The United Nations Climate Change Conference (COP26) that took place in the fall of 2021 shed light on many important findings about the state of global environmental efforts. One major issue was how corporations can better tackle climate change and help countries reach net zero carbon emissions. Among the many successes of COP26 was the agreement by world leaders to revisit and strengthen the 2030 nationally determined climate change contribution targets by the end of 2022.
This is a resolution that board directors can emulate to achieve their own climate change targets as well. The INSEAD Corporate Governance Centre, in partnership with executive search firm Heidrick & Struggles, conducted a global survey of board directors to dig deeper into the subject of corporate climate change and ESG efforts—and how boards of directors plan to address these initiatives.
Their report, Changing the climate in the boardroom, examines how boards understand and cope with the decarbonization process and how far the effects have been incorporated into their oversight responsibilities. The findings reveal how 301 board members in 43 countries, primarily in Western Europe and North America, view their boards' actions. While boards of directors aim to provide practical support for their companies on their journey towards net zero, the results of the survey reveal a clear disconnect between what board members say about the importance of climate change to their companies and what they actually do.
There is continued progress in boardroom commitment to climate change
Given its ESG impact, addressing climate change is a firm fixture on the agendas of business leaders and their boards. The report found that, encouragingly, board members are taking climate change seriously:
- 75% of board members agreed that ESG is entirely important to their companies' strategic success.
- 63% of board members have a clear understanding of strategic risks as well as opportunities that are presented to their companies.
- 60% said their board is entirely or very aligned about its importance and what should be done about it.
More concerning findings center on ESG knowledge and implementation
Although climate change is top-of-mind in boardrooms, the report revealed that the level of understanding and acting on specifics of corporate climate initiatives remains concerning. A whopping 85% of survey respondents said that their board needs to increase its climate knowledge. In addition:
- 43% of board members said their companies do not have clear carbon emissions reduction targets—or do not know if this is the case.
- Nearly half (49%) said that climate change is not or only slightly integrated in the company’s investment decisions—or do not know if it’s integrated at all.
- Only 16% of board members said that their companies have targets for carbon emissions beyond their own control, meaning their suppliers as well as end-users' emissions.
- Another 16% said that no one in their company is responsible for reporting on climate change to the board—or they do not know who is responsible for this task.
There is a talent paradox between ESG experts and board directors
The report reveals that the best climate change leaders often don't have boardroom experience. Conversely, business leaders with the skills necessary to navigate the dynamics of boardrooms sometimes lack a true understanding of how deeply the issue runs.
- 69% of directors said climate change knowledge is not a formal requirement for joining their board, and climate change knowledge is not included in their board’s competency matrix.
- 65% said that knowledge of climate change is not a formal requirement in CEO selection.
- 74% of boards do not prioritize climate change in executive performance metrics.
Why board directors taking action on climate change matters
Thanks to increasing awareness and a demand for more corporate responsibility, boards are now, more than ever, doubling down on addressing climate change and reducing their corporation’s carbon footprint. Their commitment is encouraging, with 72% of board directors reporting confidence that their company will achieve its climate change goals.
But the gaps in knowledge and implementation cannot be overlooked. In addition to the findings above, half of board directors (50%) expressed concerns about the level of reporting they receive on climate change progress. And nearly half (46%) said their board has insufficient or no knowledge of climate change’s implications for their company’s financial performance. This is striking considering that the effect of climate change on corporate financial performance is well documented—and companies usually have thorough processes for developing long-term financial goals.
For many reasons, it is incumbent upon board members to ensure their business leaders set up a climate agenda that can meet set targets. To start, customers are expecting companies to step up and contribute to ESG issues; more than half of people (52%) believe business is not doing enough address climate change. In addition, companies that do have significant emissions reduction targets are making legitimate progress. A 2021 report by Science Based Targets, which was started by the environmental groups and hundreds of businesses brought together by the United Nations, noted that the 338 large companies around the world for which it had sufficient emissions data collectively reduced their emissions by 25% between 2015 and 2019.
What board directors can do to meet growing ESG demands
The report includes several practical measures that boards can take to ensure their companies are ready to meet the growing demand from stakeholders to change the climate from the boardroom. They are:
- Consider adding more voices with relevant boardroom expertise.
- Create board chair accountability regarding the processes and dynamics supporting advancing climate change. Companies that cannot prove ESG metrics should have limited access to capital in the future.
- Anchor their ESG strategy for organizational and social purposes, and connect it to specific operations.
- Integrate their ESG objectives into search strategies and executive compensation, especially for the CEO.
- Build climate-related disclosures with the same rigor required of financial disclosures.
To meet growing ESG demands, it also important that directors play an active role in building ethical corporate culture. The joint report by LRN and Tapestry Networks, Activating Culture and Ethics from the Boardroom, recommends that leaders should incorporate the following key themes into their larger business strategy:
- Measurement: Sometimes, directors fear that they are not positioned well to read the corporate culture and thus find it challenging to interpret.
- Oversight: Business leaders need to have oversight to effectively wrestle oversight cultures. Business leaders concur that culture, ethics, and compliance warrant significant time and effort.
- Trust: While trust can be difficult to maintain, it is crucial. Trust is a key transparency enabler that is indispensable to the ability of the board to oversee a culture change that is more conscious towards corporate impact on the climate.
- Accountability: Boards are responsible for ensuring that culture and compliance are shaped by executives. This is not negotiable, but approaches may differ.
Take action on climate change
Climate change continues to be an enigma that will alter the ESG landscape. If left unchecked, the future is bleak as the effects of climate change will take the center stage in all aspects of our lives. The corporate world has a major role to play to avert a looming disaster—and boards are at the vanguard. By cultivating an ethical business culture, the negative effects can be reversed. Championing ESG inside the organization is just the first step.
For more actionable insights on how board directors can influence corporate ESG and culture efforts, check out these LRN resources: