The Dawning Age of The Earth-Competent Board
2015, with the approvals of the revolutionary Paris Agreement at COP21 and of the Sustainable Development Goals (SDGs), was a turning point. Turning the world on its axis towards a decarbonized economy and a new type of development respecting natural and human capital. Being a sustainable business and turning a profit are no longer viewed as mutually exclusive, with sustainable behavior more and more often seen as a condition precedent to long term success.
However, the only way to secure this development in the long term is to involve decision makers at the companies’ highest level of governance, whose responsibility it is to shape and validate the long-term strategy of a company and to protect its interests; the Board of Directors. This leading role is a direct consequence of its duties.
Boards fiduciary duties are generally around three main lines of responsibility; to take care of the interests of the company and all its stakeholders (not solely shareholders), to act with due diligence and due care and to ensure the external reporting is done in a fair and consistent way. 2015 landmark events are signals that those fiduciary duties need to adapt to new realities and new expectations from the society at large.
These new expectations are underlined by the recent report in December 2016 of the FSB Task Force on Climate-Related Financial Disclosures (TCFD), with new disclosure recommendations for companies towards stakeholders. Recommendations promote board and senior management engagement on climate-related issues to benefit the company and assist in planning for future climate-related financial risks. After COP21, one thing is now abundantly clear; boards of administration can no longer say that they didn’t know about climate change, business’ role in causing it and it’s associated risks.
Being a member of boards myself and advising companies on these risks for some years, it is clear to me that we need to support this transition on a large scale, to increase awareness and scale-up this change in governance. With that in mind, I have invited and received the support of leading organizations from the academic, legal and business world to collaborate on a new structured initiative, Earth on Board. This project will support Directors in understanding their responsibility as agents of change, helping boards to fully assume their evolving role and will work in improving the regulatory environment of these questions.
As the “guardian” of the level of risk a company should not surpass, it is crucial that boards fully understand the main environmental issues, as well as the impact on their own strategy and company’s resilience. If questions are not asked and companies are not prepared, an entire organization can be endangered due to new physical and transition risks.
Of course, it isn’t just a matter of risk; it is also about seizing opportunities. Will you meet your customers’ demand for products that are less aggressive towards our planet’s resources? It is the board of directors’ duty to ensure these long-term issues are addressed, and that your companies’ planetary impact is properly accounted for.
For a board to now genuinely play its role in respecting natural and social capital, there are at least three things that need to happen immediately:
- First there must be appropriate governance with the subject of sustainable development consistently considered at Board committee level. It can’t be isolated in a ‘green committee’ and ideally will be in the same committee as strategy and development, thus involved early in the long-term strategy process. It must be linked to the sustainability function of the company and there must be structured involvement with other committees assessing specifics risks and ensuring staff compensation and incentives are holistic and not only linked to short term profit.
- Secondly the board composition should include members with necessary environmental and social experiences and skills, and more generally the board should be informed and aware of this fundamental dimension of the business model and regularly updated.
- Finally, members must have all necessary information well ahead of meetings in order to be genuinely informed, and time should be clearly allocated in the agenda for these subjects including meeting and visiting other stakeholders. Those issues cannot be side lined by short-term problems and crisis management.
These are crucial components to guarantee considerations around environment and social impacts are given equitable status and work is thoroughly undertaken on these issues. This change is already happening in some boardrooms where directors are taking responsibility for the long-term future of their company.
Not changing your current model when others are progressing is often more dangerous than embracing change. A lesson we learned from the Nokia CEO famously last year, when he said “we didn’t do anything wrong, but somehow, we lost.”
As I say regularly, considering nature as free and unlimited or people as a mere resources is economically stupid, socially unacceptable and increasingly legally dangerous. Business as usual is dead, now comes the era of Earth-Competent Boards. Boards that align governance, expertise and focus, as well as reassessing the purpose of the organisation, securing a long-term profitable future for the company and all its stakeholders and taking responsibility for business’ impact on the planet for generations to come.
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