A company’s focus on ESG has gone from important to crucial for their future value and competitiveness. But what role does the board play when it comes to ESG? And what are the challenges?
Anne Louise Eberhard is a board professional as Chair of the Board at Finansiel Stabilitet and Member of the Board at FLSmidth among others. We met her for a conversation about ESG and Danish boards.
In what ways can it be a challenge for the board to ensure that management is on track with ESG?
“I am not sure it is necessarily a challenge to get management on the ESG track but it is a large and important task.
As board members, our primary role is to create value, both short-term and long-term. Not just shareholder value but also stakeholder value, and – in collaboration with management – set the company's direction.
For some companies, a sustainable strategy and purpose is ‘easy’ or straightforward but for many, it is a large transformation, requiring large investments in innovation, scaling existing or building new technologies, new positioning or new markets, supply chain, as well as leadership and alignment with management. Are we investing enough? In the right technologies? How do we ensure the long-term perspective?
The board must have the courage to push and support management in the right direction. Sometimes a cash cow needs to be transformed or it may strand in the future.
I trust that collaboration and co-creation across industries, and both horizontally and vertically in the value chain, are key to reaching our net zero targets.
For the board composition it is not enough to appoint a climate change or ESG expert to the board. It demands a strong management team as well as diverse board members with a deep understanding of the company and knowledge of how to adapt or transform the company to a more sustainable future. It’s about strong and value-creating collaboration – among board members and between the board and management.”
In Sweden it is compulsory for the board to be educated in ESG matters. How do we ensure that the board has the right education, the right skillset – with the right timing?
“As a board, we need to understand ESG and its importance in depth. There are many topics we need to master. We must all drive lifelong education. That includes constant ‘up-tiering’ in relevant topics, like ESG. However, it does not mean that everyone must be an expert in, for example, climate change or ESG. Experts are to be included in management and in the boardroom, without necessarily having to sit on the board.
A diverse board is the way forward if not already in place. This diversity includes a great mix of relevant skills, gender balance, diverse personality profiles, etc. depending on the company in question. The holistic picture is important. We must look at the collective competencies of a team, not ‘just’ a number of individual expert roles.
We are past the days where it was enough to agree that ESG is important and should be part of the company’s DNA. We need to dive into the details now and understand the implications of our purpose and strategy, our priorities, and last but not least, what success looks like in the future. And like with accounting and annual financial reports, we now have to ensure that sustainability reporting is taken to the same high standards.”
How does the general lack of diversity on the board impact the ESG agenda?
“If we look at the consequences of the issue around lack of diversity, it's clear that embracing diversity is closely linked to inclusion and equity. Studies show that a diverse and inclusive organization – and board – tend to be stronger at driving transformation with a more sustainable and long-term perspective.”
Are the dilemmas around ESG sufficiently described? (Or are we painting a picture of the situation in Danish boardrooms/companies that is too positive?)
“We all have to increase the ‘speed of our treadmills’ to reach the targets of the Paris Agreement. We are already running behind. Studies show that we as a global society have to double our investments to reach our net-zero targets in 2050. The green and sustainable transition is not cheap!
And we should not forget the S and the G in ESG.
We need to articulate and discuss the dilemmas we have in this area. We are all stepping into new territory. It is also about transparency. Only very few get it 100% right the first time. ESG is a challenge for most companies. We must drive the transformation needed and at the same time run a profitable and well performing company. How will the sustainable agenda impact our competitiveness. Should we revisit our purpose? Not all companies have an easy answer to this.
We must include the long-term perspective, not just the short term. We have to redefine success and make sure that remuneration structures align with it.
Importantly, we must ensure that we do not ‘just’ scale the sustainable solutions for renewable energy. We must also ensure that we transform the more ‘difficult’ parts of our industries, where the effects on CO2 of transformation, electrification, etc. are large. The investor communities can also play a vital role in this.”
Do you believe that the CSRD is an accelerator for the green transition?
“In order to comply with the CSRD, most companies have a substantial workload that must be completed in a short period of time – with the double materiality assessments, collection of data, assurance of data quality, etc.
Having said that, I believe the CSRD can lead to greater transparency by identifying where we are, where improvements can be achieved, and where we are heading.
Also, I expect that Scope 3 and the companies’ impact assessments will improve the holistic perspective and disclose the value chain of our products, services, and activities in general.”
How should companies organize themselves around the CSRD?
“Organizational design varies greatly among companies. CSRD reporting is probably best organized within the CFO area but it must be anchored in the entire company. Customer-facing employees must also understand it and should be rewarded for acting in alignment with the sustainability strategy.”
There is a lot of debate and attention on 'greenwashing'. What role can CSRD play in addressing this?
“I believe transparency reduces the risk of scandals. Greater transparency and more quantitative data result in less ‘overstating’ and ‘wishful thinking’, as well as fewer judgement calls. So, in my estimation, the CSRD will over time contribute to better sustainability reporting and accountability.
We should not forget that what we are trying to do with the CSRD and sustainability reporting initiatives in just a few years, has taken decades for financial accounting, IFRS et al. to do. Within ESG, addressing climate change is an urgent issue which we all need to take action on now, for the long term.”
