Time for a radical reinvention of corporate governance through purpose-led lens

Jane Taylor, Chair Manaaki Whenua - Landcare Research and Orion Group, Director Silver Fern Farms

Boards have a vital role to play in addressing the enormous crisis of biodiversity loss, compounded by increasingly catastrophic climate change. The coronavirus pandemic has accentuated the devastating impact global threats can pose to human and economic well-being.  It has reminded us that nature – taiao – is central to all aspects of our existence, from the air we breathe, our nourishment and shelter to our spiritual, cultural, and recreational well-being.  If there was ever any doubt, the interdependence between planetary health and human health has never been more obvious than it is today.

The private sector has the power to accelerate the transformative change required to address these dual challenges by putting purpose and sustainability at the centre of business models – in effect, moving sustainability from “niche to norm”. It is axiomatic that the director community has a crucial responsibility to catalyse this transformation, to provide the necessary strategic oversight and to communicate progress with investors and other participants.  If the pandemic has taught us anything, it is that the resilience and the agility required to be successful in an increasingly disrupted global economy can only be achieved through a comprehensive and robust strategy underpinned by the principles of sustainability.  The short-termism that has pervaded our capital markets must end - return on investment is as much about environmental and social dividends as it is financial.  Resilience has overwhelmingly been proved to trump short term balance sheet efficiency.  The time has come for a radical reinvention of corporate governance through a purpose-led lens.

On the bright side, there is certainly increasing impetus as enlightened companies seek to put sustainability and climate at the top of the agenda – not as a separate discrete “nice to have” but at the very heart of corporate strategy.  This is not just about risk management or cost-effectiveness. It is fundamentally about driving value for future growth by adapting and catalysing change. It is about embarking on a transformative journey - capturing new markets, leading innovation and, ultimately, in doing so, restoring balance between nature, people and planet.

Corporations have a broad set of stakeholders that includes their investors, customers, employees, and the communities in which they operate.  All these parties are asking for commitment, clarity, and communication around social and environmental factors. It is time to listen and to respond. We need to be cognisant that 60% of global GDP is controlled by consumers, and that demand for sustainably aligned companies, investments, products, and services is rising exponentially. We have also seen that purpose-led companies and investments that are ESG aligned have generally not only survived but have outperformed those that are not, particularly during the current pandemic.

So, what can you do as a board director to prudently manage the risks and capitalise on the inherent opportunities of this crisis – or, as it has been aptly termed, the “tragedy of the horizon”?

First, insist on the integration of sustainability into core strategy across all aspects of the organisation. Sustainability is not a stand-alone issue to be confined to lip service in the annual report. This includes improving ESG and climate fluency at the board and executive management level, asking the right questions and providing informed and agile oversight. It includes active engagement with your people and in particular the younger generation of employees, to whom social and environmental sustainability really matter. In my experience, such engagement is enlightening and may offer extraordinary insight into ways to transform your organisation with vision and passion.  Take active measures to prepare your employees for the future of work.  The nature of the skills necessary for the future is changing rapidly due to increasing digitisation and emerging technologies, the pace of automation and recognition of the benefits of remote working.  Many of these changes are directly linked to sustainability outcomes, including the governance and management of climate risk and opportunity.

Secondly, focus your attention on the climate emergency.  Climate change is arguably the most critical driver of financial risk and opportunity today. Best in class governance must therefore include integrated and effective climate governance.  Join the growing ranks of companies disclosing carbon emissions and reduction targets.  Investors, governments, employees and consumers are all asking for improved reporting and transparency. The recommendations of the Task Force on Climate-related Financial Disclosures, TCFD, and the emerging Task Force for Nature-based Financial Disclosures, TNFD, offer a real opportunity to drive strategy and progress by mainstreaming consideration of climate risk into strategic investment decision making to facilitate the efficient allocation of capital.

To be clear, TCFD reporting is not a compliance exercise.  As well as facilitating physical risk management, opportunities associated with transition risks and adaptation to the impacts of climate change will become apparent – use them to your advantage.  Under TCFD, governance is a foundational pillar of climate risk and opportunity management. Without effective long-term stewardship, the other three pillars, strategy, risk management, metrics and targets will potentially be redundant.

Third, commit to reduce CO2 emissions, set a target in line with the Paris Agreement and produce a credible climate transition action plan.  Be ambitious - go beyond carbon neutral to net zero and net positive, joining the many companies that are voluntarily choosing to do so. You can also look to improve the quality, impact, and transparency of corporate carbon offset efforts, including the adoption of nature-based solutions (which have positive benefits for biodiversity).  Communicate your climate and nature footprint to your consumers – they will more than appreciate it. 

This is the time for transformational leadership, and the boards of companies must play a catalytic role in this endeavour. We need to put nature at the heart of our economy as we work rapidly to accelerate our transition to a low carbon, sustainable future.