Boards are struggling with sustainability – what should they do about it?

November 10, 2021
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ESG and Boards

As the 26th UN Climate Change Conference of the Parties (COP26)- held in Glasgow from October 31 to November 12 - considers ways to fight climate change, people and organizations across the globe reflect on their own role in what can seem like a daunting issue.

For companies and their boards, the question of sustainability should now be high on the agenda. But there is much to consider. Faced with a cascade of complex and inter-related issues (the Covid-19 pandemic, economic challenges, the #MeToo movement, #BlackLivesMatter) it is clear that sustainability means a lot more than worrying about a company’s carbon footprint.

In the face of this complexity, many boards may be under-prepared to make sustainability a meaningful part of their work. A report by the New York University’s Stern Center for Sustainable Business quotes 2018 figures from non-profit organization CERES which used big data algorithms to review the board credentials of the top 475 of the Fortune 2000 companies. The review found that most board members did not have demonstrable sustainability credentials (only 17% qualified) and just 13% of boards had robust oversight of ESG issues.

An October 2021 report from EcoAct indicates that things may have little improved since 2018. The Climate Reporting Performance of the FTSE 100, Euro STOXX 50 and DOW 30 report found that 94% of the companies scored demonstrated board level oversight of climate-related issues, with 81% of listed companies lack a robust plan for net zero according to climate reporting research. The report also found that just 19% of companies within the research group had long-term emissions reduction targets to meet net-zero goals. The analysis indicated that there is a need for clear frameworks and policies to guide companies and highlights the importance of COP26 to agree on a global pathway to net zero.

While clarity from governments would help, there are things that boards can do to improve the way in which they view and implement sustainability in the companies which they oversee.

What is sustainability?

The Harvard Business School (HBS) notes that sustainability in business generally addresses two main categories: the effect business has on the environment, and the effect business has on society with the goal being to make a positive impact on at least one of those areas.

Sustainability can also drive business success, HBS says. “Several investors today use environmental, social, and governance (ESG) metrics to analyze an organization’s ethical impact and sustainability practices. Investors look at factors such as a company’s carbon footprint, water usage, community development efforts, and board diversity.”

What does that mean for boards?

The Network for Business Responsibility (NBR) reports says sustainability asks managers to adopt a “systems view”, an outlook that recognizes that companies are part of a larger social and environmental system, that systems change, and that today’s actions must consider the future impact.

The Stern Center report urges boards to diversify: “… include people with expertise in (ESG) issues…. without board members who have a strategic understanding of the issues, the board will not know the questions to ask or even understand that the potential risks might exist. A diverse board is also more likely to ask the right questions.”

To achieve this diversity, boards need to be actively looking for sustainability candidates – and that may not be easy.

Keith Labbett, Managing Partner, AltoPartners Toronto / Osprey Executive Search, says it is first necessary to define what qualifies a candidate to bring sustainability to the boardroom table. Scott Eversman, MD of Diversified Search Group / AltoPartners USA, says a sustainability candidate is “someone who, in their executive career acknowledges the risks associated with climate and its impact, both direct and indirect, and has advocated for change to take advantage of the opportunity that transition to net zero affords”.

Labbett adds that board members may believe in sustainability – but that an extra step is needed. “Members need technical depth for a board to truly take the lead and help focus and challenge their executive team.” He says boards need members with a complete understanding of how to achieve sustainability and the implications of these changes to the organization.

“A sustainability candidate needs to have experience in the production or development of an end-product. This understanding can be crucial to establishing what needs to happen and how to execute the changes — establishing a plan with the senior executive as to what needs to be changed. Most boards have their allotment of accountants and lawyers. It is not always as common to have qualified engineers and scientists.”

Why are boards short on sustainability members?

It’s possible that boards aren’t looking in the right places. Labbett notes that asset and development managers often have experience in executing innovation. Their experience might be that organizations don’t always pick the most environmentally sound solutions – but that can “drive a passion for doing what is right in the future”.

He notes that there is often a requirement for previous non-executive director experience, limiting the pool of candidates from the start. “Many people in these asset and development roles are flying under the radar and have not been considered. Good governance can be learned! A deep practical technical knowledge of what is achievable and an ability to achieve results cannot.”

Eversman adds boards and nominations committees must seek out professionals with the right blend of understanding of climate impacts and real application experience in a business environment, just as they did when cybersecurity emerged as a primary risk to business,. “Scientists, consultants and advisors can provide deep insight, but it is the business application experience that is most helpful.”

What do boards need to do?

Eversman says that until now businesses haven’t been clear eyed about the risks they face, nor have the opportunities to lead (and the associated positive messaging that that affords) been well understood.

“Everything begins with the Chair facilitating other directors to a deeper understanding of the risks of climate change and the transition risks to zero carbon economy to the business. A comprehensive risk analysis includes understanding the threats to supply chains, physical plant, the availability of materials, and the health and safety of workers from both acute and chronic climate events and the associated disruption. Sitting or former executives who have addressed the same issues in similar contexts potentially bring insight to actions that must be taken, not only to mitigate risk, but to also seek opportunities to excel and create value,” he says.

What needs to be done to attract and retain sustainability candidates?

Authenticity (i.e., level of sincerity in transforming the business) is key, says Eversman. He recommends adopting real measures and real incentives for executives (financial) and boards to meet sustainability targets.

Commitment is crucial, says Labbett. “The first step is that a company has to show that it genuinely wants to be sustainable versus ‘committing to just enough action’… The next step is to define what they need to change or develop to become sustainable. This question varies depending on the organization’s product and industry.”

Eversman adds that that boards need to be creative and innovative. “They need to decide what can be achieved with consultants, and what can be achieved by placing a true, bona fide, sustainability credentialed executive on their board. The former is a form of risk mitigation, the latter amounts to making a statement as to how serious the board is in messaging their intent.”

Boards that wish to make that statement should begin by considering candidates that would not usually be on their radar. That might include people with specialist skills but with limited board experience, or they might be from industries outside of the company’s own area of expertise.

Labbett concludes: “To attract the most desirable Board member, the Board Chair must demonstrate the organisation’s sustainability goals and that ambitions are real, not just ‘greenwash’. In the end, the right mix of talents combined with a genuine desire for action will be what matters most.

TOP TIPS FOR BOARD CHAIRS

  • The Board Chair must ensure a strong business case is in place to advance the organisation’s environmental ambitions, Labbett says.

  • Sustainability must be a common bond across all board members. Look at whether some members are more concerned about profit above all else or whether they have a genuine passion for sustainability, Labbett asks.

  • Sustainability expertise is not the same as a sustainability mindset. “You don’t need an expert, you need great directors,” one board leader told the Harvard Law School Forum on Corporate Governance. A sustainable mindset means a belief that business is not a commercial activity divorced from wider society, and the ability to align all aspects of running an organization with related core values and beliefs.

TOP TIPS FOR POTENTIAL BOARD MEMBERS

  1. Identify the skill sets you have that might be relevant to sustainability – there is a broad range.

  2. In addition to technical skills, candidates need senior corporate experience with relevant technical expertise will stand out among their peers. If they don’t have a strong Board level background, a director course can be a valid (though not guaranteed ) way to fill this gap.

Examples of companies who do sustainability well

  • The EcoAct report says 2021’s top performers across all indices are Microsoft, Apple, Landsec, Vodafone and Schneider Electric.

  • Patagonia, the outdoor-clothing retailer, not only makes eco-friendly apparel but also engages aggressively in environmental advocacy, according to the Harvard Business Review.

  • Brookfield Asset Management (Canada): Labbett says that BAM’s Board has a good mix of experience, obvious very strong financial experience, and has a good amount of practical general management with representation from high profile top international organizations. They also have political knowledge, which is beneficial when driving change in development and infrastructure. They have come out with a firm Net Zero Commitment – and have excellent financial results.

  • Associated British Ports (includes the Port of Ary near Glasgow): Held by a Canadian Institutional private equity arm OMERS, it has a very in-depth and balanced board including a diverse mix of directors of global origin and qualifications including finance, accounting, law, general management, many with strong technical skills.