The Director’s Dilemma – November 2022 Edition
Contribution by Scott Eversman, Managing Director at Diversified Search Group / AltoPartners USA, where he leads the firm’s Energy practice.
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The Director’s Dilemma - November 2022
This month we look at the options facing a board that will miss publicly stated targets.
Xiomar chairs a medium-sized listed company. Two years ago, his board decided to develop an ESG strategy with some hard targets to drive performance. A committee was organized and recommended a 3-year target for reducing carbon emissions. This was approved by the board and released to the stock market as ESG commitments.
After the first year of the strategy, the company realized the required process adjustments, new procedures and policies would greatly exceed the planned cost budget. To make things worse, the post-pandemic environment has reduced revenue and profits.
Xiomar’s board sought a solution and considered buying carbon credits. This would be a cheaper and guaranteed way to reach the emissions reduction target, although the practice has fallen into some disrepute with recent claims that the credits are not a real reduction in emissions.
Xiomar has to take a fast decision. It is almost time to close the books and report. Either he can suggest that they report that they are behind schedule and considering abandoning the targets, or he can buy carbon credits and report that the target has been reached. Either alternative will be difficult for some of his directors and both will likely reduce shareholder confidence in the company’s leadership team.
What should he do?
If Misery Loves Company, Xiomar will not be alone. Many companies, Chairs and executive leadership teams are struggling to fulfil ESG commitments made at a different time and under different circumstances. A recent EY Report suggests that while businesses are improving on climate disclosure, they are lagging on decarbonization.
Companies are beginning to embrace more detailed reporting and measurement in their analyses of business risks and articulating various ‘road maps’ on their journey to net zero-carbon and long-term sustainability, but execution and implementation are proving difficult across many sectors. The long-term effects of the pandemic (supply chain disruption); Russia’s invasion of Ukraine; and a series of extreme weather events have caused monumental disruption. Deeper causes may be at play that derive from the challenge to truly align purpose with authentic systems thinking.
In the recently published report by Cambridge Institute for Sustai nable Leadership, three topics emerge when engaging with leaders facing similar dilemmas to Xiomar’s:
- Embedding a corporate purpose aligned with sustainability.
- Developing the necessary capabilities to deliver transformation.
- Creating a dynamic and responsive relationship to impact data, performance thresholds and risk.
To address this dilemma:
- Xiomar should buy the carbon credits and report that they have reached their targets.
- Xiomar must also disclose that the ‘road map’ is being revaluated, acknowledge the challenges, but not with a view to abandon the company’s long-term goals, rather to further embed their sustainability actions in their corporate purpose and adapt a more innovative, collaborative approach.
The listing rules in most jurisdictions are very clear: if something is important enough to mention in prospect, it is important enough that it must be mentioned in retrospect.
If Xiomar’s board has announced the targets to the stock exchange they must announce, with equal prominence, that they will not meet them as originally envisaged.
That is the easy decision. Next Xiomar must lead his board in a discussion to decide if they will embark on a strategy of purchasing carbon credits. This should involve an up to date assessment of the likely costs and sources of credits and the veracity of claimed carbon absorption or reduction made by each potential seller of the credits. This is a difficult task, and they should engage specialist expert assistance.
Whichever way they decide to proceed, given the previous announcements, they should probably also announce their decision and its implementation.
The only way to gain and maintain trust is to be totally honest about what has happened, what impact that will have on their financial results and carbon emissions, and what they intend to do in the future.