This may require boards to rethink both their role as well as their composition and structure. To effectively serve as strategic advisor while providing appropriate levels of oversight, it is more important than ever that boards are composed of a diverse range of people with a wide range of experiences, skills and backgrounds. Given the specific sustainability challenges they face, they will need to seek out members with expertise in areas such as environmental, social and governance (ESG) matters.
This will enable the board to ensure that capital allocation decisions are consistent with the organisation delivering on its net zero targets. It will enable them to challenge management on specific capital allocation decisions such as returning capital to shareholders when the organisation is behind on progress toward its net zero commitments.
It is, however, not always easy to find investment opportunities to achieve net zero even when boards are fully committed to the goals. If everyone is striving towards the same goals at the same time – say with regard to building electric car manufacturing facilities or offshore wind facilities - supply of opportunities can well take good few years until the market catches up. Therefore, achievement of goals and timelines also need to be realistic.
It may also be necessary to create a dedicated sustainability strategy committee to ensure that sufficient focus is given to sustainability and that it is not detached from strategy.
In addition, effective executive remuneration structures that influence behaviour and drive accountability for the achievement of sustainability objectives should be established. Metrics should be aligned with the organisation’s overall strategy and be relevant to both short and long-term objectives.
Boards should engage with target investors and long-term shareholders around the organisation’s sustainability strategy and ESG story, as well as its sustainability reporting. Through the insights they get from this engagement, boards will better understand investor expectations and can also ensure that the organisation produces fair, balanced, meaningful and understandable reporting that will inform investor decision-making.
That reporting is critically important, and boards should engage with their auditors and other independent advisers to understand how they will approach the assurance of sustainability information and the likely form of the reports.
Summary
Poor ESG ratings can present a barrier to external investment for even the most successful organisations. The net zero transition will require investments of trillions of dollars in the coming years and investors are keen to support that, but only if organisations can provide clear evidence that they are making progress on sustainability targets. In this context, boards have a responsibility to ensure that capital is directed toward those initiatives and projects that are likely to have the greatest impact on achieving net zero objectives.
