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Grégory Bardies

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Blog | Wednesday May 10, 2023

Applying an ESG Lens to Crypto

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Cryptocurrencies continue to attract investors against the odds. How can businesses approach these opportunities in a way that maximizes their potential for empowerment and inclusivity, while guarding against significant environmental and social concerns?

We’re still witnessing the fallout of cryptocurrency exchange FTX’s collapse last November. Two crypto-focused banks in the US, Silvergate and Signature, have since buckled under heavy losses, sending crypto firms looking to banks in Switzerland for loans. While regulators rush to strip crypto of smoke and mirrors, a report from economic advisors at the White House offers the damning judgment that “crypto assets currently do not offer widespread economic benefits…[and] are too risky at present to function as payment instruments or to expand financial inclusion.”

The risks were evident before FTX filed for bankruptcy. In 2022, hackers stole over US$3 billion from crypto investors—but neither the thefts nor the exchange’s failure has proved a strong deterrent. The top cryptocurrencies also held up well in the wake of Silicon Valley Bank’s more recent collapse, while Bitcoin and Ethereum surged.

Advocates pin crypto’s resilience on the decentralized, transparent, and (in theory) auditable nature of its blockchain foundations. And while it isn’t insulated from the flaws of mainstream banking (SVB’s collapse heavily impacted Stablecoin issuer Circle, for one), it continues to attract both traders and those up against the limitations of centralized finance.

Advocates point to these theoretical advantages:

• Cheap and instant peer-to-peer transactions across borders, cutting out middlemen and supporting people in emerging markets and those dependent on remittances
• Financial opportunities for the unbanked, with potential gains for women in particular, who are less likely to have a bank account than men
• Alternative access to finance for those subject to government corruption or restrictions
• Ownership of financial assets (akin to keeping gold under your mattress) affording some protection against hyperinflation
• New fundraising sources for start-ups, again with particular gains for women-owned businesses, which receive less than 3 percent of venture capital funding.

Beyond the World’s Paywalls

While cryptocurrencies can prove as volatile as fiat, they have offered a lifeline where geopolitical challenges have cut people off from salaries and savings. Ukraine has seen an increase in crypto use with restrictions on currency cash transactions and to enable foreign donations. In Afghanistan, crypto has offered a way to pay gig workers cut off by economic sanctions, including women. In Lebanon, young people are turning to cryptocurrencies to counter dire currency depreciation and bring in money from abroad. In these extreme cases, liquidity trumps stability, while the anti-establishment roots of crypto attract those who have never known a trustworthy government.

However, the potential of crypto to drive financial inclusion where it is needed most is limited by smartphone access—particularly impacting women, who are 18 percent less likely than men to own one. Innovations might help: Sorted.Finance supports crypto wallets on basic feature phones. Its app has 4000 users, finding its largest markets in Pakistan (which has one of the highest gender gaps in phone ownership), Nigeria, and Tanzania, with usage focused on daily transactions and remittances.

Sorted's wallet supports Bitcoin and the dollar-paired stablecoins Tether (USDT) and USD Coin (USDC)—limiting the options for good reason: underprivileged people have been targeted for the rollout of crypto, only to be exposed to scams. As COO Stephen Browne explains:

“It’s against the free nature of crypto to limit a wallet, but we felt it was important to protect people from scams. Yes, Bitcoin could be hacked—but it hasn’t been since 2009. As for the stablecoins, we can’t guarantee their deposits, just as any bank account is vulnerable to theft and loss of value—but we make it clear that you transact at your own risk.”

Risks and Recommendations

Greater protections are needed to insulate all consumers from a range of risks:

• Debt and bankruptcy: One study found that trading cryptocurrencies overlaps strongly with trading high-risk stocks, while soaring loan interest rates and flash loans can expose users to exploitation and addiction.
• Access to risk-taking activities, such as drugs and gambling: Cryptocurrencies offer anonymity that can be used to fund illicit activities—although legitimate activity is growing more rapidly than criminal usage.
• Risks to minors due to weak age verification systems
• Lack of insurance provision from the likes of the UK’s Financial Services Compensation Scheme or the US Federal Deposit Insurance Corporation
• Value collapse spurred by hacks, "bank" runs, or regulation, such as China’s crypto ban

These add to well-acknowledged environmental risks: The energy demands of coin mining and minting have been a factor in bans in Iceland and China, while the US just proposed a 30 percent excise tax on the power demands of crypto mining companies.

Regulators are playing catch-up, but there is a clear opportunity for environmental, social and governance leadership from private sector players. Recommendations include:

Environment
Prioritize applications that use the coin mining method Proof-of-Stake to cut energy consumption by 99 percent compared to Proof-of-Work. Beyond this, support renewable sources to scale, look for opportunities to conserve energy and use low-carbon products, and consider partnerships such as the Crypto Sustainability Coalition, exploring how web3 technologies can drive climate action.

Social
Engage in partnerships, including with governments, to support inclusivity at every stage of design and implementation. Design for interoperability and inclusivity to maximize access and empowerment, and take a gender-sensitive approach to address crypto’s gender gap and protect women users.

Governance
Advocate for legal and regulatory frameworks to safeguard minors, marginalized communities, and other at-risk groups. Pursue standards, transparency, and accountability. In strategy setting, unite around the specific challenges you aim to solve with crypto, and seek to deliver gains across the board.

Questions to Business

• What specific challenges can you identify to which crypto can offer a solution?
• How can you support the potential of cryptocurrency to empower individuals and communities in your supply chain?
• Where can you play a role to protect the financial, social, and mental well-being of those engaged in cryptocurrency activities?

Blog | Wednesday May 3, 2023

Anywhere the Smoke Blows: The Health and Climate Risks of Wildfires

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Wildfire smoke is a growing public concern. As climate change alters the severity of wildfires across the world, experts are making unsettling discoveries about the ramifications of prolonged exposure to smoke. A new understanding of the environmental and health impacts has significant implications for the role of business in wildfire prevention, management, and adaptation.

Recent wildfires causing damage of historic proportions, from Australia to California, are driving new research on the impacts of smoke—with disturbing revelations. One is its role in greenhouse mitigation reversal. As forests burn, they release CO2, intensifying global warming and increasing wildfire risk. A recent study found that carbon released from California’s 2020 wildfires amounted to 127 million megatons and dwarfed the state’s emission cuts over a 16-year period. Protecting forests from wildfire risks is therefore crucial to maintaining the impact of mitigation efforts to date.   

Equally alarming are the disproportionate health impacts of fires for communities hundreds of kilometers downwind: in the US, three-quarters of deaths and hospital admissions attributable to wildfire smoke occur in the East, where population density is highest, not in the West where the majority of large fires occur. Not only are these impacts more far-reaching than previously thought, they are also more severe and long term: fine particles that travel cross-continent on the wind reach deep into our bodies, with significant neurological, respiratory, and dermatological impacts. These converging environmental and health impacts call for greater scrutiny of wildfire risks across value chains, examining how specific activities contribute to wildfire risk, as well as where both proximate and distant exposure to wildfires and related smoke poses a risk to communities and workers.

A Major Challenge to Emissions Reduction and Public Health

The impacts of wildfires on global warming go beyond the reversal of carbon mitigation efforts. Researchers in Singapore found that carbon monoxide from wildfire smoke could be both accelerating natural processes that produce methane and slowing those that remove it from the atmosphere, with much greater impact on global warming than previously thought. This presents a complex and escalating climate feedback loop: both smoke and warming drive methane levels; both carbon emissions from smoke and methane drive warming; warming drives wildfire incidence and intensity, increasing levels of smoke and methane.

The risks to brain health, evident in populations over 300 kilometers away, have huge implications for the workforce and communities, both immediate and long term. A number of studies link the fine particles of smoke to degenerative conditions such as Alzheimer’s disease as well as depression and psychosis. High exposure has also been linked to skin conditions like eczema and psoriasis and worsened birth outcomes. Particulate pollution from higher levels of methane is also more likely to aggravate respiratory and cardiovascular disease. Disproportionately impacted populations include outdoor workers—such as construction and farm workers, both with a high level of migrants—and socially disadvantaged groups with limited adaptive capacity, particularly in densely populated areas.

The Business Implications

Recognition of the climate and health impacts of smoke, alongside the push for businesses to fight air pollution, could heighten business liability and lead to stricter climate risk requirements across all company value chains:

“Acting to prevent wildfire smoke across the value chain is a climate win, a public health win, and a reduction in business risk” says David Wei, BSR's Climate Director.

Outdoor labor will be increasingly hazardous, and potentially subject to restrictions. Air quality reporting may be required for both outdoor and indoor environments, raising demand for energy-efficient filtration systems. Adaptation may also mean relocation—both in fire-prone areas and downwind. Poor communities, unable to relocate or filtrate, will increasingly face a clean air health divide, among a plethora of climate justice concerns.

Land-based sectors are on the frontline. Prolonged exposure to wildfire smoke can both disrupt farm labor and also destroy the outer layers of crops and affect soil composition. This can lead to chronically underperforming crops, potentially driving financial and job losses.

Fresh impetus for nature reporting and ecosystem regeneration can be harnessed to support mitigation. Agricultural experts in California have called for targeted grazing to manage vegetation as a cost-effective wildfire fuel reduction method. Controlled burning has long been used to protect ecosystems and communities from wildfires and support regeneration, but while preventative action can reduce insurance premiums, insurance for this practice is increasingly expensive or unavailable. Diverse forests, less susceptible to wildfires than monocultures, will be critical, a clear call for action to the pulp and paper industry, as well as for afforestation projects. Businesses dependent on forest inputs can advocate for regenerative approaches, as well as scouring their value chains for mitigation opportunities ahead of stricter requirements.

All sectors could be affected by the implications for decarbonization. Demand in the carbon offset market is high and expected to increase over the next few decades; however, the potential of wildfire smoke and other climate impacts to disrupt forestry-related projects and negate carbon reductions could drive a more critical look at offset quality and effectiveness. Despite the urgent need for investment in nature-based solutions, companies may favor technological carbon removals and inadvertently limit nature’s role in addressing both the climate and biodiversity crises. We may also see increased interest in methane removal.

In line with the IPCC’s latest report, as we emphasize here, it’s time for companies to look beyond emissions reduction to adapt to climate impacts. Where wildfires are concerned, the climate feedback loop means adaptation will also reap benefits for mitigation.

Integration and Innovation

For most businesses, adapting to wildfires and smoke means doubling down on worker and community health and safety, investing in innovative approaches alongside personal protective equipment (PPE), air quality, and remote work options. Companies such as PG&E and Torch Sensors are using AI technology for ultra-early-stage fire detection. Emerging aerial and space-based technologies are expanding possibilities for detecting early warning signs of wildfires. Breezometer’s Active Fires and Smoke Pollution Map provides businesses with fire-related pollution tracking and up-to-date fire alerts across 100+ countries.

However, while co-creating local solutions to the hazards of wildfire smoke is essential, businesses also need to respond to its dispersed impacts. Truly effective adaptation and mitigation will demand an integrated, multi-stakeholder response across sectors and even across continents. The recently published Roadmap for Wildfire Resilience supports an “all-of-society" approach, advocating collaboration across all levels of government, Tribal Nations, the private sector, and other stakeholders. UNEP is calling for countries to adopt a “Fire Ready Formula," in which 66 percent of spending is devoted to planning, prevention, and recovery from wildfires, and the remaining 34 percent is spent on response. Businesses should bolster such cross-sector initiatives and collaborate to drive more responsible forestry practices in their supply chains.

The climate, health, and environmental justice hazards make this a material concern for any companies, however remotely they are subject to fire and smoke risk.

Questions for Business

• What action can you take to address wildfire impacts across your value chain?
• How might you prepare for enhanced supply chain climate risk requirements?
• How does smoke affect health and safety for your business?
• How resilient is your carbon reduction strategy to the impacts of wildfire smoke?

Blog | Tuesday May 2, 2023

Climate Transition Plans That Enable Business Transformation

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Investor groups and key climate organizations are expecting clarity on how companies are moving from target-setting to taking action with a climate transition plan. The Glasgow Financial Alliance for Net Zero (GFANZ), the Task Force for Climate-Related Financial Disclosures (TCFD), and the CDP, among others, have released climate transition plan disclosure frameworks and guidance recently. In March 2022, the UN Secretary General’s High Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities published its final report with ten recommendations for non-state entities, which include creating a transition plan.

Calls for these disclosures are a response to gaps between companies’ targets and progress, as well as meaningful emissions reductions. In its latest progress report, the Science Based Targets Initiative (SBTi) highlights this gap—of 692 companies analyzed in the report, only 46 percent reported progress against all their science based targets.

Climate transition plans are a set of actions and accountability mechanisms that ensure business strategies and operations deliver GHG emissions reductions and a net-zero transition. While definitions and frameworks are evolving, climate transition plans should state the company’s climate objectives and goals and how they will be achieved via a net-zero aligned resilient business strategy, governance and accountability, business and financial planning, implementation, organizational culture alignment, and engagement with value chains, industry, and policy. In addition, climate transition plans should ensure a just and equitable transition, as well as the protection and restoration of nature and biodiversity.

To ensure that companies make meaningful progress toward their climate commitment, climate transition plans must enable net zero-aligned business transformation. Effective climate transition plans:

1.     Are integral to a resilient business strategy.

Integrating climate actions into business strategy will not be sufficient to deliver meaningful progress—it will require a paradigm shift. Resilient businesses anticipate material changes to the operating environment, systemically develop and test strategic plans in the context of such changes, and allocate resources that enable success in multiple potential futures. By focusing on building resilience, companies will develop and implement transformative climate transition plans that drive meaningful progress toward climate targets and deliver long-term business value. Building a resilient business may require a rethinking of business models, long-term value, and growth.

2.     Are overseen by the board and executive leadership.

Board and executive-level oversight enables alignment of governance, strategy, and internal processes with climate targets and resilience building. Executive decision-making that is consistent with purpose and long-term value generation avoids short-term thinking that sets failure on targets. Governance, accountability, and the integration of stakeholder feedback are vital for companies to remain on track to deliver emissions reductions and be equipped to respond to a changing regulatory environment.

3.     Allocate resources toward decarbonization programs.

A transition toward net zero will require most companies to radically transform their operations and product and service portfolios and address high-carbon assets. Such interventions will require companies to rethink how they allocate resources and deploy human and financial capital. Prioritizing the allocation of financial resources toward these actions will require upfront investment but can build resilience to changing market conditions and bring long-term returns. Financial metrics must be adapted accordingly.

4.     Integrate climate into skill development and corporate culture.

As business models evolve, climate and sustainability-related responsibilities will be embedded across corporate roles that will involve cross-functional collaboration. To facilitate this integration, companies need to invest in skill development, such as reskilling employees from high-emitting business units to transition programs or providing company-wide training on climate change basics.

In addition, companies will need to create enabling cultures, by openly communicating climate-related plans, policies, and procedures to employees and engaging them in decision-making processes. Leadership will have a role in framing climate change as a priority issue for the company.

5.     Lead to closer engagement with value chains.

According to the CDP, upstream scope 3 emissions of the average global company are 11.4 times greater than its direct operations emissions. To meet Scope 3 targets, companies will need to drastically invest in responsible sourcing strategies. By working with upstream and downstream business partners that have aligned priorities, companies will be able to advance collaborative solutions. Facilitating supplier access to sources of finance, technology, and training will ensure value chains have the critical support needed to advance their own climate transitions.

The disclosure of climate transition plan and other sustainability-related information is key to generating decision-useful information for stakeholders. While it is important that companies disclose high-quality information, they must ensure that climate transition plans are integrated into business strategy, lead to short-term action and emissions reductions, and generate a net zero-aligned business transformation. This approach will ensure that companies will be equipped to manage climate-related risks, generate long-term value, and remain competitive in a net-zero global economy.

Beyond business transformation, climate transition plans should lead to system-wide interventions that facilitate a net-zero transition. This requires engagement with public policy, industry, and communities affected by climate and transition policies. BSR will cover these topics in upcoming blogs.

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Pek Siok Lan

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Ms. Pek Siok Lan is Head of Investment Stewardship at Temasek International, responsible for the development and implementation of corporate governance
and stewardship frameworks.

Prior to this, Ms. Pek was General Counsel of Temasek for a decade, leading its global legal, regulatory and compliance function. She was also a Global Executive Council member, serving on Temasek’s investment, strategy, and management committees.

Before joining Temasek, Ms. Pek was General Counsel for more than 20 years at the Singapore Technologies Group and ST Telemedia Group, with responsibilities spanning governance, mergers and acquisitions, corporate restructuring, litigation, and compliance.

She serves on the board of Mandai Park Holdings, a company committed to wildlife conservation and on the investment committee of Temasek Trust Asset Management, a firm dedicated to impact investing.

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Laurence Pessez

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Blog | Wednesday April 26, 2023

Embedding Human Rights from Boots to the Boardroom

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The focus on human rights at the Board of Directors and C-Suite levels often starts in response to one of two situations: a crisis or scandal that forces a company to respond, or pressure from regulators, investors, and other stakeholders to implement a due diligence program. That pressure is very much on the rise, with emerging legislation in the EU such as the Directive on Corporate Sustainability Due Diligence and the Uyghur Forced Labor Prevention Act in the US making it incumbent upon leadership to proactively manage human rights issues across their value chain on an ongoing basis—which requires moving from the due diligence phase into long-term implementation and integration.

Through our partnership approach, BSR works with companies to move beyond the due diligence phase into implementing long-term human rights action plans, governance, systems, cultural integration, and stakeholder engagement to embed those processes across the business.

From experience, successfully implementing a long-term vision for human rights requires the following four steps:

1. Set and Communicate the Ambition

First, establish the level of ambition for mitigating or remediating identified risks. This often requires understanding stakeholder expectations and peer practices, your own company’s leverage, and, most importantly, requires a clear mandate and commitment from the top. This commitment should be accompanied by clear governance and measurable KPIs at the corporate level to channel efforts and track progress. Ambition level has implications for resources—budget, staff time, and strategic planning. Buy-in from the C-Suite and ideally the Board of Directors is critical to securing the resources and mandate needed to follow through.

Putting it into practice: After conducting a human rights assessment and gap analysis for a telecommunications company, BSR presented the results and recommendations to the Executive Committee. The Executive Committee agreed that the company faced significant human rights risks across its value chain and that additional resourcing would be needed to effectively manage those risks over the long term. BSR provided a briefing to the Board to build understanding and awareness of human rights issues for the company and supported the development of two corporate-wide human rights KPIs that were integrated into the following year’s strategy.  

2. Identify the Right Owners 

It is crucial to understand who within the company is the right person and/or department to own the different dimensions of the long-term action plans. Sustainability and/or human rights teams cannot implement follow-up alone. Instead, the entire business needs to take ownership where relevant—whether procurement teams that have direct engagement with suppliers, or product development teams that can embed human rights thinking and concepts like “privacy by design” at the product design stage. Making the business case to manage human rights will look different for each part of a business; for some, it will be a natural extension of their current focus, and for others, it may at first appear at odds to or irrelevant to their core work or context.

Putting it into practice: After an incident at a mining company’s asset in Australia, BSR was asked to provide a human rights training to help build an understanding that human rights are global, universal, and relevant in all jurisdictions. Through informal conversations during breaks in the schedule, the team got to know the participants and identified individuals who seemed ready and interested to embed human rights in their area of work; some were members of the senior leadership team, and others were junior technicians. Working with the Communities and Social Performance Manager, BSR helped build a network of human rights “champions” who could learn from each other, provide mutual support, and be a sounding board as they each continued to work to embed human rights into their separate core functions.  

3. Integrate into Business Functions 

Addressing human rights risks and impacts requires small, incremental changes to everyday processes. Understanding how teams perform their day-to-day roles and making those subtle changes to incorporate human rights thinking into everyday business activity is key.

Putting it into practice: Working with a company in the travel, tourism, and hospitality sector, BSR supported the training of customer service agents to spot concerns raised by customers that could relate to conditions of forced labor or human trafficking. In addition to raising awareness of these issues and educating customer service agents on what to look for, BSR also reviewed the escalation and reporting criteria to ensure that when issues of concern are identified, they are channeled to the right teams for proper handling.  

4. Monitor and Track Progress

Establishing milestones, metrics, and creating an associated governance structure that allows these milestones to be tracked over time and teams to be held accountable to them are critical for long-term success. Integrating human rights frameworks and measurement into a company’s Enterprise Risk Management (ERM) system can help ensure that senior leadership regularly has visibility on the company’s most salient human rights risks and mitigation actions. In addition to a traditional ERM taxonomy that looks at business impacts, integrating a human rights framework helps companies consistently track their potential “outward” impacts on society.  

Putting it into practice: BSR worked with a consumer goods manufacturer to conduct human rights impact assessments across many countries over the course of several years. To support the long-term mitigation and remediation of the issues identified in each country, BSR helped develop action plans, related metrics, KPIs, and timetables. The client worked with BSR to develop a web-based monitoring platform whereby the corporate human rights team could monitor progress across all action plans in real time. Ownership and accountability for each action plan was critical to its success, which included both local and corporate-level roles and responsibilities.

As implementation of the UNGPs has matured, there is consensus and growing awareness that a human rights program is much more than a one-off due diligence process. In fact, a human rights program is an ongoing, ever-evolving process that includes regular due diligence, long-term implementation of action plans, and continuous maturation and adaptation of strategies to provide mitigation and remedy on behalf of rightsholders. Taking the long view, and following the steps outlined above, will help companies implement, embed, and integrate human rights into their business and seal the new accountabilities for executive leadership and boards in a meaningful and impactful fashion.

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Matthew Welch

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Matthew helps to scale BSR and its impact through translating strategy into implementation, overseeing delivery of the work, and improving the efficiency and effectiveness of operations.

Matthew has a long history of leading and growing mission-driven enterprises. Prior to BSR, he was Chief Operating Officer (COO) of the Sustainability Accounting Standards Board and the Value Reporting Foundation, which pioneered sustainability disclosure standards for the capital markets. Before that, he held COO and senior operating roles at a mix of nonprofit and for-profit organizations in education and health care, where he built products and launched businesses as well as overseeing their operations.

Matthew holds a BA from Grinnell College and a MPA in management and public policy from Columbia University. He speaks Spanish and English and has lived and worked in the US, Spain, and Latin America.

Blog | Wednesday April 19, 2023

Nine Ways to Activate Your Board on Climate

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Recent years have seen an astonishing uptake of ambitious corporate climate goals. And recent weeks have seen an even more dramatic rise in activist action to boards and leadership on the very climate goals set by organizations.

Many companies have adopted climate change as a topic for board oversight—either directly or via climate commitments and reporting. As of early 2023, 2489 companies set Science-Based Targets, and 1748 made net-zero commitments through the Science Based Targets initiative (SBTi). These commitments represent prudent business and vital ambition. They also entail a level of corporate disclosure, risk management, and business transformation that should put net zero-aligned transformation squarely on the agenda for the Board of Directors. 

The major challenge for today’s boards and the companies they oversee is how to fulfill these commitments.

Climate Transformation on the Agenda

Boards are facing increased liabilities, lawsuits, resolutions, and elections on all aspects of sustainability, especially climate. This is driven by various increasingly well-known factors, including:

• Rising investor interest, especially institutional investors who expect board oversight and fluency on climate.
• Growing regulations such as the Corporate Sustainability Reporting Directive, the Corporate Sustainability Due Diligence Directive, the upcoming requirements from the US Securities and Exchange Commission (SEC), and the release of sustainability-related standards by the International Sustainability Standards Board, which include disclosures related to board oversight, expertise, and sign-off on targets and performance.
• Increased scrutiny on “greenwashing,” with a recent wave of rules across various jurisdictions, including Australia, the US SEC, the EU, and the UK Competition Markets Authority bringing about a zero tolerance on net-zero greenwashing.

These factors combined are rallying for a changed mindset by boards to act on climate-related risks and opportunities, as part of the company’s transformation strategy and growth over the short, medium, and long term.

Lessons Learned from Board Engagement

BSR has worked closely with corporate boards on climate topics. In doing so, three lessons stand out.

First, make climate relevant for the individual business, not just generic training on keywords. We recently conducted a training for a global beverage and agriculture company. After highlighting systemic climate and nature-related risks, BSR led a discussion on how they are relevant to the individual company and its board. The company could then meaningfully consider board oversight of risk management, strategy, and assurance of financial statements.

Second, respect the role of the board vs. management. For instance, BSR recently conducted a training for directors on the boards of private equity-owned companies regarding board oversight of management-led materiality process. It was essential to delineate respective roles, as well as to equip boards with enough knowledge to provide effective oversight.

Third, create shared leadership. In another example, we conducted a joint climate scenario exercise with the executive team and board of a European healthcare company. The exercise demonstrated the importance of getting key parties around the table to build a baseline understanding of climate issues, identify the relevance of climate for business, and agree on a coordinated plan for executive action and board oversight.

Climate Transformation is Not a One-Shot Effort

In March 2023, BSR engaged a small group of cross-industry members from our Transform to Net Zero (TONZ) collaborative initiative who are committed to enabling the business transformation needed to achieve net zero. 

We explored the following questions and challenges:

• How are you engaging with your board on climate transformation?
• What steps has your board taken to create support for managing a net-zero transformation?
• Does it engage in related scenario exercises?
• How does your board sign off on climate targets?
• How does it monitor progress?

Member companies shared strategic insights on how they engaged their boards on climate:

• Transformation must be driven by the CEO and board with “tone at the top.”
• ESG and sustainability teams are the fastest growing internally, impelling more cross-company collaboration, continuous training, and upskilling, including for executives and boards.
• Board committee structure is important, with cross-committee terms of reference and focus. For some members, a dedicated sustainability committee provides oversight across the strategy and programs, with continuous reviews from audit and risk committees.
• Scenario analysis is a key tool to test the resilience of business strategy, and it’s important to tailor the conversation to a board audience.

Climate oversight is a continuous leadership journey for chief sustainability officers (CSOs), executives, and boards alike. Some company leaders are engaging in fireside chats with employees and stakeholders to inspire transformative change. It takes heart and humanity, as well as continuous direction.

Nine Key Steps to Building a Climate-Competent Board

From experience with member company executive teams, BSR has identified three strategies to activate boards:

1. Competencies and structure:

• Build capacity through tailored training and education for the company’s specific circumstances.
• Incorporate climate competencies into the board skills matrix.
• Understand which board committees are charged with climate oversight and adapt messaging to their respective purviews.

2. Strategy and risk:

• Emphasize company risks associated with climate change and with failure to meet climate commitments (e.g., litigation risk, public relations risk, regulatory risk).
• Use scenario analysis to build shared understanding of material climate issues, identify business implications and foster joint problem solving.
• Elevate expert/stakeholder perspectives and impacts through briefings, direct engagement, advisory councils, etc.

3. Oversight:

• Anticipate governance risks related to climate oversight (including board elections, proxy votes, shareholder resolutions).
• Encourage rigorous audit committee oversight and verification in disclosures.
• Evaluate executive remunerations tied to climate and integrate with sustainability across social, human rights, and governance.

Since companies have disclosed and committed to board oversight of climate-related risk and targets, now they are on the hook to live up to those commitments.

Moreover, the latest Intergovernmental Panel on Climate Change (IPCC) synthesis report shows that we must speed up the scale and pace of climate action commensurate to the latest science. Business can take effective, credible action to meet the moment. And this includes an important active role for boards on climate and sustainability at large, in a continuously uncertain world where climate-related risks, opportunities, and the associated net-zero aligned business transformation need urgent attention by all, including from the top.

Sustainability FAQs | Tuesday April 18, 2023

Governance and Oversight of Just and Sustainable Business

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This FAQ sets out BSR’s perspective on the governance and oversight of just and sustainable business at companies. We believe that engaged boards, empowered executive leadership, and clear roles and responsibilities throughout companies are essential for the creation of long-term value for investors and society.

Defining Governance and Oversight

Why is governance and oversight important?

A clear system of governance and oversight ensures that strategies relating to just and sustainable business will be created, implemented, and actioned. 

What is the difference between governance and management?

Governance is the system by which business operations are directed and controlled. The governance structure of a company specifies the distribution responsibilities among different participants, such as the board, managers, and shareholders, and spells out the rules and procedures for making corporate decisions.

Management is the deployment of resources to achieve business goals. The management of a company includes running the day-to-day operations of a company, coordinating the efforts of staff to achieve strategic objectives, and ensuring that the company’s resources are used effectively and efficiently.

Governance is about direction, accountability, and oversight, whereas management is about execution, implementation, and operations. It is important to distinguish between these two different concepts when defining how to advance sustainability and social justice goals with companies by not (for example) assigning “management” expectations to boards.

Who leads governance and management, and who are they accountable to?

The company board is accountable to the company’s shareholders. The company’s board chair leads the board in keeping with the organization’s vision, mission, and strategic planning goals. Duties of boards include choosing the CEO, reviewing / approving company strategy, approving major policies, making major decisions, and overseeing performance.

The company management is accountable to the company’s board. The CEO leads the company in keeping with the board’s direction. The duties of management include making operational decisions, making operational policies, keeping the board educated and informed, creating the company strategy for Board review / approval, implementing the strategy, and bringing well-documented recommendations and information to the board.

What are the key elements of governance and oversight for just and sustainable business?

Governance and oversight for just and sustainable business is the formal integration of social and environmental goals into a company’s corporate governance and operating mode and ensures that material social and environmental issues are effectively managed at all levels of the company. Governance and oversight can be complex because social and environmental issues cut across many different components of a business.

BSR believes that a governance and oversight system should include the following five elements: (1) board level oversight, accountability, and sign-off; (2) executive leadership; (3) a core sustainability team (or similar); (4) clear roles and responsibilities for employees integral to the success of just and sustainable business; and (5) a system for understanding external perspectives via meaningful stakeholder engagement.

Structures for Governance

How should a company board engage on the topic of just and sustainable business?

Best practices include incorporating just and sustainable business into the board mandate, designating a board committee (or committees) for relevant social and environmental issues, training board members on material social and environmental topics, and hiring experts to the Board.

BSR believes there are four critical areas for boards to address:

• Stucture: Formalizing the board’s mandate for just and sustainable business via inclusion in relevant board committee charters and / or creating a new board committee to oversee just and sustainable business.
• Competencies: Recruiting board members with the right knowledge, competencies, and expertise in relevant topics, and with diverse backgrounds.
• Strategy: Developing a strategy with clear consideration for how material topics, emerging issues, and stakeholder impacts shape business success over the short, medium, and long-term.
• Oversight: Establishing goals, incentives, and accountability for management. Meaningful disclosure (e.g., formal approval of annual disclosures on social and environmental topics) is a key aspect of achieving oversight.

How are regulations changing board oversight of just and sustainable business?

Regulations and other emerging global standards are substantially increasing expectations and requirements for board oversight of just and sustainable business. The main implications include: (1) board oversight (e.g., of specific topics); (2) responsibilities outlined in board mandates; (3) board expertise and knowledge; (4) how risks and opportunities are considered in strategy; (5) incentive and remuneration considerations; (6) the board’s role setting up and overseeing due diligence processes; and (7) signing off sustainability reports and disclosures.

For example, the proposed EU Corporate Sustainability Due Diligence Directive (CSDDD) is expected to establish a “duty to act” on the consequence of their board decisions relating to sustainability, climate change, and human rights impacts, while the EU Corporate Sustainability Reporting Directive (CSRD) will require boards to be a part of the company’s due diligence process and sign off sustainability information within a company’s management report. Further, the International Sustainability Standards Board (ISSB) will require climate disclosure and an explanation of board governance and oversight.

These regulations and standards redefine the role of the board implicitly (by creating new corporate standards) and explicitly (by specifically obliging boards to oversee sustainability and human rights at their companies).

What are the best practices for establishing and maintaining board competency on just and sustainable business?

There is increasing awareness of the need to fill the gap in expertise and skills at board and management levels on social and environmental topics, such as climate change, human rights due diligence, and social justice. Best practices include training board members on material topics and emerging trends through formal means (such as executive education) or informal means (such as regular briefings and inviting the participation of external speakers).

It is important to ensure diversity of skills and experience at board level, including consideration of diversity or race / ethnicity, gender, and age. Ideally at least one board member has expertise on material social and environmental topics.

Should there be a separate board committee dedicated to just and sustainable business, or should matters of just and sustainable business be integrated into other board committees?

Assigning social and environmental issues to a board committee (or committees) allows for key issues to be considered systematically and in greater depth. However, there is no “one size fits all” approach to how this is achieved—every company board is uniquely structured, and different issues may be suited to different committees.

For example: an audit committee may oversee human rights due diligence overall or specific topics (such as privacy); a compensation committee may oversee diversity, equity, and inclusion; a nominating and governance committee may ensure that appropriate sustainability skills and experience are present on the board; a public policy committee may consider matters relating to government relations or social impact; a dedicated sustainability or corporate responsibility committee may oversee a company’s materiality assessment process and ensure that social and environmental risks are being appropriately identified, tracked, and addressed.

As a matter of principle, the entire board should have the opportunity to engage with matters of just and sustainable business that impact company strategy and have the right level of understanding required for informed decision making. The audit committee can play an important role in assigning issues to board committees and clarifying when the responsibility extends to the full board.

Structures for Management

What are best practices for executive oversight and leadership?

The “tone from the top” and good executive leadership helps build a culture of just and sustainable business throughout a company; if just and sustainable business is on the leadership agenda, it will be prioritized.

Clear roles and responsibilities provide clarity, alignment, and expectations to those executing the work on just and sustainable business, and enable effective communication between different functions, business units, and teams.

Rewarding performance and creating consequences for non-performance on a set of clearly defined goals helps ensure that just and sustainable business is placed on the same level as other aspects of business. For example, social and environmental performance can be linked to executive compensation and employee bonuses more broadly via key performance indicators linked to issues such as health and safety, CO2 emissions, or diversity.

How should just and sustainable business be organized inside companies?

The most effective organizational structure for just and sustainable business will be different across companies and industries, though most can be categorized as “centralized”, “embedded”, or “distributed” structures:

• Centralized: A larger team (e.g., 15+ staff) acts as the center of expertise and implementation at the company. This team will implement key aspects of just and sustainable business, such as strategy, reporting, and stakeholder engagement, while relying on other functions to implement the strategy and improve performance. Centralized structures are often associated with joined up approaches to just and sustainable business, such as leadership for climate change, human rights, and labor issues being jointly assigned to a single chief sustainability officer.
• Embedded: A smaller team (e.g., 5 or fewer staff) implements core elements of just and sustainable business (such as reporting and disclosure) but relies more on other functions to lead strategy development and implementation.
• Disitributed: A variety of different teams (e.g., sustainability, human rights, civil rights, DEI, product responsibility) lead different elements of just and sustainable business, often in different functions of the company. In this model there are often multiple rather than single executive leads—for example, there may be a chief sustainability officer for climate change, a VP for human rights, and a VP for supplier responsibility all leading different programs.

BSR believes that a dedicated “head” of just and sustainable business can be a best practice for some companies but not others; more important is the existence of a joined-up and cohesive approach that is accountable to the company board. We note that terms such as “sustainability”, “ESG”, and “social impact” have taken on different meanings in different industries and can be associated with very different team and individual mandates.

Which department or function should just and sustainable business be part of?

The most effective function for just and sustainable business will vary across companies and industries. BSR has seen both successful and unsuccessful teams located in departments as diverse as strategy, commununications, risk, government affairs, legal, product, and procurement; for this reason, we have concluded that department or function on its own this is not an important variable determining success. Far more important is that the team (or teams) reside in a part of the company where they can make, shape, and influence the decisions, actions, and implementation priorities most relevant for the company’s material social and environmental issues and have a direct line to CEO / executive leadership decision making.

Should there be a chief sustainability officer, and what should their brief be?

For many companies a chief sustainability officer can be a very effective role, provided the chief sustainability officer is resourced, empowered, and supported effectively. The precise role will vary depending on the company’s material issues—for example, it may focus on value creation where the company is in the business of providing sustainability solitions, or it may focus on risk mitigation where the company is faced with material risks; in both cases, being a change agent and coalition builder are common themes. For some companies a chief sustainability officer may be focussed on a constrained set of issues (e.g., climate change and nature), while in other companies a chief sustainability officer may have a broader brief that also encompasses human rights, labor issues, and ethics. There may be other leaders inside companies (e.g., a VP human rights) with chief sustainability officer-like roles. In all cases, direct access to the CEO and Board is essential.

How should other functions and teams be engaged?

A core sustainability team (even a large one) cannot fulfill a company’s just and sustainable business strategy alone, and a broader group of employees should take on roles and responsibilities to help implement the strategy, achieve goals, and improve performance. This is particularly true for companies with “embedded” and “distributed” approaches.

Many companies create cross functional working groups (or similar, such as councils and networks) to provide a platform for validating programs and initiatives, implement and support strategic initiatives, and engage a broader base of employees. These cross functional working groups can be composed of multiple functions, operations, and geographies, and it is important to establish clear meeting frequencies, agendas, and communications channels.

These cross functional working groups can be formal (e.g., defined membership, formal charter, regular meeting cadence) or informal (e.g., shifting membersip, flexible charter, and meeting “as needed”), with different approaches suiting different company cultures. In all cases an effective support staff or “secretariat” is needed for success.

How should external stakeholders be engaged?

Effective approaches to just and sustainable business require a deliberate, strategic, and structured approach to securing the insights, perspectives, and involvement of affected stakeholders (such as customers, civil society organizations, and local communities) and other experts (such as academics) and to embedding them into company decision making. This is the subject of a different BSR FAQ on meaningful stakeholder engagement.

Should companies establish external stakeholder advisory councils?

An external advisory council can help bring diverse thinking, improved rigor, and greater determination into programming and strategy. When doing so it is important to develop clear terms of reference, including: 

• Objective: Determine the objective of the group (e.g., review policies; input into strategy; provide emerging issue knowledge; guide industry best practice etc.).
• Composition: Determine the makeup of the group, roles and responsibilities, and term limits.
• Meeting frequency and agenda: Set clear meeting frequency, agendas for each meeting, and communication channels.
• Transparency: Establish clarity on whether / where the external advisory council is publicly known and / or whether the external advisory council can issue its own communications.