Building upon the revelations from the recent report by EY on climate-related disclosures, there is a glaring need for agriculture companies to step up their game. As we delved into the nuances of the report in our last article, it’s evident that while many sectors face challenges with climate-related disclosures, the agriculture, food, and forest sectors are significantly lagging. One of the most concerning areas identified was the need for comprehensive governance structures catering to climate-related issues. But, with challenge comes opportunity.
The next piece in this series will explore how agribusiness can strengthen their governance to manage these climate-related concerns more effectively. We’ll dive deep into best practices, industry benchmarks, and actionable strategies that can improve disclosure and compliance and drive a more sustainable and resilient agricultural future.
Importance of Governance for Climate-related Issues
Good governance naturally means managing climate-related issues well. After all, climate change affects financial risks and opportunities, just like any other topic a board tackles. Therefore, boards should address it with the same attention and detail. However, climate change presents a unique challenge. Many boards are new to its complexities, which span science, economics, and policy over long timeframes. Thus, general governance advice might need to be more detailed to effectively guide boards on climate issues.
Current trends push companies to focus on climate change, yet many boards need help to fully grasp its risks and opportunities. Directors shared a few reasons for this struggle:
- Too Many Priorities: Climate change is one of many urgent topics, like technological disruptions, economic shifts, and cybersecurity. Boards can only give equal attention to some concerns due to limited time.
- Climate Change is Complex: Its risks are varied, unpredictable, and unseen in certain markets. Predicting its impacts is challenging, especially considering unforeseen factors like disruptive tech or new climate regulations.
- Short-Term Focus: Companies constantly aim for immediate results to satisfy quarterly investor expectations. Yet, climate change brings long-term risks. This disconnect is what Mark Carney, former Bank of England Governor, called the “Tragedy of the Horizon”.
Despite these hurdles, board members must recognize a key responsibility: understand and wisely handle all potential risks, regardless of when they might strike. Ignoring or not revealing these risks could land them or their firms in legal hot water. (source)
Case Studies of Successful Governance Structures
Nestle’s governance of climate-related risks: Overview
Board-level governance
The Board at Nestlé oversees the company’s climate-related strategies and checks on the progress of our climate goals. They have a Sustainability Committee examining Nestlé’s environmental, social, and governance (ESG) efforts. This committee examines how the company’s long-term plans align with creating mutual benefits for all. The Audit Committee, on the other hand, reviews non-financial reports and ensures accuracy in selected metrics. This division showcases how seriously Nestlé takes sustainability in its governance. These committees meet thrice yearly, ensuring the Board remains focused on these critical areas.
Management-level governance
Nestlé’s Executive Board oversees the company’s sustainability strategy, especially progress toward climate change goals.
Key ESG metrics influence the Executive Board’s bonus, addressing deforestation, recyclable packaging, and factory water usage in 2022.
The ESG and Sustainability Council aid the Executive Board in guiding strategy and decision-making on climate and ESG topics. They report progress monthly.
At the operational level, the ESG Strategy and Deployment Unit puts sustainability strategies into action, working with a team of experts. They advise the ESG and Sustainability Council and are linked with strategic and operations heads.
Olam’s governance at a glance
Composition of the Olam’s Board
Olam’s Board consists of members with varied international business backgrounds, skills, and origins, enabling effective leadership and guidance to the Senior Management Team. Over half of the Directors, including the Chair, are independent, ensuring objective decision-making for Olam’s best interests.
Olam’s Board is essential for setting and overseeing the company’s strategic objectives, ensuring adequate resources, and regularly reviewing financial and operational performance. They maintain stringent internal controls, ensure compliance with relevant laws, especially Sanctions Law, and uphold corporate governance. The Board also establishes company values, oversees top management’s performance and compensation, manages succession planning, addresses sustainability issues, and considers key stakeholders’ views.
Olam’s Board Committees
The Board ensures good corporate governance with the assistance of five main Board Committees: Audit Committee, Board Risk Committee, Capital and Investment Committee, Corporate Responsibility and Sustainability Committee, and Nomination and Remuneration Committee.
Each committee operates based on clear written guidelines periodically reviewed to align with the company’s evolving needs and relevant regulations. The Board occasionally establishes ad hoc committees for specific tasks, like the Board Steering Committee (BSC) formed in 2020 to oversee the Group’s Re-organisation Plan, involving significant changes such as listings and share sales. The BSC, primarily comprising non-executive Directors, meets monthly and updates the Board on its activities. The Board can also form sub-committees for particular projects.
The recent EY report on climate-related disclosures has spotlighted a significant gap in the agriculture, food, and forest sectors. With climate change having direct implications on financial risks and opportunities, it’s imperative for companies in these sectors to integrate comprehensive governance structures addressing climate-related issues. This becomes challenging due to its complexities, spanning various fields and its long-term nature, contrasting the prevalent short-term focus in businesses.
However, leading companies like Nestlé and Olam offer exemplars of successful governance. Nestlé’s dual committee system at the board and management levels, focusing on sustainability and climate-related metrics, sets a precedent. Similarly, Olam’s Board, with most independent directors, emphasizes strategic planning, internal controls, and sustainability.
Their structured committee approach, with clear guidelines and periodic reviews, further exemplifies effective governance. Both companies underscore the vital importance of understanding and proactively addressing climate risks in corporate governance.