In a proposed rule change this past March, the SEC called for public companies to make mandatory climate-related disclosures to investors. That information includes climate risks with a reasonable chance of materially affecting their business, as well as greenhouse gas emissions. The SEC expects to finalize its new rule this fall.

“That rule elevated climate risk to a material financial risk, which is part of the duty of a fiduciary, of a corporate board member,” says Mindy Lubber, CEO and president of Ceres, a Boston-based nonprofit that works with capital markets players to solve sustainability challenges.

Lubber got wind of the impact in April, when she spoke at the Women Corporate Directors S&P 500 Directors’ Summit in New York. “Every single board member there—and they were all corporate board members—said climate has risen to their board level due to the SEC rule.”

Climate change may be high on their agenda, but boards admit they could do more to confront the huge potential risks. As they seek to understand those dangers and make climate part of company strategy, directors are feeling the heat from investors.

Some companies occupy the leading edge on climate change and other ESG topics, but many others have a ways to go, says Rich Lesser, global chair of Boston Consulting Group (BCG). “Boards are on a learning curve with this issue probably not so different than the way they were on a learning curve on digital five or eight years ago.”

That education starts with general climate science awareness and extends to regulatory reporting, says Steve Varley, London-based global vice chair, sustainability, with Ernst & Young (EY). “There’s some basics that I see happening in boardrooms around education of the non-executives, so they can get to the level on climate change of challenging both the strategy and execution of the management team.”

New York–based Lesser points to a recent global survey of 122 board members by BCG and French business school INSEAD. “In that, 91% of directors think that their boards should devote more time to the strategic aspects of ESG, and 53% said that they’re not effectively focused on embedding sustainability into their long-term plans sufficiently.”

For respondents, carbon emissions are a top ESG concern. However, among companies with a net-zero commitment, only 55% of directors polled said their organization has prepared and published a plan to hit that target.

Meanwhile, shareholders are ratcheting up the pressure. For example, last year activist investors concerned about climate change added three new directors to ExxonMobil’s 12-member board, including one with climate expertise. “It was a shot heard around the world,” Lubber says. “Every corporate board now is saying, Am I next?”

Lubber also cites Climate Action 100+, a group of 700 investors controlling a combined $68 trillion in assets that is pushing the planet’s biggest greenhouse gas emitters to take action. “With them and with others, there are about 190 shareholder resolutions this past year, and about 175 the prior year, dealing with climate risk.”

Board members are hearing from their companies’ largest owners, Lubber adds. “They’re saying to the companies, We want you to address climate risk as a matter of good management.”

There’s no precise way to predict the magnitude of climate-related risk, notes Carol Liao, an associate professor at the University of British Columbia’s Peter A. Allard School of Law, where she directs the Centre for Business Law. “Climate change differs because of the systemic and interconnected risks that can act as a risk multiplier.” But climate risk has a material financial impact on 93% of U.S. public companies, according to a 2016 report by the Sustainability Accounting Standards Board.

Companies and their boards also need to understand the legal risks, Liao explains. “There are currently more than 1,000 climate-related lawsuits in court in 28 countries,” she says. “So directors of public companies should be aware that disclosure is a legal obligation and there is potential civil liability for failure to disclose climate-related financial risk.”

Lesser thinks boards are fairly well prepared to handle the regulatory and compliance requirements around climate change. “The more challenging risk is that the markets are moving faster, and technology is moving faster, than companies realize,” he says. “They’re missing opportunities to think about how to embed climate into the core of what they offer and into how to build competitive advantage—or, in some cases, eliminate a competitive disadvantage.”

Then there’s reputational risk, which can ensnare not only companies inattentive to climate but also those that engage in greenwashing, Varley observes. “Boards need to be careful not to make external announcements that can’t be backed up by data and by evidence.”

For boards worried about being climate laggards, education is good place to start. Liao is a principal co-investigator with the Canada Climate Law Initiative (CCLI), whose mandate is to help Canadian businesses consider, manage and disclose climate risks. The CCLI is halfway toward its goal of making 250 free, confidential board presentations by June 2023.

Climate change creates business opportunities, too, Liao emphasizes. She sees a chance “for companies to access new markets nationally and internationally with the development of technological innovations such as battery storage, artificial intelligence, smart metering, and new, lower-emissions products and services.”

What other steps can boards take to show they’re serious about climate risk? Businesses can choose from many integrated assessment models of climate change, Liao says. “Companies are now using scenario analysis as a tool to test their strategic resilience to different climate outcomes.”

Liao also recommends asking five questions:

1. Does the company have a climate plan?
2. Does the board have effective oversight of its climate strategy, including identifying climate-related risks that are emerging or increasing in significance for the company?
3. Has the board identified strategic opportunities for the business over the short, medium and long term?
4. Who in the company is responsible for climate-related risk and accountable for implementing the company strategy?
5. Is the board approving the disclosure of the company’s efforts to manage climate change to investors and stakeholders, including integrating disclosure in its financial reporting?

During Ceres’ frequent climate change training with boards, one question that Lubber hears is whether directors should add an environmentalist to their ranks. “That’s not the answer,” she maintains. “Yes, have somebody with credentials who understands climate risk. But what we don’t want to see is one special green representative that only deals with climate. The board needs to look at the risk from climate as they would any other risk facing the company.”

Lubber also often gets asked where climate change belongs in board committees. “I don’t know that there needs to be a special climate or ESG committee,” she says. “Whichever committee is looking at risk, that’s what should do so, so it’s not seen as a special, cute project but it is an essential part.”

Smaller businesses could add a director who’s a sustainability expert, Lesser says. “That’s unlikely to work for a bigger and complicated company where [sustainability] touches many aspects of the business, but that can help a smaller organization that doesn’t want to lose sight of this.”

Varley sees an opportunity for leading boards to engage with climate activists, who tend to be in their 20s and 30s. “Putting them in the mix with a board who might be quite a bit older, I’ve seen that work really well to forge a new level of understanding,” he says. “Maybe not agreement, but at least mutual respect between both parties.”

As for board expectations of management, Lubber says directors should get a progress report on short-, medium- and long-term goals related to climate. And if climate change is important to the company, boards should link it to CEO compensation. “Let that water fall down throughout the enterprise,” Lubber says. “If you say it’s a priority, make it a priority.”