate concerns and the “ripple effects” they may have across the enterprise and may thus already consider climate change as a part of “normal” strategy and risk oversight.

Questions for Boards to Consider

Directors should consider asking the following questions, among many others, to determine whether the board structure is able to address climate transition and risk oversight:

• Based on the organization’s climate goals and evolving regulatory requirements, has the board considered the most applicable allocations of climate oversight and considered what responsibility should reside at the board level and at the committee level?
• What is the board’s process to ensure climate oversight responsibilities are properly and fully allocated at the full board and within individual committees (audit, risk, nom/gov) to provide proper coverage at the board level without creating gaps or silos?
• How does the board effectively coordinate committee agendas to provide integrated climate oversight?
• Has the board developed a regular cadence to discuss climate and receive committee reports?
• Are board climate responsibilities clearly established in relevant charters or has the nominating and governance committee established a process to review committee charters as necessary? Does the board or committees need to reconsider the length, frequency, or format of meetings to manage its responsibilities effectively?

This article is part of an 8-part series that provides guidance in applying climate governance principles in the US boardroom. Click here to access the full series and learn more about NACD resources for effective climate governance.