In a world upside down, boards must drive stakeholder capitalism

In a world upside down, boards must drive stakeholder capitalism

Corporate and political leadership towards a better, more sustainable world means taking difficult and sometimes unpopular decisions.

2022 will go down in history as one of the years when the world was turned upside down.

With COVID-19 still lurking in the background, fundamental agreements and values were violated and sent the world into a downward spiral of inflation, increasing food and energy prices, while the climate clearly demonstrated what happens when global temperatures approach a 1.5 degrees Celsius increase. Today, we face a deeply fragmented world that is becoming more divided. A world where corporate and political leadership towards a better, more sustainable world means taking difficult and sometimes unpopular decisions. But now is not the time to waver.

The Balanced Scorecard of the world is in the red

It is devastating to look back to 2015, when the Global Goals were unanimously approved at the United Nations and became the Balanced Scorecard for the world. I had just joined the U.N. Global Compact as the new CEO and executive director, and I still recall the shared excitement by heads of state and business leaders that now we had a new way of tracking our collective progress towards becoming a more sustainable society leaving no one behind.

Today, the pandemic has wiped out more than four years of progress of eradicating poverty, with more than 24 million learners at risk of never returning to school. One quarter of the global population is living in conflict, levels not seen since 1946. A record 100 million people are forcibly displaced worldwide, 80 percent due to dangerous conflict situations exacerbated by droughts, monsoon rains and floods. The war in Ukraine is causing food, fuel and fertilizer prices to skyrocket, spurring a global food crisis.

At the same time, the window to avert the climate crisis is rapidly closing. Leading up to COP27, the Intergovernmental Panel on Climate Change warned that to avoid a climate catastrophe we need to cut global emissions by 45 percent by 2030. COP27 finally delivered the long-awaited Global Fund, but it didn’t deflect a climate catastrophe — ending with vague political language and no firm commitments to phase out fossil fuels.

So, the world’s Balanced Scorecard is in the red. While political leaders lack the power to turn the tide, business leaders need to take the situation in hand and rethink their measures of success. Not by the ability to create shareholder value for the short term, but by the ability to deliver planetary, human and stakeholder value as the only means towards delivering economic value.

There is no way back to shareholder capitalism

In times of trouble, it is tempting to seek back to the old ways. That’s what we have seen in the U.S., for example, with the anti-ESG movement, or anti “woke-capitalism” movement, seeking to turn back time to Milton Friedman’s ideas of shareholder capitalism. But as we are reminded by Nicolai Tangen, who leads Norway’s $1.2 trillion oil fund: “We are observing the backlash against ESG in some places in America. Despite times being volatile in financial markets and increasingly in the economy, we think it’s more important than ever to retain the focus on these extremely important matters.”

While political leaders lack the power to turn the tide, business leaders need to take the situation in hand and rethink their measures of success.

Tangen is urging investors to stay focused on environmental, social and governance issues, warning of a real danger that economic turmoil and a political backlash in the U.S. will dampen support for the agenda. There is a strong momentum behind ESG from both governmental institutions, businesses and the financial sector — in the form of the Inflation Reduction Act in the U.S., the European Union Taxonomy and the Glasgow Financial Alliance for Net Zero led by Mark Carney. But stakeholder capitalism is still a young trend that has not yet reached its tipping point, and it will need a lot of push from a broad palette of global stakeholders to become mainstream.

Boards play a crucial role in transitioning towards stakeholder capitalism

In recent years, ESG has become a top strategic priority for many businesses across the world. Boards must ensure full integration of ESG across strategy, operations and stakeholder engagement. Failing to do so is being seen as a breach of fiduciary duty.

The European Commission’s draft directive on Corporate Sustainability Due Diligence, for example, introduces a “directors’ duty of care” provision requiring directors to consider the human rights and environmental consequences of their decisions in the short, medium and long term. It demands that directors put into place and oversee due diligence actions and policies, and adapt the company’s strategy where necessary.

According to a recent study by Boston Consulting Group and the INSEAD Corporate Governance Center, 91 percent of board directors think their boards should devote more time to the strategic aspects of ESG issues. The survey findings also reflect that boards can add the most value in their mission of stewarding the company over the long term by ensuring that ESG is integrated into the corporate strategy. Yet 53 percent of these directors say their boards are not doing this effectively.

In my mind, board directors have a great platform for driving specific companies — and the world — towards stakeholder capitalism through a strategic, transformational approach to ESG. It is the duty of each director to speak up if the conditions for doing so are not optimal. In today’s world upside down, everyone must use their platforms to get back on course towards a just, regenerative, nature-positive, net-zero economy.

It’s time to rethink human rights in the boardroom

It’s time to rethink human rights in the boardroom

As the impacts of climate change are felt by more people, human rights are taking center stage in a new and evolving climate agenda. With the blurring of lines between environmental, social and governance concerns, this ushers in a new era for companies’ ESG work.

At the core of this agenda is social justice, and the right to health and well-being. As companies evolve their climate action strategy to include Scope 3, there needs to be a focus on those stakeholder groups and rights holders most affected by climate change and environmental degradation across the value chain. With emerging legislation on mandatory human rights due diligence, the time is now for boards to fully understand the ins and outs of the evolution of human rights in a world in rapid transition.

On Oct. 8, a small revolution took place at the chamber of the Human Rights Council in Geneva. The United Nations body for human rights passed a historic resolution recognizing access to a clean, healthy and sustainable environment as a universal right. 

Decades in the making, the newly declared right to a healthy and sustainable environment sends a clear signal to governments and businesses of putting human rights at the center of climate action, of conservation, of addressing pollution and of preventing future pandemics. 

How does this influence the corporate board agenda, duty of care and risk oversight? You may begin with three simple questions to get the board dialogue started.

1. Are we ready for mandatory human rights due diligence?

Mandatory human rights due diligence laws are gaining momentum, and European countries are leading the way. Among first movers are France, Germany, the Netherlands and Norway, and 11 more European countries are actively working towards similar regulation or are getting ready to adopt the European Commission Corporate Sustainability Due Diligence Directive, in the making.  

In the context of the right to a clean, healthy and sustainable environment, here are some important facts to consider:

  • Your accountability is borderless; your salient human rights focus starts with the most vulnerable population groups whose health and livelihoods are most at risk; and it covers every business activity and business relationship across your entire supply chain.
  • Climate change, environmental degradation and loss of biodiversity undermines the future health and well-being of all people on planet Earth. One-quarter, roughly 13.7 million deaths a year, are linked to the environment due to risks such as air pollution and chemical exposure.
  • And worsening land degradation, climate change and loss of biodiversity puts roughly the health and well-being of half the world’s population at risk. Most at risk are children and women, Indigenous peoples and people living in areas most vulnerable to the impacts of environmental degradation and climate change.

2. How might our business activities affect the future of health and well-being?

In the lead up to the resolution, the WHO-UNICEF-Lancet Commission published “A future for the world’s children?” in 2020. The authors argue that despite dramatic improvements achieved in survival, nutrition and education of recent decades, today’s children face an uncertain future. They stated that government has a duty of care to protect the future of the world’s children across all sectors, citing Greta Thunberg’s famous quote: “I want you to act as you would in a crisis. I want you to act as if our house is on fire. Because it is.” They also highlighted that women and children’s rights, health and well-being are inseparable, and that woman and child health intersect inseparably with planetary health. 

Where I am going with this is that human rights due diligence also needs to take a life-course and an intergenerational perspective. It starts with recognizing the very tenets of sustainability best articulated by Gro Harlem Brundtland: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Defending the right to a healthy and sustainable life

Across the world, we are seeing a growing number of human rights-based climate litigations against states as well as corporations, which take the perspective of the vulnerable and marginalized groups.

The court cases against Shell, Total and Bayer-Monsanto are well-known, but a few others are worth mentioning.

In Colombia, the Future Generations v. Ministry of the Environment and Others has garnered much attention because it directly links to the future of health for the next generation.

In Switzerland, a group that calls itself KlimaSeniorinnen — female climate seniors — have gone to court insisting that the Swiss government fulfill its obligations under the Paris Agreement on the basis that women over 75 have a proven elevated risk of death during extremely hot summers.

In Australia, in the case of Torres Trait Islanders versus Australia, Indigenous peoples from the low-lying Torres Strait Islands have sued the Australian government for violating its duty of care to take sufficient action to stop climate change. In the long term, climate change will cause the islands to disappear below the surface of the ocean, endangering their right to life, right to privacy and family life and the right of ethnic minorities to their culture. So stakeholders from many walks of life are taking legal action to defend their right to a healthy and sustainable life.

3. How are we engaging with those stakeholders who have most at stake?

These are most unprecedented times, and this calls for different measures. Most of all, it calls for a new way of thinking of the laws of economics with a new understanding and appreciation for the world, the human, natural and ecological resources we so deeply rely upon. 

Clearly, the change we are talking about here is massive and requires systems change and all-of-society approach. Most boards would caution not to attempt to “boil the ocean.” But the Ukraine crisis has lately taught us an important lesson: Any change starts by recognizing our level of accountability and by taking a visible stand.

A very important qualification of any business in this new and uncertain world is that of stakeholder engagement. It starts by viewing the groups with the biggest stakes in the risks not as opponents but as partners, and it puts the importance of diversity and inclusion in an entirely new light.

Women, for example, are increasingly seen as particularly vulnerable to climate change because of their biological, social, economic and cultural standing in the world. But they are not just victims.

As female leaders, business owners, entrepreneurs and workers, they are also important resources for climate adaptation strategies. They can become change agents for just, regenerative and inclusive economic development practices that put next generation needs at the core. 

Time to rethink the social dimension of ESG 

Human rights have always been at the heart of sustainable development, but in recent years a singular focus on environment and climate has sometimes been confused with sustainability.

Now is the time to put human rights back at the heart of ESG with a new and broadened understanding of our duty of care for the future of health and well-being for generations to come, and thus emphasizing the “S” in the many new shapes and forms that it might take in today’s turbulent world.

Read the article from Greenbiz here.

Lise Kingo featured in GreenBiz: 3 simple climate questions for your board going into 2022

Lise Kingo featured in GreenBiz: 3 simple climate questions for your board going into 2022

COP26 came and went: Some progress, many disappointments, few surprises. This has been much covered and discussed already. But despite the lack of ambitions and absence of key players, the commitment from progressive businesses and governments has the potential to unleash an unprecedented wave of investments in the global energy transition.   

Any business that plans to be in business 5-10-20-30 years from now needs to tackle this literally burning platform with a completely different sense of urgency. For non-executive directors, this means taking personal leadership and responsibility to support chief executives and their organizations in accelerating their net-zero transformation.

Science speaks volumes of the level of ambition required

The latest Climate Action Tracker, published at COP26, gives us a pretty good idea of what we are heading towards: With current policies, we’re shooting for a 2.7 degrees Celsius increase in global temperatures by 2050. By delivering on the 2030 targets, this will fall to 2.4 degrees C, and by fully implementing all submitted and binding targets we’re heading for a 2.1 degrees C scenario. In the right direction, yes. Yet, we’re still heading for disaster.

According to the Intergovernmental Panel on Climate Change (IPCC), we need to keep global warming well below 1.5 degrees C. This half degree will make the difference from bad to catastrophic for billions of people, affecting lives and livelihoods. The past couple of years have already given us a flavor of what is in store: Extreme heat waves; floods; arctic winters; droughts; wildfires; and irreversible changes in the world’s ecosystems — it’s already happening. It’s no surprise that half of all CEOs (49 percent) state that supply chain interruptions due to climate change are among their top risks, according to a recent United Nations Global Compact-Accenture Strategy CEO report, “Climate Leadership in the Eleventh Hour.”

The headline board agenda item in 2022 is climate action

According to the Climate Action Tracker, the “glass half-full” version of the story is that if everyone delivers on their announced targets, we could deliver on a 1.8 degrees C scenario. That’s why the headline board agenda for 2022 should be how to accelerate from commitments to transformational action.

Also here the UN Global Compact-Accenture report gives food for thought: Because while more CEOs are committed to taking climate action, they are struggling to accelerate their climate ambitions.Companies working against science-based targets demonstrate real progress: From 2015 to 2019, they collectively reduced their annual CO2 emissions by 25%.

Fully 71 percent of CEOs say they are actively working to develop a net-zero emissions target for their company, and 57 percent believe they are operating in line with the 1.5 degrees C goal. Yet as an indicator, only 2 percent of these companies have a formal target validated by the Science-Based Targets Initiative (SBTI). In contrast, companies working against science-based targets demonstrate real progress: From 2015 to 2019, SBTI companies collectively reduced their annual CO2 emissions by 25 percent.

Scope 3 requires new stakeholder engagement skills

Scope 1 and 2 that focus on the company’s own operations and the energy supply are not simple, but CEOs find it particularly hard to deliver on Scope 3 of their emission targets. To broaden their net-zero impact throughout their supply chains, they need to work within their ecosystems of change, looking at competitors, policymakers, investors, providers and suppliers as stakeholders and partners. They need to join forces to improve traceability of their collective carbon footprint and agree on new incentive structures and price points to reward their collective progress towards net zero.

This is a hugely complex agenda. It bridges planetary, social and economic dimensions. It requires that we rethink leadership, governance and strategy so we create stakeholder value by default. It takes new capabilities and skillsets at the leadership level. At the board level, it starts by asking the right questions and by demonstrating the right level of support of senior management to steer the transformation through. But there is no other way.

Questions to take to the board in 2022

As you prepare for 2022, how about bringing along the following three questions for your next board meeting:

  1. Is ESG fully integrated into our overall business strategy and cascaded across the organization into transparent integrated reporting?
  2. Do we have a financed and operational net-zero climate strategy aligned with the Paris Agreement and 1.5 degrees C ambition for Scope 1, 2 and 3?
  3. Are we ready for the new company reporting requirements in the European Union complying with the Task Force on Climate-related Financial Disclosures (TCFD)?

The board has an important role in encouraging management to launch into the Race to Zero: This is a radical and transformational innovation agenda that needs full support and attention from every executive and non-executive director.

Read the article from GreenBiz here.