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The board’s oversight on the sustainability agenda can help organisations redefine their relationship with stakeholders, customers and employees.
In brief
- Boards need to be responsible for ensuring that their organisations fully integrate sustainability into its strategy and business model.
- There’s a need for boards to review their composition to enhance their own competencies.
- Boards should consider whether to delegate ESG responsibilities to a dedicated sustainability committee or the audit committee.
Aconfluence of powerful forces is making sustainability a priority agenda item for boards. Investors and asset managers are pushing organisations to improve their sustainability performance and reporting standards, extreme weather events around the world are highlighting the operational risks posed by climate change, while political and regulatory momentum is building behind the transition to a net zero economy.
Organisations are being pushed to become more sustainable, faster. And many of them have already made commitments to become net zero within a specific timeframe.
Several policy initiatives are in the works that are preparing countries and organisations for a concerted response to global warming and widening the scope of the sustainability lens. The plan – as defined by the European Green Deal - has set 2050 as the deadline for the European Union (EU) to achieve climate neutrality. The Paris Agreement provides the framework and the obligation to get there. As part of the goal, organisations will be required to take meaningful sustainability and carbon reduction actions. The European Commission is seeking to align the EU capital market and financial services sector with sustainability objectives through several initiatives such as the EU Taxonomy Climate Delegated Act, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD).
The CSRD will require organisations to disclose a wide range of information about their business models, strategy, and supply chains. Its aim is to align sustainability reporting with financial reporting to give stakeholders access to comparable and reliable sustainability information.
On the other hand, the EU sustainable corporate governance directive is proposing to clarify directors’ duties so that they are required to act in the best interests of the organisation by pursuing long-term value creation and managing sustainability risks. These duties include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy¹. This will have the effect of embedding sustainability into the governance framework.
Meanwhile in November 2021, the IFRS Foundation launched the International Sustainability Standards Board (ISSB), which is responsible for the creation of a set of global sustainability disclosure and reporting standards. This was followed by the launch of the UK Transition Plan Taskforce (TPT) in April 2022 to develop the gold standard for private sector climate transition plans in the UK.
The US, on the other hand, has announced an initiative that requires all major government suppliers and contractors to set science-based emissions reduction targets aligned to the Paris Agreement and also requires contractors to disclose their greenhouse gas emissions and climate risks. Following a UN report at COP27, the United Nations and standard setter the International Organization for Standardization released guidelines to help organisations construct plans for net-zero emissions.
These new initiatives are likely to significantly expand the roles and responsibilities of boards so that they can support their organisations to better manage their environmental, social and governance (ESG) risk exposure.
The results of the EY EMEIA Board Barometer 2022 indicate that boards recognise the need to focus on sustainability. More than 90% of the respondents thought the sustainability of their organisation’s business model was a relevant concern, while 86% emphasised the importance of long-term value creation and measurement. And 81% prioritised operational and strategic ESG integration.
How can boards lead from the front?
Boards will be required to support and provide oversight for their organisations around decarbonisation, reporting on key ESG metrics, transformation to manage associated ESG risk factors, actions toward a circular economy, etc. They need to see how these issues will impact the long-term value of their organisations.
Boards, however, will need to go further than simply overseeing sustainability-related risks. They will be responsible for ensuring that their organisations fully integrate sustainability into its strategy and business model. This means using sustainability to create value through accelerated innovation, improved access to capital, better employee and customer engagement, and an enhanced reputation in the market. Fully embedding sustainability into strategy may even require the business to totally transform its traditional operating model.
It is about understanding and appreciating everything outside the four walls of the organisation, and how the board must act to influence both itself and its entire value chain to decarbonise and become more sustainable. The board also needs to simultaneously chart a path for the organisation to mitigate the impacts of climate change on its business, and to adapt where necessary.
COP27 in Egypt brought it home that businesses and countries must go “all in” on keeping global temperatures below 1.5 degrees, lest we experience far greater disruption, destruction and losses due to climate change in the medium term.
The board’s role and its composition need to be tested now for whether it is fit for purpose for these impending challenges.
Irish boards will need to review the suitability and feasibility of any goals set and challenge management as to how it plans to deliver on these targets. They will also need to ensure that ESG-related metrics are turned into measurable KPIs and integrated into management priorities and executive compensation frameworks.
Boards also have a role to play in ensuring robust practices and procedures are in place to facilitate both internal and external reporting, and that the reporting metrics employed are relevant to the strategy, stakeholders and the sector in which the organisation operates.
Boards may need to review their composition to enhance their own competencies. It may be necessary to bring in external insights to the boardroom to boost the understanding of ESG-related trends that may affect the organisation’s business, such as regulatory development, and further evolving stakeholder expectations.
Boards should also consider whether to delegate ESG responsibilities to a dedicated sustainability committee or the audit committee.
The responses to these will help the board garner momentum on sustainability discourses within the organisation. A good starting point for boards can be by building a symbiotic working relationship with Chief Sustainability Officers (CSOs). This relationship can be the foundation on which organisations can realise the benefits of ESG while mitigating the risks.
Summary
Irish boards have a pivotal role to play in sustainability-led value creation. The board’s direction can strengthen the link between sustainability and financial performance of organisations, thereby giving them a competitive edge. A board-led framework of ESG goals, KPIs and measurement metric can help the Irish organisations map out a risk-benefit analysis.
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