Board composition and responsibilities adapt to ESG purpose
Didier Cossin, Professor of Governance and Finance, Founder and Director of IMD Global Board CenterÂ
Sophie Coughlan, Associate Director, IMD Global Board Center
Many boards have responded to increasing ESG pressures by recruiting a sustainability specialist. This is understandable in the face of competing metrics and reporting requirements â and the resulting confusion â but as with digital, geopolitics, or other specific areas of general impact, such roles have been limited to board work. That is not what makes for successful ESG governance. While there is a degree of technical knowledge required, including integrated reporting methodologies and disclosure, there is the risk of a tick-box compliance focus that does not lever a real ESG identity. Instead, boards need to understand their own true personality around ESG and then evolve the board composition in that direction â whether it is climate change, next generation, social justice, or diversity concerns. Finnair Chairman Jouko Karvinen values age and background diversity as part of the airlineâs emphasis on sustainability, shifting the scope of the dynamics â and the discussion â in the process. Boards leading on ESG drive the ESG culture of the board through its composition.
Innovation, investment, and business transformation fuel climate hopes
Knut Haanaes, Professor of Strategy and Lundin Chair Professor of SustainabilityÂ
As we head out of COP27, many are disappointed to see climate deterioration going much faster than any governmental moves to address the crisis. But there are also reasons to be optimistic. Fundamentally, if we take a long-term perspective, we will deal with climate change. It is not a question of âwhetherâ, it is a question of âwhenâ. We will go through the whole energy transition, and we will build a circular economy. We will scale new technologies to gradually disrupt our carbon economy. Some facts are encouraging:
- First, the world is searching for new solutions. At any given time, we have at least one million green startups exploring new energy solutions. According to HolonIQ we already have 47 climate unicorns worth more than $1bn.
- Second, we are investing. According to the REN21 renewable energy community, we globally invested $366bn in renewables in 2021 alone.
- Finally, our companies are transforming. Today, we have at least 13,000 large and medium-sized companies in Europe transitioning towards more sustainable operations by disclosing their climate footprint.
So, there is a real case for a âglass half fullâ view on climate. Leadership is about being positive and seeing opportunities, and we are living in a time where climate leadership is critically important.
New regulations drive sustainability strategy
Florian Hoos, Professor of Sustainability and ESG accountingÂ
In a few years, almost all companies around the world will have adopted mandatory sustainability reporting standards â either because they were obliged to by law or because they can no longer resist stakeholder pressures. Board members and top executives can make a choice today between just complying with the new standards and using this one-time change in mandatory reporting as an opportunity to prioritize sustainability even more as a key component of their strategies. The following issues are key in that discussion:
- What are material sustainability issues for your company above the standard settersâ guidelines?
- What are the new sustainability KPIs that are at the heart of your strategy execution?
How do you incentivize the C-level and senior managers? - What kind of regulation forecast mechanism is needed to be prepared for changes in standard setting at different levels (ISSB, EU regulation, etc.)?
- What is your plan to transition into the low-carbon era under different scenarios?
Answering those questions and going beyond just complying with mandatory sustainability reporting standards is key to gaining and maintaining competitive advantage in the future.Â
Harnessing collaboration to enable the circular economy
Victoria Kemanian, Senior Advisor, Business Transformation InitiativeÂ
The challenges of transitioning to the circular economy are such that one single actor cannot tackle them alone. Collaboration within and outside ecosystems in circular economy solutions is central to unlock benefits that organizations cannot achieve on their own. These are accelerating systems transformation by boosting multi-stakeholder innovation, thus reducing costs for players, surmounting obstacles, and advancing solutions adoption. Yet collaborations are difficult to orchestrate as they demand systemic changes in clear contrast with the linear and profit-driven mindset prevailing in business.
Successful examples include multi-stakeholder platforms like the Global Commitment, led by the Ellen McArthur Foundation and the United Nations Environment Program, through which 500 signatories such as NestlĂ©, PepsiCo, Coca-Cola, Unilever, Mars, and LâOrĂ©al â which together utilize 20% of all plastic packaging produced globally â have committed to ensuring that all plastic packaging is reusable, recyclable, or compostable by 2025, among other circularity goals.⯠With most models still at an experimental stage, a tougher challenge is spreading solutions globally. While policy and regulation play catch up, how will the financial sector, firms, and consumers step up to the challenge?
AI: a friend and a foe for sustainability?
ĂykĂŒ IĆık, Professor of Digital Strategy and CybersecurityÂ
ArtificiaI Intelligence, and specifically certain deep learning models such as those designed to process human language, requires huge amounts of energy. By their nature, they process huge amounts of data, and all those data centers carrying out storing and processing tasks require a lot of energy for cooling.
The good news is that AI can also help with better conservation of natural resources through better prediction, managing agriculture yield or managing the demand and supply of energy in energy grids. Also, several AI giants such as Google and Microsoft have already pledged to become carbon negative soon.âŻMoving to a cloud service provider that has made such commitments may help organizations reduce their own carbon footprint as well!
The expectations from AI in terms of efficiency and costs savings is very high â it is still considered to be the most disruptive technology of today. But we need to look beyond short-term benefits and keep an eye on the long-term implications of scaling AI too. Â
Mind the ESG reporting trap! An opportunity lens on sustainability
Julia Binder, Professor of Sustainable Innovation and Business TransformationÂ
With all the regulatory changes ahead, 2023 will be a year dominated by managing ESG risks. Considering all these pressures, itâs all too easy to stumble into the ESG reporting trap. All too often, companies and business leaders are not getting any insights from ESG analyses, as they approach ESG reporting solely as a required disclosure exercise. While this âtick-boxâ approach demands an incredible amount of data, it does not provide insight on how to seize the enormous opportunities that the sustainable transformation will open up across all sectors.
In fact, a recent study by McKinsey estimated that the transition to net zero alone will provide business opportunities of $12trn per year. Beyond capturing new markets, transforming your business towards sustainability is also a way to address changing customer and investor needs, as well as to attract and retain talent.