Supportive public policy is crucial to move corporate decarbonization in the right direction. Instead of waiting for helpful policies to appear, companies should actively engage with policymakers to shape them. Board members must take the lead, overseeing how good governance and processes around policy engagement form part of the core business strategy.
Companies at the forefront of the net zero transition know that public policy alignment with business goals is a crucial enabler to derisking their transition. When governments, regulators, and standard setters put the right climate policies and regulations in place, companies can attract required transition investments and advance toward their goals faster.
However, a new survey of CEOs showed that only 54% expect to be able to meet their 2030 goals, with evidence that many companies are finding it hard to move at the necessary scale and speed, resulting in far longer to achieve the energy transition needed.
A key constraint holding this progress back is a significant gap between current climate targets and the policy and incentive structures needed to support the transition. Multiple organizations, including the IEA and Climate Action Tracker, have shown that the current policies in place around the world are putting us on a pathway closer to 2.7°C than 1.5°C.
The need for a systems-level rethinking of policy and incentives was emphasized in the WBCSD Business Breakthrough Barometer launched in October, with 67% of executives saying that implementing key policies would significantly impact low carbon investment levels. As a new WBCSD public-private collaboration initiative emphasizes, it is clear that leading companies can – and must – play a role in far smarter engagement with public policy evolution to deliver their transition targets (given the lack of momentum in multi-lateral processes and national governments) to close the policy gap.
While it is clear that companies must lean in more to support ambitious policy-making for the climate transition, lobbying and broader corporate influence are now under more scrutiny. This is where what is becoming known as Responsible Policy Engagement (RPE) sits.
This focus on RPE is fast becoming an area of risk and opportunity for business. There is increasing public focus from climate leaders such as Christiana Figueres and Antonio Gutierez, NGOs, and the media on how leading companies and trade associations are contributing to or blocking progress on climate policy. Major investor groups such as Climate Action 100+, representing $ 68 trillion in investment, are calling on companies to assess and report on the alignment between their sustainability commitments and policy advocacy, and regular rankings are now being compiled. A focus on public policy engagement is also a key element of emerging transition planning guidance.
This means that there is a need for boards to consider RPE.
The transition planning - policy engagement axis
According to We Mean Business Coalition, a transition plan has four key components: an emissions reduction strategy, a governance and business strategy, public policy, and just transition. Similarly, the UK Transition Planning Taskforce’s (TPT’s) Disclosure Framework, which helps organizations set out a credible and robust climate transition plan as part of reporting on forward business strategy, in element 3.3 identifies the need to identify engagement with government, the public sector, communities, and civil society.
The Corporate Sustainability Reporting Directive (CSRD) also calls not only for disclosure of a transition plan (and thus consideration of policy engagement) in ESRS E1-1 but also disclosure on ‘Political influence and lobbying activities’ in G1-5.
In practice, companies who have set ambitious targets on climate, human rights, and nature will be undertaking double materiality assessments for their transition journeys and CSRD reporting – forecasting five to 10 years into the future – and identifying their most material dependencies, risks, and opportunities on that transition journey. Any double materiality risk and opportunity assessment will reveal that much of the policy to enable companies to achieve their transition plans is not yet in place. Thus, focusing on policy advocacy and its success may be a key material dependency. This is why the WBCSD transition planning program and its Transition Planning Primer with ERM have identified policy engagement as one of five key unlocks.
A rising consensus that RPE is a board responsibility
Investor perspectives are a top priority for boards, and 'climate lobbying' has become the most frequent topic of AGM shareholder resolutions. Many of these resolutions call for board oversight of lobbying, and RPE litigation related to net zero greenwashing and NGO action is also becoming more prevalent and better understood than ever before.
Therefore, RPE must be approached with strategic intent, which is the board's domain. All these issues – the requirements for strategic transition planning, transition planning becoming part of reporting, the risks of misalignment, and increasing pressure from investors – speak to governance and the role of boards. Below are a few examples of emerging consensus about responsible policy engagement and the role boards should play in it.
- The central role of boards on these issues is highlighted ina piece in Harvard Law School on Corporate Governance, which calls on boards to oversee and question management about company lobbying. It also calls on boards to make clear their expectations of the company's approach to lobbying in terms of its strategy, risks, values alignment, investor expectations, and peer best practices.
- The Principles for Effective Climate Governance, developed by the World Economic Forum, make clear boards should ensure that their company discloses all material climate-related risks, opportunities, and strategic decisions to all stakeholders – especially investors and regulators (Principle 7) and stay informed on current best practice in climate governance by maintaining dialogue with policy-makers (Principle 8). Transparency Internationalcalls for the same levels of oversight and strategic direction on lobbying by the board.
- The Global Standard on Responsible Climate Lobbying, launched and endorsed by many of the world’s leading investors, calls on companies to “assign responsibility at board level for oversight of its climate change lobbying approach and activities.”
- The We Mean Business Coalitionof leading corporate networks also stipulates in upcoming guidance that companies consider forming a board committee to oversee climate advocacy.
- Echoing this, the G20/OECD Principles of Corporate Governance states that “boards should ensure that companies’ lobbying activities are coherent with their sustainability-related goals and targets.” The Principles further specify that “boards should effectively oversee the lobbying activities management conducts and finances on behalf of the company, to ensure that management gives due regard to the long-term strategy for sustainability adopted by the board. For instance, lobbying against any carbon pricing policy may be expected to increase a company’s short-term profits but not be in line with the company’s goal to make an orderly transition to a low carbon economy”.
- The current OECD drafting of Guidance on Responsible Corporate Lobbying and Political Engagement calls for board oversight and strategy setting on lobbying and notes, in its stock take of best practice, that such governance is fast becoming standard practice in leading companies.
So, it is clear that boards should be thinking deeply about policy gaps that might be hindering their transition journey, considering how this impacts core business strategy, and assessing the risks of misalignment of policy engagement. They must be clear-sighted about the entity’s position on these issues and whether their executives are empowered and accountable for supporting more ambitious climate policy.
Rising to this challenge, as we approach 2025, we expect to see more board-led initiatives for private sector leadership and coalitions to close the policy gap. These are issues of ongoing focus for a cross-sector WBCSD collaboration, and ERM supports many companies to lean into them. So, we would welcome further discussion with boards on how to integrate policy engagement into their work.
Jules Peck, Global Partner at ERM,
Dr Jennie Dodson, Senior Director for Policy & Advocacy at WBCSD)
