Adapting to AI Legislation: Preparing Boards for the Challenges Ahead

As artificial intelligence (AI) continues to transform industries, its implications extend beyond technology teams to boardrooms. The European Union’s Artificial Intelligence Act (AI Act) has emerged as a cornerstone of regulatory oversight, demanding not only compliance but also a shift in how boards of directors approach governance. This article explores the challenges, opportunities, and imperatives for boards as they adapt to the evolving AI landscape.

The Importance of the AI Act for Governance

The EU’s Artificial Intelligence Act (AI Act) is a landmark regulation aimed at ensuring the safe and ethical deployment of AI technologies. Proposed in April 2021 and finalised by EU lawmakers in December 2022, the Act is expected to come into force by 2025. It introduces a risk-based approach, categorising AI systems into prohibited, high-risk, and lower-risk groups, and mandates transparency, oversight, and accountability measures for certain applications.

The Act does not stand alone. Related directives, such as the EU AI Liability Directive, further extend accountability to both executive and non-executive boards. This dual regulatory framework requires organisations to integrate robust risk assessments and mitigation strategies into their governance structures.

For boards, the AI Act underscores the need to integrate AI risk governance into their oversight functions. Unlike deterministic systems, AI operates probabilistically, producing results with inherent uncertainties and potential biases. These characteristics challenge traditional risk frameworks, necessitating new expertise and adaptive governance practices.

Boards are thus tasked not only with ensuring compliance but also with fostering a strategic approach to AI adoption—balancing innovation with ethical considerations and operational integrity.

Bridging Executive and Non-Executive Perspectives

AI presents immense opportunities but also significant challenges, which often lead to misalignments between executive leadership and non-executive boards. Executives typically grapple with the technical complexities of quantifying AI risks and integrating these analyses into broader cost-benefit considerations. Non-executive directors, meanwhile, may focus on leveraging AI for strategic growth while underestimating the compliance and liability implications.

The European AI Liability Directive adds another layer of complexity, extending responsibilities for AI-related decisions to non-executive boards. Bridging these gaps requires fostering a shared understanding of AI’s strategic and operational implications. Boards should prioritise cost-risk-benefit analyses that account for the unique dynamics of AI adoption, such as volatile data dependencies and rapid innovation cycles.

Building AI Competence in the Boardroom

One of the most pressing challenges for boards is acquiring the knowledge needed to oversee AI effectively. A shared vocabulary and foundational understanding of AI concepts are essential starting points. Resources like ISO/IEC standards can provide this groundwork. For example:

  • ISO/IEC 22989 outlines fundamental AI concepts and terminology.
  • ISO/IEC 42001 offers guidance on AI governance and management practices.
  • ISO/IEC 38507 explores the governance implications of AI within organisations.

These standards serve as valuable references for boards navigating AI-related decisions. Structured learning programs tailored to board members can further help non-executive directors grasp the compliance, ethical, and strategic dimensions of AI. Consistency in training ensures alignment in perspectives and decision-making frameworks.

2025 Is Upon Us: Key Challenges Ahead

As the AI Act’s go-live date approaches, boards face several critical challenges:

  1. Quantifying New Risk Dimensions
    AI systems introduce unique risks, including ethical concerns, workforce impacts, and environmental effects. Standards and risk catalogues will play a pivotal role in addressing these dimensions.
  2. Scaling Governance for AI
    Moving from low-risk pilots to large-scale deployments necessitates robust governance frameworks. Boards must establish adaptive control mechanisms to monitor AI’s cost, risk, and benefit dynamics.
  3. Liability and Accountability
    The AI Liability Directive places non-executive directors under greater scrutiny, particularly in publicly listed companies. This heightened accountability demands proactive measures to ensure compliance while seizing opportunities responsibly.
  4. Balancing Innovation and Compliance
    AI’s rapid evolution requires boards to navigate the fine line between fostering innovation and meeting regulatory obligations. This involves anticipating market dynamics and preparing for unforeseen challenges.

Establishing adaptive governance mechanisms is essential, including implementing clear control points for AI’s evolution that ensure alignment with company values and compliance requirements, monitored by the board.

The Path Forward

To address these challenges, boards should consider the following actions:

  • Leverage Standards and Best Practices
    Frameworks like ISO/IEC 42001 and guidelines from international bodies provide actionable governance guidance.
  • Invest in Education and Training
    Ensuring all directors receive consistent AI-related training will enhance their ability to oversee AI strategy and compliance.
  • Establish Clear Governance Protocols
    Define control points and metrics for monitoring AI systems, from pilot phases to full deployment. Encourage better exchange between executives and non-executive directors to ensure unified oversight.

Conclusion

AI’s transformative potential brings both promise and complexity to corporate governance. As regulatory frameworks like the EU’s AI Act come into force, superficial knowledge of AI technology and compliance mechanisms is no longer sufficient. Boards must embrace deeper engagement with these issues, which may require them to delve uncharacteristically deep into technical and regulatory complexities.


The iauthor: 

Dr. Pamela Ravasio, Shirahime

Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Development & Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently is a member of INSEAD’s International Directors Network.

ESG x Governance (8): True Cost & Future Proofing – Amitava Guharoy

This is the 8th of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, we delve into the experiences of a truly global individual, who is not only an (I)NED, but also a certified global climate risk professional.

Amitava Guharoy

Amitava Guharoy is an accomplished finance and sustainability expert with a 40-year career, having held senior partnership roles at PwC in India and Singapore (where he was Advisory Leader and Executive Committee member) and EY (where he held an Asia Pacific role). He has also served in C-suite roles, including as a main board director of a South African listed company. Amitava is an alumnus of Harvard and INSEAD, a certified global climate risk professional, and sits on multiple boards. His expertise spans finance, technology, investment, and sustainability, with a focus on climate change. He actively contributes as a judge and advisory board member in the Harvard community.

What role do you believe ESG plays in corporate governance and overall business success?

ESG is foundational to company governance and long-term success. Historically, companies like Unilever and Walmart began with a strong social focus alongside their commercial objectives, aiming to improve the communities they operated in. Today, businesses continue to hold a “license to operate” within society, meaning they must integrate societal and environmental considerations into their strategies.
Profitability remains key as financial sustainability is essential for any sustainability, but the question is: at what cost? Traditional profit calculations often ignore externalities—the hidden costs that are transferred to society, such as pollution or public health issues. For example, the fossil fuel industry has been reported to have received a subsidy of $7 trillion in 2022, of which $5.6 trillion accounts for external costs like pollution and climate impact. If companies were required to account for these externalities and did not receive these subsidies, their actual profits would decrease significantly. A consequential impact would be that fossil fuels costs would rise significantly impacting related energy costs.
ESG helps businesses address these risks. If companies continue to operate without considering environmental and social factors, they risk undermining long-term profitability. The growing costs of climate change are a major concern; reports indicate that by 2050, it could reduce global GDP by nearly 20%. Currently, cost of natural disasters alone affect global annual growth by 10-12%.
By integrating ESG principles, companies not only protect the environment and society but also ensure their own financial sustainability. Short-term profit maximization may seem appealing, but it’s ESG-driven strategies that secure long-term financial performance and corporate success. This is why ESG is foundational for both business sustainability and broader societal well-being.

From your experience in India, Singapore, and globally, how does ESG create value beyond compliance and risk management? Do you see any geographical differences in its impact?

Managing risk is essential, but it alone cannot drive a profitable business. Boards, particularly in Asia, often focus on compliance—ensuring legal and disclosure requirements are met—while neglecting ESG as a potential performance differentiator. In fact, ESG can elevate a company, distinguishing great companies from merely good ones.
Private equity firms, for example, increasingly prioritize ESG when evaluating investments. Strong ESG practices can lead to higher market valuations and improved EBITDA multiples upon exit. A McKinsey study shows that companies leading in profitability and growth and also leading in ESG enjoy a 1-2 percentage point higher Total Shareholder Return (TSR) than companies with similar profitability and growth but lacking the ESG performance.
Climate change presents a once-in-a-generation opportunity for transformation. Emerging technologies tied to climate action could drive significant returns. This is evident in regions like India, where, despite the lack of ISSB based ESG disclosure requirements, according to a recent report, 77% of C-suite executives believe sustainability practices boost revenues, and 84% see operational improvements as a result of ESG integration.
Beyond financial gains, ESG enhances employer branding, particularly among younger generations like Gen Y, Gen Z, and millennials, who prefer to work for sustainable companies. This has become a critical factor as companies face talent shortages.
On the regulatory front, ESG can either enhance or erode value. For instance, Southeast Asian palm oil producers will face challenges with the upcoming EU non-deforestation regulation, which could hurt non-compliant companies while benefiting those that adapt. Similarly, Indian steel companies exporting to Europe could see profits affected by carbon taxes (due to the upcoming CBAM regulations), underscoring the importance of aggressive decarbonization strategies.
In short, ESG offers opportunities for higher financial returns, operational efficiency, and competitive differentiation, positioning companies for long-term success in a changing global landscape.

In your experience, what is the biggest alignment gap in ESG between executive teams and non-executive boards? What recommendations would you give to address this gap?

A key gap between executive leadership and non-executive boards in ESG terms often stems from differing priorities. Executive teams are driven by the need to create value. If a company doesn’t adopt sustainable business practices, it may struggle to maintain its financial sustainability. As an example, private equity funded businesses without sustainable business practices may be difficult to sell or struggle to achieve appropriate value affecting overall returns for the fund. Conversely, companies with strong ESG strategies can command higher multiples and smoother exits.
However, non-executive boards in Asia generally have tended to focus more on compliance and risk management. Their mindset is often geared towards minimizing risks rather than actively seeking ways to enhance value through ESG initiatives. This can limit the company’s potential to fully leverage ESG as a driver of long-term performance.
To bridge this alignment gap, the mindset of non-executive directors need to shift from merely ensuring compliance to engaging with how ESG can enhance company value. Boards should move beyond a risk-averse approach and instead focus on how superior ESG practices can unlock value, create differentiation, and enhance profitability (without neglecting appropriate risk management). Private equity firms, with their shorter investment horizons, are well-positioned to lead this shift by demonstrating that companies with strong ESG practices can achieve better financial outcomes.
Non-executive Directors could help to facilitate the adoption of a more proactive role in ESG strategy. They need to work closely with executives to understand how ESG initiatives can contribute to both short-term returns and long-term value creation. By aligning themselves with the executives’ goals and actively contributing to ESG integration, non-executive boards can help drive better performance and optimize financial returns. Aligning the executive compensation plans to the value created by adoption of ESG strategies would also be important.
Ultimately, as ESG becomes a central factor in business success, this alignment between executives and non-executives will be critical for any company looking to stay competitive, profitable and sustainable going forward.

What are the key gaps in ESG understanding among board directors that need to be addressed for them to become ‘ESG fit’? How can boards effectively upskill in this area, and what should Board Chairs prioritise?

Training is critical for board directors to become “ESG fit,” but the right kind of training is essential. While it’s unrealistic to expect most board members to become climate experts, they should at least be capable of having meaningful discussions on ESG matters, just as they do on finance. Many directors are not finance experts, yet they contribute meaningfully to those conversations. The same standard should apply to ESG.
Peer influence plays a vital role in this learning process, often being more effective than formal training. For many senior directors, the idea of returning to the classroom can be daunting, especially for those who haven’t been in an academic setting for years. While structured training, like the one-day courses offered by the Singapore Institute of Directors, may help, they aren’t enough to drive significant change on their own. It’s the influence of peers within their network that often compels directors to take ESG seriously.
Board Chairs must prioritize finding ways to foster a cultural shift among directors. This could involve creating an environment where peer-driven learning is encouraged and providing incentives for directors to engage with ESG topics in a meaningful way. Moreover, the presence of just a few climate-competent directors on a board can significantly elevate the overall ESG competency of the group.
And then of course, institutions like INSEAD could also play a larger role in this process, particularly in regions like Asia, where ESG training is becoming increasingly important. As the business landscape evolves and executives push ESG forward, Board Chairs must ensure their teams are prepared to contribute to these discussions, even if the learning curve is steep. In time, this will enable boards to meet the growing demands of ESG effectively and strategically.

How do you differentiate between ESG literacy and true expertise on a board? Using your finance experience as an analogy, when is literacy sufficient, and when is expert knowledge essential for effective contributions?

The distinction between ESG literacy and expertise can be likened to the difference between general financial literacy and specialized knowledge in finance. For example, consider finance professionals serving on a board. They may be well-versed in the overall cost of capital, funding sources, and financial structuring. However, they need not be experts in M&A or leveraged buyouts (LBOs),which require a deeper understanding of specific financing challenges, structuring complexities, and market implications. These director are financially literate but do not possess the specialized expertise required for nuanced discussions on LBOs or M&As.
Similarly, in the realm of climate change and ESG, one can be literate without being an expert. A board member might understand the general causes of climate change, recognize that rising temperatures will adversely impact business operations, and identify related risk factors. However, they may lack the specialized knowledge needed to interpret complex climate models, understand how various parameters interact, or assess the nuanced implications of climate risks on long-term business strategy.
In this context, ESG literacy is sufficient for basic understanding and governance, enabling directors to engage in strategic conversations. However, true expertise becomes essential when the board faces critical decisions influenced by climate change or sustainability challenges. This distinction is crucial, as it determines how effectively a board can navigate ESG issues and integrate them into corporate strategy. As with finance, boards benefit from having a mix of literate members who can engage in discussions, alongside experts who can provide deep insights when needed. If required, they can be supplemented with expert external advice.

What do you see as the biggest ESG challenges for non-executive boards in the next decade, and how can companies effectively tackle them?

In the coming decade, non-executive boards will face significant ESG-related challenges, primarily driven by evolving mindsets, higher impact of climate and nature related challenges, deeper stakeholder engagement and technological advancements.
Firstly, the mindset of directors is expected to shift from a risk management focus to a more proactive, value-creating approach. Boards will increasingly recognize that effective ESG practices are not just about compliance but are integral to long-term business success. This change will facilitate more informed decision-making and a stronger commitment to sustainability.
Secondly, stakeholder engagement will become more comprehensive. Currently, many companies in Southeast Asia and India maintain relatively shallow dialogues with stakeholders. However, as the expectations of asset owners and managers converge, boards will need to actively engage in meaningful discussions with all stakeholders to understand their needs and perspectives. This shift is essential for aligning corporate strategies with stakeholder expectations, which will be crucial for future success by facilitating “Future- Seizing” rather than mere “Future-Proofing”.
Thirdly, ESG considerations will transition from being peripheral to foundational within corporate structures. Companies that excel in ESG practices will differentiate themselves, gaining competitive advantages, attracting investors, and potentially achieving higher market multiples and lower financing costs.
The adoption of new technologies will also play a pivotal role. Innovations in artificial intelligence, quantum computing, and sustainable materials are already emerging, enabling companies to develop more effective solutions for reducing emissions and improving sustainability. Boards must embrace these technological advancements to stay competitive and drive value.
Culturally, many Asian boards traditionally prioritize risk management, but this perspective must evolve. A shift towards recognizing the potential of sustainability as a transformative opportunity is necessary. For instance, allocating carbon costs to individual departmental profit and loss accounts can catalyse significant change, similar to how the allocation of working capital costs transformed financial management in companies. By addressing these challenges proactively, boards can position their companies for sustainable success in the future.

As we conclude this insightful conversation, Amitava underscores a crucial point: the role of organizations like INSEAD can significantly enhance the ESG landscape in Asia by leading initiatives in training and awareness. He emphasizes that ESG should not only be viewed as foundational but also as a strategic lever for driving corporate purpose and value. This perspective is vital for boards as they navigate the complexities of sustainability, highlighting the need for proactive engagement and continuous learning. By fostering a deeper understanding of ESG principles, boards can better position their companies for success in an increasingly competitive and environmentally-conscious market.


The interviewer: 

Dr. Pamela Ravasio, Shirahime

Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Development & Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently is a member of INSEAD’s International Directors Network.

ESG x Governance (7): Of Multinationals & Start Ups – Jukka Märijärvi

This is the seventh of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, we delve into the experiences of a seasoned executive turned INED, with unique experiences in both, multinationals as well as start ups.

Jukka Märijärvi

Jukka Märijärvi is a seasoned executive based in Helsinki, Finland, with a rich background in both startups and large corporations, notably Nokia. He has held various roles, including oversight of customer interfaces and the mobile handset business, where he managed software quality and product roadmaps in a competitive market. With extensive board experience, Jukka brings a unique Nordic perspective and a strong ability to navigate challenges, making him a valuable contributor to strategic decision-making in non-executive advisory roles. His expertise in technology and product management enhances his effectiveness in governance and corporate oversight.

In your view: What is the relevance of ESG for overall company governance and success?

The relevance of ESG (Environmental, Social, and Governance) factors in corporate governance and success is increasingly significant. ESG has evolved into a basic competitive requirement for companies. Businesses must meet these criteria to attract investors, enhance brand value, and retain talent and customers.
Drawing parallels to the quality movement of the 1980s, some companies superficially embraced quality through slogans and merchandise rather than genuine commitment. Today, a similar trend is observed in how companies approach ESG—often focusing on public relations rather than meaningful action.
For example, while companies may announce ambitious projects in sustainable energy or diversity initiatives, the implementation can be slower and more costly than anticipated. This hesitation can stem from uncertainty about the return on investment or the effectiveness of these initiatives.
Moreover, the global political landscape influences corporate attitudes toward ESG. During periods of reduced regulatory oversight, such as under certain political administrations, businesses may deprioritise environmental concerns. This shift can lead to a decline in public enthusiasm for sustainable practices, as seen in the lukewarm adoption of electric vehicles despite growing climate concerns.
In summary, while the ESG framework is essential for modern governance, companies must adopt a genuine commitment to these principles. A proactive and authentic approach, rather than a superficial one, will ultimately lead to better governance and long-term success.

From your experience in the Nordic region with large corporations and start-ups, what unique value does ESG offer beyond compliance and risk management? Have you noticed geographical differences in its adoption?

In my experience, the Nordic countries are distinguished by a strong commitment to ESG principles, largely driven by a rule-based societal structure. This cultural inclination towards ethical responsibility and compliance is evident; once regulations are established, businesses tend to adopt and implement them proactively.
The value of ESG extends beyond mere compliance and risk management. It encompasses societal impact and corporate citizenship, fostering a sense of pride among employees and stakeholders. For example, the Finnish bank, Ålandsbanken, integrated environmental initiatives into its strategy by actively supporting the health of the Baltic Sea, financing annual initiatives, and linking CO2 footprints to credit card spending via the Aland Index. This not only garnered positive publicity but also instilled a sense of purpose among its employees.
The index was originally developed at Ålandsbanken in 2016, later becoming a stand-alone company and is now used by more than 90 banks.
In larger corporations like Nokia, ESG has long been taken seriously, demonstrated by their commitment to reducing environmental footprints and enhancing brand reputation. Initiatives were embedded in their operations well before regulatory requirements emerged, with sustainability forming part of their corporate ethos. The annual Nokia Quality Award, for instance, has included an environmental category since 1996.
In contrast, start-ups often focus on immediate operational challenges, such as scaling their business, which can result in ESG considerations being deprioritised. However, innovative start-ups that incorporate ESG into their business models, such as those focused on wastewater reduction, can achieve significant operational efficiencies and cost savings.
Geographically, I’ve observed that the prioritisation of ESG varies widely. In regions with stringent regulations, businesses are more likely to embrace ESG as a core value, while in areas with less oversight, there may be a tendency to overlook these considerations. Understanding the regional context is thus crucial for companies seeking to effectively integrate ESG into their governance frameworks.

Where is the biggest alignment gap in ESG between executive leadership teams and non-executive boards? What recommendations do you have for non-executive boards to address this gap?

A significant alignment gap often exists between executive leadership teams and non-executive boards regarding ESG initiatives. This gap can arise from several factors, including the lack of familiarity with ESG issues among board members. Many boards consist of members with diverse expertise, but ESG might not be among their strengths, leading to questions about the authenticity and depth of reported ESG activities.
One challenge is the detachment of board members from the day-to-day operations, which can hinder their understanding of the true ESG landscape within the organisation. Board meetings are infrequent, and the information presented may not reflect the realities “on the ground.” Consequently, the executive team, being closer to the operations, often has a more comprehensive understanding of the company’s ESG performance.
Moreover, while executives may be committed to ESG strategies, the focus on high-level targets can sometimes overlook the critical details necessary for effective implementation. There is often a disconnect between strategic intentions and actual execution, reminiscent of the common misconception that announcing a strategy equates to its implementation.
To bridge this alignment gap, I recommend that non-executive boards take a proactive approach to ESG oversight. Establishing an ESG committee led by a non-executive director can provide an independent perspective on ESG matters. This individual would ideally possess relevant training and expertise, ensuring that ESG issues are treated with the seriousness they deserve.
Additionally, it’s essential for boards to integrate ESG discussions into their regular agendas and ensure that performance metrics are well-defined and measurable. This approach will facilitate better understanding and monitoring of ESG initiatives, ultimately aligning the board’s oversight with the executive team’s operational realities.

Given the disparity in ESG understanding among board directors, what are the key areas for improving ESG competency, and how can boards effectively upskill? What should be the priorities for Board Chairs?

The disparity in understanding ESG among board directors is significant, often stemming from varying levels of knowledge and experience. For boards to be ‘ESG fit,’ it is crucial to close the gap in knowledge, particularly regarding how ESG impacts overall corporate strategy and performance.
The culture of the board plays a pivotal role in this process. The chair of the board is key; they must be well-versed in ESG topics and actively engage with stakeholders, including investors, to gain insights and support. By fostering a culture of continuous learning and curiosity, chairs can encourage directors to explore ESG issues more deeply.
To efficiently up-skill, boards can leverage existing committees to incorporate ESG matters into their agendas. This approach allows for a bottom-up integration of ESG into board discussions. It’s essential that board members recognize the importance of ESG as a strategic imperative rather than merely a compliance checkbox.
One challenge is the tendency for directors, particularly those with deep expertise in specific functional areas, to dominate discussions and steer focus towards their interests. This can create silos and prevent a holistic view of ESG. Therefore, it is vital for the board chair to encourage a balanced dialogue that considers broader corporate strategy alongside ESG implications.
Board chairs should prioritize creating an environment where ESG is treated as a strategic issue and not just operational detail. This may involve curating educational opportunities, bringing in ESG experts for presentations, and ensuring that discussions remain focused on the bigger picture rather than getting lost in minutiae. Ultimately, a well-rounded understanding of ESG will empower boards to make informed decisions that align with stakeholder expectations and long-term sustainability goals.

What do you foresee as the key ESG challenges for non-executive boards in the next decade, and how can companies effectively address them?

Reflecting on the future, I believe the biggest ESG-related challenge for non-executive boards will be the persistent gap between commitments and tangible outcomes. Despite the growing emphasis on ESG, many companies still struggle to translate their lofty goals into actionable plans and measurable results. The concern is that the environmental situation continues to deteriorate, and without a clear understanding of key performance indicators (KPIs) and the relevant actions to address them, progress will remain stagnant.
A significant issue here is the concept of accountability. Each year, general meetings release boards from liability, which can create a disconnect between long-term ESG goals and the actual responsibility for achieving them. This results in a lack of ownership and accountability for future outcomes, as current board members may not be around to see the implications of their decisions or commitments.
To address this challenge, boards need to cultivate a culture of accountability, where ESG is integrated into the fabric of corporate strategy. This includes not only setting ambitious goals for 2040 or 2050 but also ensuring that there are mechanisms in place for tracking progress and holding individuals accountable. In this regard, companies could benefit from a framework that ties executive compensation and performance metrics to ESG outcomes, thereby creating incentives for board members and executives to prioritize these issues.
Moreover, companies should actively engage with stakeholders, including investors and regulators, to stay informed about evolving expectations and best practices in ESG reporting. This could involve collaborating with peers to share insights and experiences or investing in training programs that enhance the board’s understanding of ESG implications.
Ultimately, the responsibility for ESG should not be seen as an isolated issue but rather as an integral part of overall corporate governance. By embracing this mindset, boards can better navigate the complexities of ESG challenges and drive meaningful progress over the next decade.

As we conclude, Jukka Märijärvi highlighted that it’s essential to recognize the dual role of AI in the ESG landscape and its potential to enhance ESG reporting through efficient data processing and insights. However, he also cautioned against the environmental impact of AI technology, particularly its high energy consumption associated with advanced hardware development. This discussion underscores the need for boards to balance technological advancements with sustainable practices in their governance strategies.


The interviewer: 

Dr. Pamela Ravasio, Shirahime

Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Development & Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently is a member of INSEAD’s International Directors Network.

ESG x Governance (3): An ESG Executive’s Insights

This is the third of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, we delve into the experiences of a seasoned ESG executive, exploring the insights she imparts to non-executive boards regarding ESG-focused interactions.

Kiku Loomis

Kiku Loomis is a seasoned ESG professional bringing 20+ years of expertise in business and sustainability. Guiding global Fortune 500 companies, she strengthened sustainability programs and managed PVH’s human rights supply chain. Kiku directed traceability and certification at the Rainforest Alliance, later integrating Rainforest Alliance and Utz Certified. In 2000 she co-founded World Monitors, and launched the Fair Factories Clearinghouse, acquired by Worldly in 2023. Kiku is a director for the New York Solar Energy Society, former Foundry Theatre director, and on the Advisory Board for a biodiversity research project in Maui. She’s also a member of the ExCo of the INDEVOR Global Club and a founding member of the INDEVOR student club.

How do you perceive the significance of ESG for overall company governance and success?

My inclination is distinctly biased toward the complete integration of ESG into a company’s strategic framework. Over my 25-year career in sustainability, which began in my early 30s, I’ve consistently viewed ESG issues as pivotal business risks. Whether it’s human rights concerns or historical challenges like pollution, these have been part of our discourse for decades. ESG, in its current form, provides a more systematic and advantageous approach for companies, addressing risks while presenting new opportunities.
My focal point has always been ensuring a harmonious alignment of board strategy with the diverse opportunities encapsulated in ESG. For instance, aligning strategy with opportunities like electric vehicles or solar power significantly enhances the prospects of success. As we navigate the challenges of surpassing planetary boundaries, understanding dependencies becomes paramount, especially concerning supply chain risks. ESG serves as an invaluable framework, extending beyond immediate financial considerations to encompass societal values crucial for long-term health and value creation. While it may not yield immediate gains, I firmly believe that ESG plays a pivotal role in shaping a company’s medium and long-term success. This encapsulates the high-level, theoretical perspective I bring to the discussion.

What’s the key ESG misalignment between executives and non-executive board members, and how can non-executive boards effectively address and bridge this gap?

To start out: it is worth noting that not every board is the same! Boards may lack specific ESG knowledge, despite a noticeable rise in ESG discussions, especially in Europe. While board members may be aware of ESG matters, their proficiency in operational aspects could be limited. If an alignment gap exists, it might stem from a divergence in expertise between the board and the company. Turning to the second part, the ongoing discourse on ESG and the board’s agenda has prompted various training opportunities, though current materials often remain foundational. While non-executive board members may have a reasonable ESG understanding, the current imperative is to delve deeper into issues specific to their organizations. We’ve moved past the introductory stage, requiring executives and board members to engage in more profound discussions and tailored learning experiences aligned with their organizational nuances.

What crucial gap must boards address to achieve ‘ESG fitness,’ and how can they efficiently enhance skills in this area? What should Board Chairs prioritize to foster ESG competency among directors?

A significant source of strategic tension derives from a systemic conflict between traditional make-take-waste business models and ESG imperatives, and it calls for a reconsideration of practices, particularly in sectors like apparel, where a shift from linear to circular models is crucial. The challenge also involves the misalignment between financial incentives in capital markets and ESG principles, leading to decisions where financial interests clash with ESG perspectives.
Managing this tension falls to CEOs, who must present these complex issues for collective deliberation. Achieving complete alignment between ESG goals and financial objectives is a broad challenge requiring political attention, with the European Union’s regulatory initiatives seen as a potential model. For board chairs, the recommendation is to foster inclusive conversations across the organization, steering clear of siloed approaches. Integrating ESG considerations into the overall governance framework, whether through committees or alternative mechanisms, is crucial for a holistic and effective approach.

As 2024 approaches, what are the main ESG challenges for non-executive boards, and how can companies strategically address them?

The first imperative is fully integrating ESG into a company’s core strategy to avoid conflicting objectives, going beyond compliance to create a seamless integration into the broader strategy—a crucial safeguard amid evolving ESG landscapes.
A top challenge for multinational companies is to conform with emerging reporting requirements, including developments like the European Corporate Sustainability Reporting Directive . This is a substantial challenge for global companies grappling with various jurisdictional reporting requirements. While it entails significant investment and meticulous processes, it’s vital to perceive it as more than compliance—viewing it as a catalyst for progress and valuable strategic insights. This era compels companies to collectively comprehend and fulfil ESG commitments for transparency and accountability.
Then, as we approach 2030, the focus must extend beyond climate commitments to effectively implementing them. Despite substantial challenges, the innovation spurred by collective ESG focus, particularly in climate action, presents significant potential.
For governance, fostering innovation and welcoming solutions aligned with ESG goals, especially in climate-related initiatives, is a strategic imperative propelling progress and integration into the core of business.
Lastly, one emerging concern for boards is the emerging prominence of Biodiversity and Nature loss, with a “nature positive” movement addressing the alarming loss of biodiversity and the impending sixth extinction.


The interviewer: 

Dr. Pamela Ravasio, Shirahime

Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently sits on the boards of Polygiene AB and INSEAD’s International Directors Network.