Evolving risks to business: Key actions for corporate governance capabilities

Post Date
27 February 2024
Author
Cory Skuldt
Read Time
7 minutes
  • ESG advisory

In 2024, corporate boards must expand their understanding of the strategic risks facing their companies to manage increasingly acute, complex, and interconnected issues affecting business and society as a whole. We offer three key actions to help equip them for this challenge.

The first of our 2024 “Actions for Business” identified the growing responsibilities of corporate boards to govern effectively on evolving business risks, and the challenges to doing so. The evolving regulatory environment on climate and other ESG reporting increases pressure on companies to demonstrate their boards’ capabilities to govern effectively in a climate-crisis context. We cited alarming findings in one survey that nearly half of board audit committee members say they lack the basic literacy on climate needed to make informed decisions, and only 7% say they are ‘climate competent’ - meaning they know enough about climate change to understand how it could affect their business.

Our ESG advisory team has often referred to ourselves over the years as 'critical friends' to business. We believe in the power of business as a key driver towards a world where people and planet can thrive. We are here to support our clients - as companies and as individuals working within those companies - to find solutions to their challenges, steer them through obstacles – and as critical friends, we are also here to challenge them: to push their ambitions further, and to fully accept the grave responsibilities for improving their impact.

Bill Weihl spoke recently to a packed auditorium recently at GreenBiz24 as that same kind of critical friend to the sustainability professionals and business leaders in the audience. Bill Weihl, who lost his voice to ALS, spoke to us using assistive technology, with a compelling invitation to raise our voices collectively.

Formerly director of sustainability at Facebook, and green energy czar at Google, Bill knows the power of large company voices, and that those voices are essential to catalyse the speed and scale of climate action the next decade will require. For a successful, just, and equitable transition to a zero-carbon economy, Bill said, “companies need to do more than pipe up about their latest innovative work, as vital as that is…they need to speak up for policy progress”. Bill called on each of us as sustainability professionals to join together in advocating for our companies to lead on mitigating the worst impacts of climate change, acting on our commitment and our confidence in the power of corporate leadership.

Bill’s call to action focused on policy engagement but could apply equally to other ESG issues and to the broader need for ESG-capable governance and management. We know that a board of directors without sufficient climate literacy can’t govern effectively on either internal decisions or external policy engagement on climate risk. Similarly, a board that’s not well informed on issues like human rights, labor, gender, racial justice, resource scarcity, deforestation, etc, cannot successfully mitigate the business and societal risks related to those issues.

The physical and transition risks inherent in climate change are a few of the many interconnected risks to business and to the broader society in which business operates. Geopolitical instability, ideological polarisation, and 'crises of trust' in societal institutions are some of the other risks cited by the Erb Institute’s Corporate Political Responsibility Task Force in its 2024 CPR Task Force Overview. Lauren Caplan, in conversation with the Institute, notes that while boards are important to managing risks related to political instability, currently only 25% of boards consider political risk at all, let alone develop competencies to manage it effectively.

How can companies address the challenge of rapidly increasing board and management expertise on climate and other material ESG issues?

1. Assess existing expertise and conduct a map and gap exercise of the company’s material ESG issues. Material issues should be identified through a robust, best practice ESG materiality assessment which engages internal and external stakeholders to gain a true 360 view of the business and its impacts. To ensure the appropriate topics are covered and effectively assess the boards expertise:

  • Identify relevant stakeholders to engage through a formal value chain mapping.
  • Include peer material issues as well as investor ratings and reporting standards – but remember that publicly reported issues are inherently backward looking and won’t be sufficient to identify emerging issues and those of rising importance.
  • Conduct ongoing landscape monitoring in addition to full materiality assessments every 2-5 years, leveraging industry coalitions, NGOs, ESG data platforms, and ESG experts to support internal monitoring.
  • Ask board members to self-evaluate expertise, but look for experience validated by credible sources – not just exposure.

2. Expand board recruitment beyond the 'usual suspects'. Boards struggle with a lack of climate and ESG expertise, and knowledge gaps among qualified potential members are a real challenge. However, the lack of board diversity (across gender, race, age, socio-economic background, etc) indicates that significant pools of talent remain untapped. Those pools often contain above average ESG knowledge. To increase the board diversity and tap into broader pools:

  • Consider candidates outside of the traditional, retired executive pool. While retired executives can provide essential experience and capacity, current executives, as well as those outside of the c-suite, can provide much needed familiarity with emerging issues and recent experience managing challenges the company currently faces.
  • Recognise that a sole focus on demographic diversity may not be sufficient; HBR finds that “too often demographically diverse candidates are chosen because they have backgrounds similar to those of incumbent directors; they 'fit in' well with others on the board.” Actively seek candidates with a focus on intersectional issues and strive for cognitive diversity in addition to demographic diversity.
  • Add new board seats: The low turnover rate of most boards is one of the biggest hurdles to increasing diversity – adding new seats before a current member reaches the end of their term or retires is a simple way to increase diversity in the short term. These additional seats can be permanent or temporary.
  • Think long term to build the future non-executive director pipeline today: offer opportunities for your current sustainability professionals to gain exposure to board functioning and responsibilities, as well as formal training in corporate board responsibilities. At the same time, ensure your pipeline of sustainability leaders includes a broad demographic range.

3. Provide immediate opportunities to upskill. Board education on ESG and climate should be on every company’s 2024 agenda. This education should cover details of their expanding responsibilities to govern climate risk, process for assigning responsibilities, and plans for management to keep the board informed on current and emerging issues. In addition to traditional presentation and workshop formats, consider novel approaches such as:

  • Invite board members to join sustainability advisory groups, where they can listen in as experts debate and advise on complex sustainability issues.
  • Pair board members with internal ESG experts to expand collective competency – informal ‘office hours’ with internal sustainability experts and visibility to trade-offs and considerations related to management decisions on corporate social and environmental responsibility can round out more formal educational offerings.

Indicators point to rising strategic risks facing business that are growing more acute and complex – and increasingly tied to ESG issues. Many corporate boards will need to broaden their perspectives and augment their skills to tackle these evolving challenges and steer their companies through the storms ahead.

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