Climate Governance Structures and Bodies

Author: Niko Korpar, Senior Consultant / Sustainability and Climate Change at Deloitte and Member of the Working Group of Chapter Zero Slovenia

The World Economic Forum has developed a set of eight principles to guide the development of effective climate governance. To make these principles useful and tangible, each of them is accompanied by a set of guiding questions. These questions help organisations to identify and address potential gaps in their existing climate governance strategies.

As Chapter Zero Slovenia is committed to ensuring that its board members pursue climate governance, we have produced a series of monthly articles explaining the eight climate governance principles, which are designed to increase their climate awareness, embed climate considerations into board structures and processes and improve navigation of the risks and opportunities that climate change poses to business.

Climate concern goes beyond the responsibility of one person. For long-term and effective climate governance, companies need to put in place multi-level governance structures that are tailored to their own needs and capacities.

Let's start with a real case of one Slovenian company.

In this company, the CEO has a long list of responsibilities, including ensuring that sustainability is embedded in the business. He chairs the Sustainability Executive Committee, which is responsible for developing the sustainability strategy. He regularly attends meetings and actively engages in the debate. He asks questions and listens carefully to what his colleagues have to say. He sees ESG as one of the key factors for the long-term viability of the company and regularly updates his knowledge in this area. It is no surprise that this company is successfully integrating sustainability principles into its business, step by step, and at the same time is steadily preparing for sustainability reporting in line with the CSRD.

The example above clearly shows the important role of personal values and leadership skills, as well as the importance of the climate governance structures and organisation. The leadership of companies can change, new people come in with new ideas and priorities. Board members have to navigate their way through a variety of different and often conflicting objectives. When sustainable transformation is led on an ad hoc, or informal basis, it risks being quickly abandoned when there is a change of key staff, or a short-term crisis. This means that over-reliance on the personal enthusiasm of the leadership to adapt to climate change can also be a risk factor. The company described above is therefore also successful because it has established and formalised its own climate governance model.

In other words, the long-term planning and implementation of the climate strategy (and other sustainability projects) is too important to depend on one individual. That is why it is crucial to get the (climate) governance structure right, from top management to more executive structures. Governance models need to clearly define not only responsibilities, but also processes and channels for communicating sustainability to board members, ways to integrate sustainability into decision-making, communicating the results of the double materiality analysis and sustainability due diligence, stakeholder engagement, and much more.

There is no straightforward answer to what structure is considered best. Companies need to find a model that suits their needs and capabilities and embed it in the internal acts that define the company's management structure. Climate governance models differ in practice, which is not only due to the differences between one- and two-tier corporate governance systems. They are also linked to the size and complexity of the company, the number of board members, the board structure, the sector, etc. However, there are some common points that link the different models:

• Distribution of responsibilities within the board: Typically, one board member is responsible for climate change, overseeing the governance structure, achievement of objectives, risk management, etc. The member's responsibilities should include regular briefings on climate impacts, risks and opportunities, integrating sustainability into the company's business strategy, and how to engage with other board members. It is essential that the responsible board member is equipped with appropriate skills. Of course, the aspect of leadership skills, based on the values of respect for nature and society, is also crucial for the successful performance of their assigned responsibilities.
• Setting up executive structures for sustainability: In the broadest sense, this refers to the group of staff responsible for the preparation and implementation of the climate strategy. This usually includes a sustainability coordinator, and other subject matter experts, often in executive positions, to ensure that all key departments within the company are covered. The sustainability team is responsible for preparing and implementing the sustainability strategy, monitoring climate risks, reporting to management, and producing reports. In the case of large companies, there may be several levels of executive structures or they may be separated into different areas.
• Appointment of a Sustainability Coordinator: Whether known as the "Chief Sustainability Officer" or something else, the link between the board and the executive (and operational) bodies is present in almost all major companies today. It is important to note that the new requirements for sustainability reporting, due diligence, climate strategies, and other areas of sustainability are beyond the coordination capacity of a single person. In such cases, the Sustainability Coordinator needs a dedicated team and an additional breakdown of responsibilities.
• Empowering control and oversight functions: Expanding the role and tasks of internal control and auditors, and supervisory boards to ensure effective governance in the style of the Three Lines of Defence model.

All larger companies that will be subject to mandatory sustainability reporting will be required to disclose in the first chapters of their sustainability reports the above aspects of (climate) governance: responsibilities, knowledge, information and reporting on impacts, risks and opportunities, alignment of strategy and business model, internal control and risk management systems, and sustainability due diligence.

The process of developing and integrating a sustainability management model takes time and a strategic approach. Through dialogue with other companies in the sector, collaboration with professional organisations and personal contacts between board members, we can accelerate the transfer of good practices in climate governance, which will be a key differentiator between well- and excellently managed companies in the future.