Is Governance Important for Sustainability?

13 Aug

How did we get here?

Two inter-related drivers have highlighted the need for corporates to fundamentally re-evaluate, re-think and re-plan their strategy to create sustainable value. These are: 1. Action on Climate Change and 2. Ineffectiveness of ESG (Environmental, Social, Governance)

The latest IPCC report (April 2022) clearly states the increasing imperative to address climate change. The Intergovernmental Panel on Climate Change (IPCC) is the United Nations body for assessing the science related to climate change. IPCC authors assess thousands of scientific papers published each year to provide a comprehensive summary of the drivers of climate change, its impacts and future risks, and how adaptation and mitigation can reduce those risks.Recent IPCC reports show some similar things as previous reports which you may already know about: that climate change is already causing more frequent and more severe storms, floods, droughts, wildfires and other extreme weather events.

The latest IPCC report shows greenhouse gas emissions continue to rise, and current plans to address climate change are not ambitious enough to limit warming to 1.5°C above pre-industrial levels — a threshold scientists believe is necessary to avoid even more catastrophic impacts.

As reported by the Financial Times in March 2022 (and many other organisations) the range of different approaches and methods to report and rate ESG is creating confusion and potentially enables companies to avoid real progress in sustainability. Regulatory probes and investigations of “Green washing” are increasing and it seems that regulators around the world will take action to address this problem.

In summary, sustainability can not be achieved as a box ticking exercise as recent failures in ESG reporting are highlighting and furthermore, ambitious and rapid action is needed, as indicated by the IPCC report.

Firms need to rethink their current sustainability strategies

What do you mean?

Sustainability and governance are broad topics and beyond the scope of this article. However the examples below will provide a flavour of what we mean.

1.Sustainability

The United Nations 17 Sustainable Development Goals (SDG) are the most widely known and broad ranging. The SDGs include 3. Good Health and Well-being, 4. Quality Education, 10. Reduced Inequalities, 13. Climate Action, and 16. Peace, Justice and Strong Institutions.

The United Nations 17 Sustainable Development Goals (SDG)

As Amartya Sen (Professor of Economist and Philosophy at Harvard University and Nobel Prize winner) states, we should think about our responsibilities for future generations and not adversely affect the future — leave no footprint behind

“be committed to make sure that our successors are not left in ruins generated by us”

To encompass the preservation, and when possible expansion, of the substantive freedoms and capabilities of people today “without compromising the capability of future generations” to have similar — or more — freedoms

Robert Solow, (Emeritus Institute Professor of Economics at the Massachusetts Institute of Technology and Nobel Prize winner) in An Almost Practical Step toward Sustainability, sees sustainability as the requirement that

The next generation must be left with “whatever it takes to achieve a standard of living at least as good as our own and to look after their next generation similarly.”

One final reference, Roman Krznaric’s recent book The Good Ancestor, How to think long term in a short-term world. From the pyramids to the NHS, humankind has always had the innate ability to plan for posterity and take action that will resonate for decades, centuries, even millennia to come. If we want to be good ancestors and be remembered well by the generations who follow us, now is the time to recover and enrich this imaginative skill.

The UN SDGs facilitate the alignment of corporate strategy with the needs of today’s society, offering areas of innovation and opportunity. A firm can define an aspirational purpose in a way that is relevant and inspiring to stakeholders (for example, attracting talent). We believe it makes sense for corporates to take a broad and long term perspective on sustainability.

2. Governance

Put simply, governance means active challenge and oversight. We should avoid considering corporate governance as the sole activity of a board of directors that meets monthly or quarterly. All stakeholders must be involved in governance, as they have an important role to play in discussing, agreeing and reviewing corporate activities and plans.

The UK Corporate Governance Code (formerly known as the Combined Code) sets out standards of good practice for listed companies on board composition and development, remuneration, shareholder relations, accountability and audit. The code is published by the Financial Reporting Council (FRC).

Governance can be simplified to mean the rules by which we operate. We believe governance consists of a structure and a system (set of processes) to define and oversee the rules.

Structure — elements such as a formal board, an advisory board and organisational structure, defining individual accountabilities, roles and responsibilities; and
System — principles and processes such as setting board composition, compensation, business goals and strategy, reporting and communication, audit, risk and controls. Processes will also include monitoring and changing the governance structure and system itself. Regular independent reviews would be useful.

Governance must be adaptive and not rigid. koralli believes governance must mobilise and align all stakeholders, which could include:

The Board
Regulators
Employees
Customers
Suppliers
Trade Unions / Professional Bodies
Investors
Creditors
Local community
The media
Government

koralli views the UK Corporate Governance Code as a good starting point. Individual agency and ownership are vital. Governance is not the sole remit of committees and forums. Individuals must understand and feel that its up to them to get involved and take action. Individuals can influence and control their destiny. It’s up to us to make a positive impact.

Is governance important for sustainability?

Until recently Anne Simpson was considered an evangelical advocate for the cause of environmental, social and governance investing (ESG). This spring, however, the former head of sustainability at the Calpers pension fund, who now runs responsible investing at Franklin Templeton, made a surprising declaration. “I think it’s time for RIP ESG,” she told a conference in New York. Specifically, she thinks that the war in Ukraine has forced ESG advocates to reconsider some of their approaches, because energy security and poverty reduction have suddenly become as important as the green transition. Box ticking around carbon emissions alone, in other words, does not work.

We firmly believe sustainability presents opportunities for value creation (as well as risks to be managed). Sustainability is critical for long term corporate success.

Governance is key to achieving sustainable change within organisations — and it is through governance that sustainability can be embedded within an organisation and transcend the problematic ‘box ticking’ paradigm.

Real change has to start at the top and involve all stakeholders, it needs to be embedded in the day-to-day (and not a Sustainability function on the side). Governance includes key activities, such as:

Active discussion and debate about sustainability and values
Development and tracking of goals and targets
Allocation of resources, balancing the needs of different stakeholders

Through governance rules are defined and overseen. No limits or no rules leads to anarchy and chaos. Without effective governance, unfair and unjust standards and procedures will be established and/or the right rules will not be properly followed and managed. Not following the rules, is irresponsible, reckless and could be illegal. We set and work to corporate governance standards, not just because it’s a legal responsibility and “worthy”, it’s in an organisation’s self-interest, a business imperative to create long term sustainable value.

What impact do we want to have?

The consequences of not tackling sustainability challenges effectively will be dramatic for corporates, whether in the short term or long term, impacts range from:

Employee or customer dis-satisfaction
Regulatory fines
Lost business opportunities
Lack of investment
Competitive failure

Whereas, on the other hand, sustainable value creation provides long term competitive advantage. Founders, leadership teams, employees and, in fact, all stakeholders want to have a positive impact on our future. We do have a responsibility for future generations and through good governance we can make this happen.

Continual oversight and challenge, i.e. governance, is critical to corporate success and making a positive impact.

Is Governance Important for Sustainability?

How did we get here?

Firms need to rethink their current sustainability strategies

Is governance important for sustainability?

What impact do we want to have?

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