[Editor's Note: The Director's Chair is a new column to provide readers perspectives from inside the boardroom. We welcome submissions from public company board directors and officers.]
As a frontline corporate director, I’ve seen how the governance workload has increased in recent years. The time, effort and resources demanded of board oversight often outstrip traditional board structures and membership, and we are forcing our governance systems to play catch up. But one coming governance change has upended this cause-and-effect evolution. Boards will soon need a formal risk management committee, or at least a formal risk management structure, in place…or be ready to explain why they don’t.
The demands for a formal board risk structure will force boards to look outside the sometimes-narrow fields of audit and pay, and examine other risk dangers that could be waiting on the doorstep. This covers many operational, strategic and legal concerns. But my work on the boards of energy and technology companies has alerted me to a very real, pending regulatory risk facing many major corporations. Worse, hardly any boards seem aware of it.
In March 2009 the U.S. Environmental Protection Agency proposed treating emissions of greenhouse gases (GHGs), such as carbon dioxide, as “pollutants.” This proposal, which seems certain of approval by the end of the year, would launch a whole new set of regulatory strictures. Beginning in 2011, thousands of U.S. companies would be required to compile and disclose reports on the greenhouse gases they produce. At least 13,000 facilities would come under the disclosure rules, accounting for 85 to 90% of all industrial GHG emissions in the U.S.
This sounds like a fairly technical item, impacting just the regulatory compliance staff at some utilities and smokestack industries, right? Well, every major corporation will feel the effect of this new rule, and every board needs to know the risks it may face. The EPA disclosure rules cover industries as diverse as transportation, electronics manufacturing, agriculture, chemicals, food processing and others.
Facilities would have to meet the disclosure regimen if they emit over 25,000 metric tons of CO2-equivalent GHGs per year. That sounds like a huge amount, but the EPA proposal notes that this threshold is “roughly equivalent to the annual greenhouse gas emissions from just over 4,500 passenger vehicles.” Further, if you don’t scientifically calculate the greenhouse emissions from your facilities, how will you know for sure if each is above or below the threshold?
These disclosure rules definitely come under the purview of a board’s risk committee, not only for their reach, but for their potential liability exposure. Corporations that are out of compliance will face fines of up to $32,000 per day for non-compliance.
Consider this scenario: At your next corporate annual meeting, you as a director face an angry shareholder demanding to know why your board ignored the new regulatory risk that left your company paying out $32,000 daily in fines.
The new EPA rules are part of a new risk oversight trend that all responsible boards must consider. For the past decade or two, it’s been easy for some boards to accept vague, feel-good, “greenwashing” assurances from management on environmental issues. No longer. Tough, enforceable legal disclosures are now the rule. Corporate leaders and boards of directors, who may have viewed most environmental concerns as public relations issues, must now disclose hard, objective, scientifically validated numbers from their legal and compliance staff. “Green” no longer means lovable images of wildlife and trees. Now, Green has grown teeth.
In July, the Social Investment Forum was joined by over 50 major movers in activist investing (including Ceres and Calvert Asset Management) in petitioning the SEC to require annual reports from all U.S. public companies on environmental, social and governance (ESG) issues. Carbon footprint and sustainability would be among the measures required, with the legal accuracy and timeliness mandated for all SEC disclosures. Also last summer, a new international Climate Disclosure Standards Board (CDSB) was formed to develop solid standards on corporate climate-related disclosures.
The biggest risks your company may face in the years ahead, both in reputation and legal liability, will spring from disclosure that is inaccurate, partial or mishandled. Corporate “greenwashing” messages are no longer harmless. Soon, they will be as dangerous as CEO assurances that all is well the day before a major income restatement is announced.
In sum, your board now must not only weigh the risks presented by environmental issues. You must also weigh how well those issues are measured, disclosed, and reported to legal bodies and in the media.
But it’s not an easy task. Through my involvement with Clear Standards (recently purchased by SAP and renamed SAP Carbon Impact), a software company that developed a solution developed to help corporations meet this “count every molecule” greenhouse gas mandate, I’ve seen first-hand the challenges companies face measuring and reporting GHG metrics. For example, currently, there are five different international carbon registry groups setting standards for calculating emissions — and all five differ (the formula SAP Carbon Impact uses is approved by all five). With stakeholders and regulators clamoring for increased visibility into the GHG emissions of businesses, a simple seat-of-the-pants, spreadsheet-driven tracking system is simply no longer tenable. Organizations need a well-defined, well-implemented method of measuring and reporting these metrics.
What to measure and how can lead to confusion for even a seemingly simple task. The Sept. 18, 2009, Wall Street Journal notes how the U.K.’s Carbon Trust, a group formed to help calculate the greenhouse gas impact of retail products, is struggling just to measure the carbon “footprint” of a gallon of milk.
Sustainability mandates and reporting requirements present a real and present danger no board can ignore. But it is also proving to be an inconsistent, elusive risk, one tricky for a board to manage. How should directors cope?
- First, review your board and committee charters to see how you specifically address risk management and its oversight. Stating that overall risk monitoring is in the hands of the full board, with assignment to committees based on their expertise, is an important first step in proving your board takes its risk management role seriously. It shows thought and effort to craft an effective structure.
- Second, to deal with coming sustainability and carbon disclosure issues, seek ongoing reports to the board from the key staff involved in compliance. Environmental, legal and compliance staff will need to monitor regulatory developments and shape the company’s response structure. Most importantly, for governance purposes, companies must assure that the board is kept well informed. Brand impact and reputational risks are the biggest to consider.
- Finally, note that the coming disclosure regimen doesn’t really seek to force companies to cut their greenhouse gas emissions or carbon footprint. Instead it focuses on full, accurate and timely data capture and disclosure — with penalties based around that goal. The future might well bring voices who want to use the data collected to drive down emissions (any coming cap-and-trade system will need solid numbers). But for now it’s just the data that counts. That means that management (and your board) will need to obsess over the technology used to assure accurate carbon counting.
Midsize corporations, for example, may be at the borderline of the 25,000 metric tons per year reporting threshold. The pending EPA rules place an affirmative duty on companies to know whether they are above or below this threshold. If a facility’s total emissions are just above the limit, and you’ve failed to accurately report it, those $32,000 a day fines may be coming. But suppose you are unsure of a facility’s carbon footprint, start reporting it under the EPA plan, and later find the unit is below the reporting threshold? The proposed rules feature a “once in, always in,” requirement — once you begin the costly reporting process, you are required to continue doing so as long as the facility is in operation, even if it is below the cutoff levels. Inaccurate calculation of carbon footprints will cost the company at either end of the scale.
My experience with SAP Carbon Impact has made me aware of how vital accurate, scientifically valid measurement of a company’s greenhouse gases has become. However, I’ve also seen too many boards of directors who are still unaware of the looming risk and management challenge this burgeoning focus on sustainability presents to good governance.
Your board may have less than a year to prepare for this major risk-management challenge. Before your next meeting, ask your legal and compliance staff to prepare a briefing on how the new EPA rules would hit your company. Then, at the meeting, review your exposure and determine whether your board’s structure is up to the challenge of oversight. By considering this topic now, your board gains a head start on shaping the processes and systems needed to address the sustainability issues facing businesses today and in the near future.
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Betsy Atkins currently serves on the boards of SunPower, Polycom, Chico’s FAS, Reynolds American and NASDAQ LLC. She is the former CEO and chairman of Clear Standards, and former CEO of Key Supercomputer and NCI.
Betsy, great article. How high on the priority list of cutting greenhouse gases is corporate travel to see the asset managers that own the stocks of these public Fortune 500 companies? Using very rough figures, the avg. large company ($10B in mkt. cap) spends 45 days flying their management team around the country to see the institutions who own their stock. This is not only very expensive, but the gas emissions as a result are immense. Live video conferencing is here, completely compliant w/the SEC for Reg. FD and should be used more effectively by mgmt. teams