Interview: Powering Business Away From Climate Risk

December 7, 2021

Recently, Farient Partner Dayna Harris participated on a National Association of Corporate Directors’ (NACD) Climate Risk panel with Britt Ide. Britt is on the boards of NorthWestern Energy (NASDAQ: NWE), ATLIS Motor Vehicles, and Clean Tech Acquisition Corp (NASDAQ: CLAQ.) She also serves as an Advisor to Plan C Advisors, a climate consulting firm that informs business leaders on climate impacts and develops strategies to address climate related risks and opportunities. Additionally, she is on the advisory board of 3 Degrees, a Bay area company focused on renewable energy, transportation decarbonization, and climate solutions helping businesses and utilities work toward meaningful climate action to reach environmental goals.

At this juncture, climate risk is more than probable. It is here. From the fires in California to hurricanes in the South and extraordinary flooding and tornados in the Northeast, we have a “perfect storm” of activities. And, to this end, it’s a great time to talk to Britt about the impact of climate on business and sustainability and the board’s responsibility in all of this.

Britt, thanks for spending a few minutes with Farient to talk about climate risk, board accountability, and stakeholders.

Please note that the opinions expressed by Britt Ide during this interview reflect her own opinions and not any of the boards or businesses with which she is associated.

Dayna Harris: At many companies, climate risk has become a full board issue. As one of your boards is a public energy company, how are you addressing present climate issues and how are you planning for the future? A future that may include resource scarcity as well as tougher environmental controls, activist shareholders, and stakeholders? If it’s not a full board issue, who on the board owns this?

Britt Ide:  All energy companies are focused on climate risk. We look at this as a full board issue because it impacts so many different areas of the company. Our Audit Committee also has a significant role as far as overseeing appropriate reporting. As expected, there is a big push for assurance on reporting numbers and because we are a public company, we are heavily regulated, and at this juncture, we have become quite good at reporting. We have an ESG Committee at the company that works on the reporting aspect which is then shared and used through the Audit Committee. We also talk about climate risk on a regular basis within the Nominating and Governance Committee. I would say that the Nominating and Governance Committee owns this more than any other Committee. We are on the front lines of communications with our investor relations team (every quarter) regarding what investors are asking for and how we are providing them with information. The Compensation Committee also has a significant role in our process because we are talking about how to align management incentives and benefits with ESG and especially with climate and greenhouse gas reductions. And, since we are an electric and gas utility, we are looking both at carbon emissions from power generation and methane emissions from natural gas.

Dayna: To finish up this question, in the utilities and renewables world, do you have any concerns about scarcity (e.g., water, other?)

Britt: The public utility where I am a board member is very fossil-free. In fact, we are heavily reliant on hydropower. Our average of fossil-free generation is considerably higher than other utilities. Water, however, is the resource we watch closely. It is no secret that parts of the United States are in the worst drought the country has experienced in the past 100 years, which has a big impact on our energy production. Not surprisingly, with all the supply chain scarcity issues impacting every industry, we are seeing delays in our lead time to get parts and provide maintenance at our facilities, which in turn can interfere with energy delivery.

Dayna: Activist investors are increasingly focused on climate issues and board composition (among other areas). How can boards facilitate bringing on directors who fit the bill as “expert” to advise on climate change? What skills should they have? (formal education, prior work experience, etc.)?

Britt: I have been working in this space for a long time and I continue to see many terrific executives/directors out there with deep climate experience who are available to fill company needs. From a scientific perspective, most companies don’t need a climate scientist. What they do need is someone who understands climate issues, policies, general science, and general environmental issues. Also, it depends on the industry you are in. For example, retail may need more of a water and supply chain focus, while financial services may have a need for someone in climate finance, especially now with many new things falling under the climate finance umbrella. I do think it is important to have at least one, maybe two, directors with climate knowledge on the board to help build momentum and consensus. Ideally, boards should consider people with general expertise around climate. The factors you want to look for are the ability to understand climate broadly, understand the concepts and policies that are in place and understand what is coming and get a sense of what is happening in different states. Europe is much further ahead than the U.S. on climate issues so I suggest looking to Europe to gain an understanding of what they are doing as a preview of what is coming down the pike.

Board members who can think outside the box may be important game changers and can help the full board see climate as an opportunity and not a regulatory frustration. Boards will benefit from someone who is a forward-thinking optimist and sees climate within the lens of all things possible.

Dayna:  What are your thoughts on stakeholder incentives in compensation plans? How do you see stakeholder incentives evolving within the context of financial measures vs. non-financial measures? Short-term vs. long-term?

Britt: We are currently looking at aligning climate and the broader ESG incentives the company is considering. As far as how to include carbon reduction and moving to net zero emissions, right now we are trying to watch and understand best practices. We are doing “shadow targets” and not yet incorporating in the executive pay plan. Our intent is to eventually have some greenhouse gas concept in our long-term incentive plan for our management team balancing reliability and affordability to our customers.

I think journey is the key word and it’s evolving. You want to make sure you are thinking about it as a board member and considering what you already have in your compensation programs. The utility sector has been very good about including safety and customer satisfaction in their wide-ranging short-term incentive plan for decades. That’s a great place to start.

There are so many aspects of climate and ESG, it’s important to think about what is important for your company. For example, water may be an important issue for your company, or it may be carbon or power generation—or other factors. The first thing for the board: what really matters for our long-term strategy and then how are you measuring it and what are the plans for reduction and what makes sense for compensation. I think you will see boards and management try to develop and implement best practices over time.

On an equally important note, it is Important for any [utility] company to engage stakeholders. There are still areas of the country with divergent opinions on how to address climate and get to carbon neutral. These issues are complex, and it is hard to please everyone. To that end, it is important to develop a strategy that can benefit the most people. There are areas across the country where coal plants are the lifeblood of communities and the tax revenues from these plants are important to the state. The question is, how can we, over time, transition away from coal and keep communities intact with jobs and provide opportunities from other generation sources?

Dayna: How are the executives incented to transition? Is there a level of accountability at the management level?

Britt: This goes back to strategy, and it is integral to strategy. The board’s role is to help approve and poke at strategy to make sure it is clearly defined and hold the management accountable to engage and make progress on it.

Dayna: What else should boards be doing right now within the context of managing carbon intensity, shareholder communications, and other relevant areas?

Britt:  Understand what’s important to stakeholders and shareholders. Learn as much as you can about the impact of environmental issues and policies on your business and what your competitors are doing in this area. Consider climate/environmental oriented training for board members to get up to speed on what’s coming. There are some great training organizations out there, including the Climate Competent Board and the National Association of Corporate Directors’ (NACD) broader ESG training. Plan C Advisors is one of the groups with which I consult. They have board members like me who are hired by the board to advise them on climate issues. For companies that aren’t in a position to add a new board member, Plan C and others can advise the board specifically around industry as well as other areas that are bubbling up. The good news is that there really are a lot of options. Currently, there is increasing demand for ESG competency. Additionally, I work with Athena Alliance and have coached a number of women who have great backgrounds in ESG from all different perspectives, whether it’s energy, climate, and/or technology. There is a great pipeline out there and it’s a matter of being thoughtful about how to leverage.

At the end of the day, it comes back to building a foundation and being prepared, “thinking outside the box,” thinking differently. Sharing plans and success with shareholders and continuously thinking about stakeholders. The recent NACD summit was helpful in encouraging board members to listen to the younger generation, especially around employees and customers. It is important to understand the depth of concern Gen X and Gen Y have around climate change. They will be vocal. They will look for new jobs and they will vote with their wallets. This is our opportunity as board members to create the change we want to see.

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