Center for
Issue #47
June 2023
Climate Finance: What board members need to know

Most companies and boards are realizing that climate change will have a substantial impact on their businesses in the coming years. Many companies are building sustainability plans around measures such as switching to renewable energy sources, discontinuing single-use plastic or reducing water usage. However, truly sustainable companies must act not only in their operations but also in their finances to fund themselves in greener ways. 
This brings companies and their leaders together with investors, financial institutions and regulators/central banks. They all have an important role to play in tackling the challenges ahead. Importantly, for companies and financial institutions, this is also an opportunity to develop novel products that are in high demand among their customers, investors and other stakeholders. 
The green transition will require trillions of dollars in private capital. Demand for financial instruments related to climate change, sustainability and ESG is growing and will continue to do so in the coming years.

My new book, Climate Finance(1), explores how financial decision-making and climate-related risks are inextricably linked, and how developing the corporate-finance relationship will be key if we hope to achieve the transition to a lower-carbon world. It explores many important issues board members should pay attention to. 

Climate and finance: It's a two-way street
Climate impacts finance. The new risks and opportunities for companies brought on by climate change have obvious financial implications. Many long-term investors, including pension funds and sovereign funds, are worried that failure to act could endanger long-term returns on their assets. For companies, there’s a high cost of acting now. Yet the cost of not acting will be even higher. 
And finance also impacts climate. Investors (and other stakeholders) are pressuring companies to act. They want companies to provide additional climate-related disclosures, incorporate climate risks into their forecasts and have clear low-carbon transition strategies. 
Different finance tools, new ESG metrics and novel financial instruments, such as green bonds, all contribute toward companies taking concrete actions to reduce their carbon footprint, and thus help in the transition. 

Financial innovation, risks and opportunities for boards
In the book, I first explore the need for capital, covering corporate investment and financing needs, the roles of executives and boards, climate risk assessment at the corporate level, and supply chain aspects. Then I analyze the roles of different suppliers of capital such as banks and bondholders, as well as equity investors, including pension funds, sovereign funds and other large institutional investors.
Globally, the green transition implies different degrees of risk for different sectors. Top executives and boards will need to carefully factor possible impacts across different parts of the firm’s operations.
The surging demand for green bonds, sustainability-linked loans, sustainable supply chain finance, and many other novel financial instruments is a positive step. These instruments align objectives, helping bring this topic into the company’s operations and beyond the board room. 
Additionally, boards must incorporate into their work topics such as the role of proxy advisors, shareholder activism on sustainability issues, how to structure the board to address new challenges, and executive compensation implications. 
However, several challenges lay ahead. To prevent greenwashing concerns, sustainable targets should be clearly announced, linked to strategy, and imply a clear commitment to change. They cannot be too easy, too shallowly defined or lacking in transparency. They cannot merely pay lip service to sustainability. 
Companies, financial institutions and investors will play a role in financing the transition and redirecting capital flows to sustainable projects. There is no single solution, but many important ones. Among them, an engaged board of directors is key to guiding businesses to more sustainable outcomes.
(1)Climate Finance features evidence from markets, academic research and practical case studies of leading companies and investors. This new book provides an in-depth understanding of climate finance, taking aim at topics such as the risks and opportunities, the demand and supply of capital and the impact of global policies. 
Corporate Governance Trends and News.

According to the report on CEO confidence for Europe issued by The Conference Board covering the first half of 2023, CEOs in Europe perceive the potential for improvement of economic conditions over the next six months. However,  they expect that geopolitical risks, inflation and energy costs will continue to impact their businesses in the short term.
Read more here
Critical leadership skills required by CEOs are evolving and go beyond technical expertise or delivering financial results. Spencer Stuart offers some interesting reflections on the “soft skills” that leaders should develop and cultivate to be successful CEO candidates.
Read more here
The divisive political views on ESG in the US continue. A recent article published by Wachtell, Lipton, Rosen & Katz offers guidance for boards of directors on how to balance conflicting stakeholders that are growing more divided on this topic. 
Read more here
Internal dynamics of boards of directors and the firm's management of relevant strategic issues are key factors for the quality of corporate governance. PwC and The Conference Board’s study, Board Effectiveness: A Survey of the C-suite, offers useful information on certain aspects that influence board performance and effectiveness.
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Institutional investors are requesting more climate-related information to mitigate environmental risks. Lazard has issued a study that reflects on the financial effects of increased disclosure of climate change-derived risks and mitigation strategies.
Read more here
IESE's Recent Research.

Bonetti, P., Ormazabal, G. (2023). Boosting Foreign Investment: The Role of cerfitication of corporate governance. Journal of Accounting Research.
Read here
Fernandes, N. (2023). Climate Finance.
Know more here
Cohen, S., Kadach, I., Ormazabal, G., Reichelstein, S. (2023). Executive Compensation Tied to ESG Performance: International Evidence. Journal of Accounting Research.
Read here
Almandoz, J. (2023). Inside-out and outside-in perspectives on corporate purpose. Strategy Science.
Read here
Canals, J. (2023). Boards of Directors in Disruptive Times. Cambridge: Cambridge University Press.
Know more here
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