Set clear business strategy for environmental risks

Natural approach

A clear business strategy that tackles long-term ESG issues needs to be set at board level to address environmental risks

Natural approach

In the midst of the global pandemic – with the SA economy at breaking point and the human cost still to be counted – there’s a growing understanding that businesses need to pay more attention to the natural environment.

This coronavirus, which spread from animal to human, is a consequence of mankind disrupting ecosystems and putting pressure on wildlife. The way the virus snowballed from its origin at the other end of the globe into a catastrophic avalanche that also devastated the foot of Africa clearly shows that environ mental issues are everybody’s business.

‘An increasing number of business leaders see COVID-19 as a tragic example of the broader risks to business and societies from our seeming inability to address environmental risks associated with climate change, biodiversity loss and other “planetary boundaries”,’ writes Ralph Hamann, professor and research director at UCT’s Graduate School of Business (GSB), in the Conversation.

The big question is how SA companies should best address these environmental risks. While King IV highlights the importance of environmental, social and governance (ESG) issues for any organisation, often the social and governance issues require the most urgent attention from business leaders in the country’s unequal society. So should it be mandatory to have an environmental director on the board of medium to large companies in order to formalise environmental risk as a board priority?

Yes, says Aunnie Patton Power, ‘because that’s when it becomes strategy as opposed to compliance’. As a former M&A investment banker, she is the founder of Intelligent Impact, as well as a lecturer and adviser at the GSB Bertha Centre for Social Innovation and Entrepreneurship. ‘One of the things that we’ve seen in the environmental and social impact space is that having direct communication with the boards of companies can lead to more strategic decisions around these issues,’ she says. ‘Once there is someone who sits [in on] those conversations at the board level and is able to talk about how these risks are important, as opposed to someone merely reporting to the board on a range of different topics and including some of the elements in it. Having someone on the board who has a climate-risk background and understanding is particularly important to whatever sector that company is in.’

Patton Power explains that, for example, a construction company would benefit significantly from having someone on its board who has real experience with construction industry supply chains, different types of materials and the green-building approach.

‘Such a person would be able to contribute directly to the strategy of the company,’ she says. ‘It’s not just a question of saying, “Oh, you’re really clued up about the environment”, when appointing a board director. It has to be more specific, such as asking “Do you have the background in the environmental issues that are relevant to this company?”.’

In fact, the materiality of environmental issues varies so significantly by sector and company that prescribing a mandatory environmental board director may not solve the issue, argues Jon Duncan, head of responsible investment at Old Mutual. ‘I do, however, believe that it’s critical for directors and the executive to have a clear view on long-term material ESG risk issues impacting the company and its key stakeholders,’ he says.

‘These insights should be baked into the long-term strategy and executive reward for the company. On this basis we would expect company boards and management to have the necessary skills and experience to provide oversight and management of the material ESG issues facing the company. And where such skills are inadequate or absent, a director-training programme on ESG risk management would be appropriate.’

While it’s important for the management of any company to have an understanding of environmental risk, Tracey Davies, executive director of Just Share, a non-profit shareholder activism and responsible investment organisation, says that ‘a mandatory requirement for a director with environmental expertise would make more sense for those companies with a particularly large environmental impact, for example those in carbon-intensive industries and industries associated with high levels of air, soil and/or water pollution’.

Furthermore, there are practical issues that would arise from ‘forcing’ an environmental director onto every board, says Parmi Natesan, CEO of the Institute of Directors in South Africa. ‘A board needs to have an appropriate mix of skills and experience relevant to the entity and its industry. While climate change impacts, and is impacted by, all companies, there are many other equally important matters for the board’s attention, and it’s all about getting a well-rounded board in terms of skill and experience.’

She adds that it is not practical to have a director specialising in each and every critical area. ‘This also runs the risk of boards becoming too large and possibly dysfunctional as a result. Every board should be taking environmental matters such as climate change seriously, and setting appropriate key performance indicators for the organisation and its management team; whether or not they have a specialist environmental director,’ she says ‘This skill or expertise could also be available on the management/employee team, as specialist advisers to the board or social and ethics committees, or via consultants to the company.’

There’s no question that directors who have a strong background in – and understanding of – environmental risk will be better placed to influence environmentally friendly strategies than those without any background or understanding of the issues, argues Davies. ‘However, prescribing that there should be one such person on every board would not necessarily solve the problems of short-termism and the failure to address sustainability issues,’ she says.

‘We have seen how the presence of one climate expert on the boards of oil companies, for example, does not result in any dramatic changes in approach by those companies. What is important is to have a balance of skills and to be aware, when appointing board members, of how their skills and expertise complement those of existing board members.

‘Every company with a large environmental or climate impact should be carefully considering the appointment of board members and asking whether the board as a whole is able to understand and engage in a balanced debate around risks and opportunities.’

However, the challenge likely to be faced by such boards around climate risk alone is the sheer complexity of the problem.

‘Climate change is not an “E” issue – it encompasses the whole range of E, S and G: from the need to urgently reduce carbon emissions, to the competence of management teams and boards to address climate risk, to the fact that it will exacerbate all of our current, already serious, social, economic and environmental problems,’ says Davies. ‘We need to stop thinking about ESG as something separate and “outside” of normal business, and start thinking about how we can incorporate so-called ESG concerns into business strategy and leadership as a matter of course.

‘If you don’t understand the material financial impact of poor governance, poor stakeholder relationships and ignoring environmental risks, then you cannot be an effective leader.’

Duncan takes a similar line. ‘Rather than a non-executive environmental champion, we would advocate for the idea of a “shared value” champion at the board level – someone who has the necessary skills and experience, [and] is able to work skilfully with the material ESG issues impacting the company,’ he says. ‘We would expect the “shared value” champion to articulate a clear strategy for the company in interactions with stakeholders. At the management level there is a growing global trend for sustainability to feature in the C-suite, particularly as businesses come to see the business opportunity associated with operating with a “shared value” or sustainability mindset.’

It might be a good start for SA companies to ensure they have directors at the board or executive management level who champion environmental risk, particularly climate change, as part of a broader sustainability strategy.

‘It’s like a gateway drug,’ according to Patton Power. ‘Once people start to think about climate risk, they begin to think about risks around different types of social impact as well. It’s easier to quantify the environmental risk than social or governance risk, and when they see it’s hitting the bottom line, then they start thinking more broadly about ESG risk and sustainability.’

As the tone is set from the top, directors are likely to be the most direct route to embed environmental sustainability into the fabric of an organisation. COVID-19 has brought home the urgency of future-proofing companies against external global risk while also demonstrating that governments and businesses can take drastic, far-reaching action when needed.

The pandemic presents an opportunity for business to make environmental risk a priority at board level, which would be a step towards respecting our planetary boundaries.

By Silke Colquhoun
Image: Gareth van Nelson/Highbury Media