by Ron Soonieus, Louis Besland and Alice Breeden
We have good news for 2022: according to our research, climate change is finally well placed on the corporate governance agenda. In fact, we interviewed over 300 company directors in 43 countries and three quarters of the respondents said they consider climate change to be very important for the strategic success of their companies.
At the same time, however, the investigations revealed one strong disconnection between what the boards say and what they do. For example, in our survey the 72% reported that they are confident that their company will meet its climate targets, but the 43% has not yet set any carbon reduction targets.
As for Italy, a research conducted by Dynamo Academy is SDA Bocconi Sustainability Lab found that the 64% of large and medium-sized companies operating in Italy is attentive to sustainable development goals. The research, carried out on 116 companies representing the 17% of national GDP, is also significant in light of the new European regulations, such as the Corporate Sustainability Reporting Directive (CSRD) with which the European Commission aims to introduce common standards for the assessment of impact of companies according to ESG (Environmental, Social and Governance) criteria.
The other good news our research suggests is that this too gap between good intentions and climate action appears surprisingly easy to fill. Here, then, are ten things that every board should do in 2022 to prepare their company for this critical problem for the whole human species.
Conduct a quick review of the board's effectiveness on climate change.
Check out what the board knows and what it should know. Our research suggests the advice 85% needs increase their knowledge of climate issues, so you may need outside help just to fine-tune the questions. However, directors know better than anyone what is usually on their agenda: financial performance, executive performance, new investments, and so on. The fundamental question is: Do advisers know enough about the implications of climate change for key issues so that an effective review can be carried out?
Determine how to fill in the knowledge gaps discovered by your review.
There cannot be an expert on every topic in a board. But do we need one specifically for climate change? Our interviewees were divided in half on this question, but to the 50% who answered "no", we ask: do you need external climate consultants to the council? Can we learn more from the management team (while of course continuing to monitor their performance objectively)? Is there a temporary solution, such as a short-term appointment? Or a training program? Or joining a specialized organization?
Bringing new voices to meetings.
Depending on the results of our first two suggestions, you may decide that you need to renew your board members sooner or later. At a minimum, you will probably want to revamp your board update strategy to include the climate change in the matrix of skills. Even if you decide not to recruit new members or seek out new skills, you will most likely need to involve climate experts as observers or consultants.
Make climate change an explicit part of your agenda.
Sometimes, it can be a talking point in its own right. Other times, the words "climate" and "change" will appear next to "asset allocation" or "risk assessment" (or some other strategic discussion). Alternatively, if relating climate change to everything seems too disruptive, zoom in on one single business unit, product line or asset to make it real.
Bring climate change into your governance structures.
Depending on your industry or your board's level of knowledge, there will be different approaches. If you have a sustainability committee, there is a natural place to discuss the impact of climate change on your business. Nearly a quarter of our respondents were members of such a committee. But other structures may be equally relevant: a specialized non-executive director (NED) or a "decarbonization task force", for example.
Assign the management team to set specific targets for climate change.
If, like our respondents' 57%, you run a company that already has carbon reduction goals, consider looking beyond goals 1 and 2 to goal 3, i.e. emissions beyond your control. direct, like the operations in outsourcing or use of the products. Only 16% of companies whose executives were interviewed have already taken this step, suggesting that companies' 84% "could do better."
Link executive hiring to climate knowledge and executive compensation to climate goals.
Establish a clear chain of executive responsibility for setting and achieving climate change goals, starting with the CEO - and connect hiring and compensation decisions. Only the 35% of our respondents say climate change is a formal requirement of their company selecting a new CEO and only the 26% that climate change is integrated into executive performance metrics. These tricks are too trivial to ignore.
Make your climate report as robust as your financial report.
Sure, the lack of universally applicable reporting standards has been an excuse for inaction in the past, but one result of COP26 is that the world will have standardized emissions reporting by 2024. Your company's auditors should be able to provide guidance. And if they can't, maybe it's time to think about switching suppliers.
Use the purpose of your company as a lens.
Reports and regulations will only take you so far. In addition to zooming in on the details (see point 4) to make climate change real, zoom in on the big picture again. If you can use your purpose (purpose) to frame your climate-related decisions, create a platform to engage the entire company. Plus, any specific steps you take will have a better chance of success.
Drive climate change from the presidency.
Board chairpersons have a particularly important role to play in guiding the nine quick actions above, but even more so in ensuring that the meeting is set tone right. Those who sit "at the head of the table" must make climate change a priority, ensure an open and honest discussion about it and - above all - encourage reflection on how the board and the company can do even better in 2022 and beyond.
THE BOARDS OF COMPANIES are they just talking about climate change? We believe this interpretation of the gap between words and actions is superficial. We prefer to think that many administrators are so overwhelmed by the scale and complexity of their environmental, social and governance (ESG) responsibilities that they don't know where to start. With these ten quick tips, we hope to give them a hand and guidance.
Ron Soonieus is an INSEAD executive and Managing Partner of Camunico.
Louis Besland is a partner of Heidrick & Struggles and leads the chemicals sector for Europe, the UK and Africa.
AliceBreeden is a partner of Heidrick & Struggles and a global leader in its practice on board effectiveness.
