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The board’s role in sustainability: A view from Denmark

June 2022

Recent events have highlighted that leaders cannot avoid being held accountable for the impact their businesses have on society and on the environment. If they are slow to understand that sustainability must be positioned at the heart of strategy and operations, they will antagonise a growing set of stakeholders, including their investors, who are increasingly vocal in demanding accountability on a range of non-financial issues.

It is a difficult time to be at the helm. Not only have CEOs and their leadership teams had to grapple with an unprecedented combination of immediate short-term operational challenges brought on by the pandemic, supply chain upheaval, inflationary pressures, volatile commodity prices and the fallout from geopolitical conflict, they are now also required to focus on the existential threats coming from climate change and biodiversity loss.

It is easy to see how today’s leaders can be overwhelmed. No previous generation has had to contend with so many critical issues in tandem. Now more than ever, the CEO needs wise guidance and constructive support from a board of directors that is well informed about the issues and committed to the long-term sustainability of the business.

At a recent event in Copenhagen co-hosted by Spencer Stuart, WomenCorporateDirectors and law firm Kromann Reumert, over seventy female board directors gathered to discuss the board’s role in sustainability. Environmental concerns have long been a priority for Danish companies, and this is reflected in the fact that three out of seven of the world’s most sustainable companies in Corporate Knights’ 2022 annual ranking are Danish: Vestas (1), Chr. Hansen (2) and Ørsted (7).

Also present were 10 chairs of Nordic companies who agreed that it is the board’s responsibility to ensure that each organisation has a truly meaningful purpose that drives everything from decision making to operational activities. Only with a clearly defined purpose can sustainability really take hold in an organisation.

Our keynote speaker was Mads Nipper, CEO of Ørsted, an energy company with a vision of a world that runs entirely on green energy. Ørsted develops, constructs, and operates offshore and onshore wind farms, solar farms, energy storage facilities, renewable hydrogen and green fuel facilities. Mads Nipper commented that the best way to test whether you have a true purpose is to consider the question: “What would the world miss if your company did not exist?”

Companies that can answer this question with conviction tend to be catalysts, pioneers of change who take a leap of faith and innovate in ways that make others want to follow. They are often the companies whose impact extends well beyond the limits of their own organisation.

Boards need to be honest and consistent about their sustainability ambitions and to stay focused on long-term goals despite any short-term performance difficulties that may arise along the way. Board members need to walk the talk on sustainability in their personal as well as professional lives: you can’t be one person in the boardroom and another outside it. Ethics, as they say, is what you do when no-one is watching. One chair posed the question: “As boards, are we always 100% honest about our sustainability ambitions? We only know the answer to that question when things get difficult.”

Some boards have mixed views about the importance of sustainability, and some boards are less ambitious when it comes to ESG issues than their own CEOs. The key is for board directors to keep an open mind, do their homework and make a thorough effort to understand what sustainability means in the context of their specific business. It is vital that the board and the executives are able to have robust, values-based discussions, so that ESG ambitions do not buckle under financial pressure. “As a board member you have to be prepared to be the most unpopular person in the room,” says Lone Fønss Schrøder, vice-chair of Volvo Cars AB, who has been a catalyst for Volvo’s leading role in transforming the industry towards climate-neutral and sustainable transportation and infrastructure solutions.

The most important thing a board can do is appoint a chair and a CEO who care deeply about sustainability; indeed, it is often said that the chief executive ought also be the chief sustainability officer. How the board should structure itself for optimal effectiveness is the subject of much debate. From our discussions with Danish board chairs, the consensus is that hiring a specialist into the boardroom is rarely the answer. Nor, many argue, is delegating responsibility to a sustainability committee. Sustainability must be on the agenda of every board meeting.

This view is borne out by a recent survey of global board directors conducted by Spencer Stuart and Diligent. A plurality of respondents (43%) say primary ESG oversight is at the full board level, followed by nominating/governance committee (30%), and ESG/sustainability committee (15%). Only 20% of directors reported that their boards were looking to appoint new directors with ESG expertise.

“ESG is not just something you run on the side,” one chair told our gathering in Copenhagen. “it must be integral to everything you do.” Another pointed out that boards should keep discussions of sustainability at a strategic level and leave it to management to come up with solutions. “Sustainability is complex and the executives know the business far better than a non-executive ever can.”

A key responsibility for boards is to ensure that the executive team sets ambitious sustainability goals and has a plan for how to get there, year by year. As one chair said: “You must treat sustainability like any other discipline, with rigorous tracking.” It is then the board’s duty to hold their feet to the fire and provide advice and support on some of the difficult trade-offs. When charting the road to net zero, with so many stakeholders to consider, CEOs and their teams have little or no experience to draw upon, so it helps to have the backing of a board that is prepared to be courageous, while also willing to challenge itself.

When business performance is under threat it is easy to de-prioritise environmental and social considerations. This is when the board needs to hold its nerve and remain focused on the long-term vision for the business and the part it can play in addressing the larger issues of climate change and biodiversity and social injustice.