ESG x Governance (5): The CSRD Challenge – Céline Abecassis-Moedas

This is the fifth 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 business academic who is also an INED, and explore the insights he has gained in the course of her career.

Céline Abecassis-Moedas

Céline Abecassis-Moedas is an academic and corporate leader, with over 25 years of experience spanning academia, consulting, and board positions. She is the Dean for Executive Education and Associate Professor at Católica-Lisbon School of Business and Economics, and serves as a non-executive director on the boards of CUF (chair of the innovation and sustainability committee), Vista Alegre Atlantis in Portugal, and Lectra (Chair of the remuneration committee and member of the CSR committee) in France. She also was on the board of Europac in Spain and of CTT and Grrenvolt in Portugal. She earned her PhD from Ecole Polytechnique, a MSc from Dauphine University (France), and is also an INSEAD IDP-C certified independent non-executive board director.

How does ESG, particularly with the emergence of the CSRD, impact company governance and success?

In my view, the relevance of ESG for overall company governance and success is multifaceted. Firstly, it’s a requirement. Legislation is evolving, and 2024 is a pivotal year as companies will need to report increasingly detailed ESG information due When I say it’s a requirement, I’m referring to the Corporate Sustainability Reporting Directive (CSRD). The first cohort of large companies will need to report on their fiscal year 2024 activities under this directive.
From my perspective, obtaining this information is quite challenging, especially for SMEs, which are often suppliers to the companies on whose boards I serve. It’s like we’re reinventing accounting or creating a parallel system of accounting. We must report all these new metrics, and many companies are unsure where to begin.

What’s the added value of ESG beyond compliance and risk management, considering your board and academic experience, and do you see any geographical variations in its importance?

Yes, it’s an interesting topic. Last week, during our Advanced Management Programme (AMP)—the most senior programme we have— I invited a guest speaker (a female seasoned expert in the area) to discuss the Corporate Sustainability Reporting Directive (CSRD) because it’s a major topic. She titled her talk “CSRD: Challenge or Strategic Opportunity,” which aligns perfectly with what we were considering. While not all companies view it as an opportunity, some definitely do.
For example, I serve on the board of a company in technology for the fashion industry that focuses on computer-aided design and manufacturing. They report on metrics such as energy usage and improvements over time. This company structurally benefits the environment by helping its clients reduce waste. However, since it’s their clients’ waste being reduced, it doesn’t directly reflect on the company’s own sustainability metrics, which is frustrating. The fashion industry is highly polluting, but by enabling on-demand fashion and reducing waste, this company contributes to sustainability. This exemplifies how CSRD can be seen as an opportunity rather than just a challenge.
On the other hand, I also sit on the board of a ceramics company, which uses a lot of energy. The recent rise in energy costs has been a financial nightmare for them. They’re now considering changing their energy sources to become less dependent on traditional, more polluting options. For them, CSRD is more of a challenge, but it can become an opportunity.
I notice more industry-specific differences rather than geographical ones. My experience is mostly in continental Europe—Portugal, France, and some in Spain. I suspect the topic is less pressing in the US, but I don’t have detailed information on that.
I am an optimist and believe CSRD presents opportunities for those who understand what is at stake. In the last two years, I’ve seen the growing importance of our role as non-executive directors in this area. While executives drive these initiatives, we have a significant responsibility bring external perspectives and best practice from company to company. This makes our work as non-executives particularly valuable.

What alignment challenges do you observe between executive leadership and non-executive boards in terms of ESG, and what recommendations would you offer to address these?

In terms of alignment, I also see the need to balance the Environmental (E), Social (S), and Governance (G) aspects of ESG. When people talk about ESG, they often prioritize the Environmental part, while the Social and Governance parts receive less attention. Two companies where I serve on the board—a tech company, and a healthcare company—are very people-oriented. Both have faced the issue of doing a lot in terms of social initiatives but not reporting it effectively. It’s a pity because their efforts are not visible. They needed to make an effort to report better, use more KPIs, and show their social impact more clearly.
The environment part is always present and significant but difficult to address. As for governance, it’s often assumed to be well-managed, but it should receive more focus. This could be because governance was previously well-handled, or because the other two areas need so much attention that governance is overlooked. I believe it’s a bit of both.
In governance, two things are particularly important, diversity and processes. Diversity on the board is essential, beyond just gender diversity. Diversity is becoming mainstream, but it’s crucial to extend it beyond gender. More than anything it is the existence of processes that guarantees good governance.
Finally the balance between the three and they interact is core and needs to be looked at.

What are the main gaps for boards to become ‘ESG fit,’ and how can they efficiently up-skill directors? What should Board Chairs prioritize?

What I’ve been observing more and more from the inside is that, in the last year or two, companies are increasingly hiring for ESG roles. They are bringing in consultants and hiring dedicated ESG personnel within the company. It’s like we’re creating a second accounting system and now building the team for it.
If you compare it, today a company might have an accounting team of 25 or 30 people for regular accounting and only two or three for ESG. It will take time to build up to the same level, but that’s where we are getting. As both a board member and an academic, I see that even the most dedicated companies often don’t know where to start. The CSRD rules are very demanding, still being designed, and this creates a significant challenge. Companies often don’t know where to begin. They are seeking help from consultants, but even the consultants are still learning. This situation is both exciting and a bit scary because we are all learning as we go.
For boards to be “ESG fit,” the biggest gap to close is in understanding and capability. Boards need to prioritize building their own knowledge and skills in ESG. This means Board Chairs should create ESG training for board members, hire or consult with experienced ESG professionals, and integrate ESG considerations into the core strategy of the company.
Efficient and effective up-skilling can be achieved through dedicated training programs, learning from best practices, and ensuring ongoing education on the evolving ESG regulations and expectations. It’s essential to foster a culture of continuous learning and adaptation to keep up with this rapidly changing field.

What are the primary ESG challenges ahead for non-executive boards, and how can companies address them effectively?

I think the big challenge is not just having a strategy and an ESG strategy separately, but rather integrating ESG as an essential part of one cohesive strategy. Not all companies are ready for this integration, and in some cases, it might require significant changes that are daunting for them.
The role of the board is essential here. Because we have a broader perspective and can bring insights from across different companies, non-executive directors have a unique responsibility. For example, I serve on the boards of three companies with different activities, but the discussions we have in one often become relevant in another.
One example I’m proud of is how we integrated ESG into the variable remuneration of the CEO at one of the companies. As the Chair of the Remuneration Committee and a member of the ESG Committee, I led multiple discussions to include ESG criteria in the CEO’s variable pay. For 2024, 50% of his variable remuneration will be based on ESG performance, which is a significant change. Next year, we plan to extend this to a few more executives and eventually further throughout the company. This makes ESG truly strategic; if variable remuneration is tied to both EBITDA and ESG, it changes priorities significantly.
Another critical issue is getting the right information, which is often challenging. In the private healthcare group that I sit at the board of, we discovered that anaesthetic gases had the same carbon footprint than their entire fleet of vehicles. Initially, this seemed like a mistake, but after thorough checks, including comparisons with NHS data, it was confirmed (Desflurane has a significantly higher global warming potential compared to Sevoflurane). We then had to convince doctors to switch to the gas with the lower carbon footprint. This example illustrates how crucial it is to have accurate information; without it, significant impacts can go unnoticed.
In summary, for boards to be “ESG fit,” they need to integrate ESG into their core strategy and ensure accurate information flow. Prioritizing ESG training, hiring knowledgeable professionals, and setting clear ESG metrics in executive compensation are key steps. This approach not only aligns short-term actions with long-term goals but also makes ESG a fundamental part of the company’s success.

Could you provide an overview of University’s upcoming CSRD preparation program, its objectives, target audience, and key features?

The programme is still a work in progress, we aim to launch it by October. It will be called ESG Strategy and Reporting. The idea is to address the needs of the many companies that will soon be required to comply with the CSRD. For example, in Portugal, around 1,200 companies will need to report, a significant increase from the current number. The top 50 companies probably have the resources and knowledge, working with large Audit firms. However, the remaining thousand companies probably don’t know where to start.
Our goal is to build a programme that helps guide these companies through compliance. We’re still finalizing the length and cost because it needs to be accessible. We also want to involve the right experts, as few people have deep knowledge of the CSRD requirements. The programme will include expert instruction and numerous guest speakers from top companies that have already begun this process. We aim to create a community where participants can share best practices and support each other during and after the program. These companies are not in competition; they are facing the same challenges and would benefit from working together.
We see this as a significant opportunity, but we acknowledge that auditors are already moving into this space, which is only fair. We will need to collaborate with them to ensure the programme’s success.

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 (4): White Goods to INED – Bengt Engström

This is the fourth 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 industry executive-turned-INED, and explore the insights he has gained in the course of his career.

Bength Engström

Bengt Enström was senior executive at Whirlpool (Global VP Microwave Ovens, Europe VP Manufacturing &Technology, EVP Whirlpool Corporation) and President Whirlpool Europe. After moving home to Sweden, he was CEO of Duni AB and Nordic CEO of Fujitsu.
In recent years, he has worked as an advisor, board member and investor in both large and small companies. His assignments include: Chairman of the board of Nordic Flanges AB, Qleanair AB, Qlosr AB, and IFG Duroc. Board member of Polygiene AB, Scanfil Oy, Real Holding AB, Scandinavian Chemotech AB and KTH Executive School AB.

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

The up front value is to drive change, which is vital. The entire society needs to shift direction, with businesses playing a crucial role in driving this change. However, this transformation must occur within the framework of business operations, which is crucial. I’m somewhat apprehensive about past experiences where new regulations were introduced without adequate oversight thereeafter. Many individual companies failed to comply without facing consequences. This penalized those who adhered to the rules from the outset, as it imposed certain costs that could initially only be offset by raising prices. This situation could put compliant businesses at a competitive disadvantage. I’m therefore sceptical that adherence to regulations will necessarily result in a marketing advantage. While in some areas, sustainability efforts currently offers an edge, especially among investors and larger companies, which are beginning to cascade requirements down to suppliers, this advantage may diminish as regulations become more stringent. Ultimately, this raises questions about the viability of compliance strategies. So, it’s a complex issue with no simple answer.

What do you see as the added value of ESG beyond compliance and risk management? And: What is your perception of the cultural differences between companies successful in implementing sustainability initiatives and those facing challenges?

If I may draw a parallel: When ISO came into play initially, it was merely about filling out forms and getting them stamped. It was a box-ticking exercise. But over time, it evolved into a management tool. Similarly, when the concept of quality management emerged, it was seen as an added cost. However, it eventually transformed into a means of enhancing and rationalizing business operations.
And indeed, taking again quality management as an example: It did take some time before it became apparent that there were other underlying issues that needed to be addressed to operationalize it. For instance, everyone desired Zero Defects, but achieving this required intervening at multiple levels, providing assistance, training, and continually reinforcing expectations.
Contrasting approaches between the white goods and automotive industries were evident.
While the latter imposed demands on suppliers, we in the white goods industry proactively supported our suppliers.
I recall one supplier who prioritized car production over us, only to realize later our significant role in their development. This underscores the importance of a demanding yet supportive customer base.
In industries with narrower margins, the responsibility extends further back due to less room for error. The disparity in productivity between low and high-margin businesses is considerable. Despite advancements, the cost of washing machines has decreased over time (the opposite is true for cars), and reveal hence differences in marketing approach. But not in engineering prowess.
What does it need? I am Swedish, so I take Swedish examples. For instance, Atlas Copco exemplifies successful decentralization, with P&L responsibility cascading down the organization. This fosters a culture of financial literacy and leadership, enabling seamless transitions to other companies. Conversely, a centralized structure delays exposure to P&L accountability until senior levels, resulting in leadership challenges when individuals transition. Companies that neglect holistic financial understanding often struggle to thrive. Jack Welch’s approach at GE, pushing responsibility downwards, yielded remarkable leadership proliferation. Conversely, increased centralization tends to stifle success.
Hence, the key lies in empowering individuals with accountability and comprehension When responsibility is distributed and ESG principles ingrained in daily operations, success naturally follows.
Until ESG principles become ingrained in everyday business practices, they’ll remain burdensome rather than beneficial. It’s about more than just ticking boxes; it’s about using these initiatives to drive real improvements in efficiency and sustainability, in business processes and business ethics. An overly simplistic example: considering energy conservation measures from the outset rather than as an afterthought.

What are the critical areas for bridging ESG alignment gaps between executive leaders and non-executive boards? Also, which domains are crucial for board members to further educate themselves on?

I perceive no significant disparity in mindset between executive management and the board. Both should prioritise driving improvements rather than mere oversight. This is akin to the distinction between accounting and control; it’s about utilising data to enhance competitiveness. Ultimately, fostering this proactive approach throughout the company is paramount for delivering better products and services to customers, especially in the industrial sector.
For board members, possessing a comprehensive understanding across various domains is essential. However, an inclusive skill set within the board is equally critical for effectiveness. This encompasses expertise in finance, ESG, sales, operations, and more. Recognising that no one individual can excel in every area underscores the necessity for a well-rounded team.
Further: while committees like audit or remuneration are commonplace, extending this approach to ESG preparation could streamline decision-making processes. Leveraging specific skill sets while fostering independence in each area is pivotal. It’s often a missed opportunity to witness topic-specialist committees addressing both operational and board-level concerns simultaneously.

Do you think the public sector can learn from corporate practices? If yes, how do you see this knowledge exchange happening?

It’s quite intriguing. My daughter works in the public sector, focusing on procurement. She’s attended numerous courses on avoiding failure and about rules and regulations, but not a single one on excelling. It’s all about avoiding mistakes rather than seeking improvement. This mentality is evident in hospitals too, where disposables are used excessively without consideration for sustainability. Yet, they continue to request more funding, a scenario unlikely in the private sector, which prioritizes efficiency.
This approach extends to ESG initiatives, where compliance takes precedence over innovation. Changing this mindset will take time, even in the private Med tech sector, where there’s potential for business growth by embracing sustainability. The public sector’s rigid adherence to rules often stifles progress and leads to recurring scandals. It’s a concerning trend.
There are areas where the public sector could well profit from considering ‘common place’ approaches from the private sector. Let’s just take one example that has received considerable attention lately: Apparel, and particularly the recycling of clothing. Interestingly: there are alternative approaches worth considering. Take, for instance, extending the lifespan of clothes through less frequent washing, which reduces material waste, and fibre shedding getting into water ways.
On the other hand: Metal recycling, especially aluminium, is well-established, and other sectors are finally catching up. At Whirlpool, we aimed to minimize water and electricity usage in dishwashers and washing machines, benefiting both the environment and customers. The industry has long been engaged in such efforts, but there’s room for more.
The fascinating thing is: the public sector lags behind due to a lack of incentives. It would be intriguing to explore its untapped potential, as everything holds value in industry, unlike the public sector. What if it were different?

On the shorter term, what are the biggest ESG-related challenges for non-exec boards? Why? And: what can companies do about that?

Certainly, implementation is crucial, but government oversight and enforcement are equally vital. Without effective monitoring, compliance falters, allowing criminal activity to thrive, as seen in recent scandals like illegal waste disposal in Sweden. Trust is valuable, but robust control mechanisms are indispensable to prevent abuse and maintain societal integrity. We must embrace ESG initiatives, integrating rigorous adherence to regulations as an opportunity for innovation rather than a mere cost to pass on to consumers.
Requiring annual reporting of improvements in the annual report is a step towards transparency, but without auditors verifying these improvements ‘hands on’, ensuring accountability becomes challenging. Transparency alone may not suffice, especially considering the risks of corruption. Therefore, a robust system of checks and balances is essential to uphold integrity and foster trust.
Oversight is essential, with larger companies monitoring smaller ones to prevent issues. However, expecting big companies to oversee multiple layers down the supply chain is challenging. Instances like H&M in Sweden illustrate this complexity. Relying solely on private companies to ensure compliance, especially in regions and geographies with limited governmental oversight, may not be feasible.
But: where there are challenges there are also solutions: I am therefore cautiously positive that we will manage to tackle this demanding lift successfully.

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 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.

ESG x Governance (2): Board Level ESG Readiness

This is the second of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, the we look at ‘ESG Readiness’ at non-exec board level, skill gaps, and how to close them.

Federik Otto, Sustainability Boards

Frederik Otto is the founding Executive Director of The Sustainability Board (TSB), an independent think tank that aims to advance sustainable leadership and governance. He has been a leader in consulting multinational companies on organisation and human capital strategy for over 15 years, with a more recent focus on sustainability and ESG. Frederik hosts the ‘Leadership Conversations by TSB’ podcast and further is a member of the Council for Inclusive Capitalism, and a fellow of Salzburg Global Seminar. Frederik has published multiple articles on the Harvard Law School Forum on Corporate Governance, and regularly writes for various other resources.

What is the importance of ESG considerations for a company’s governance and success?

While acknowledging ESG’s importance in corporate success and governance, I believe it doesn’t capture the entire narrative. To make it more tangible let’s capture sustainability by the acronym CHANGE:

  • C = Climate change;
  • H = Human rights;
  • A = AI and emerging technology;
  • N = Nature and biodiversity;
  • G = Geopolitics and conflict;
  • E – Equity, diversity, and inclusion.

All these issues illustrate that we have to go beyond ESG, and it is urgent to consider global impacts beyond our company’s sphere. Even if a business has a small environmental footprint, awareness of climate change and broader factors is crucial.
ESG, viewed as an organisational framework, is valuable for this purpose. It serves as a reporting tool, ensuring accountability and establishing a stakeholder governance framework. ESG criteria should be embraced for technical understanding, as they are essential tools to keep us on track. However, we must also remain mindful of the broader societal factors and dependencies that impact the business.

What is the main takeaway or key learning from this year’s findings in the recently published 2023 Annual ESG Preparedness Report?

Every year we evaluate whether boards have formalised an ESG policy, established a sustainability committee or delegated ESG matters to another committee. We also look at the materiality and quality of their charters, and we analyse board diversity and individual ESG engagement of directors of large, publicly listed entities.
This year our ongoing reporting initiative, in its 5th edition since 2019, reveals both familiar trends and new insights. Positive aspects include a rise in sustainability governance, though the messaging from boards in their disclosures is misaligned. Despite a gradual increase over the years, director engagement on ESG matters seems to be plateauing. The percentage of directors tasked with ESG oversight who are also engaged on the topic has risen from 16% in 2019 to 45% in 2022, and fallen to 43% in 2023 – a worrying trend.
Consistently, women directors play a pivotal role in driving sustainability governance, showing over 60% more engagement than male counterparts. A trend consistent since our first report, and a clear case for more gender equal boards.
We also found that management experience is as a key driver for ESG engagement, with directors leveraging their expertise implementing sustainability strategies in executive roles.
Another trend is the adoption of the increasing articulation of ESG in board policies, particularly among American boards, despite the current political polarisation on the ESG moniker.
In summary, awareness of the need to improve sustainability governance is rising, but engagement is fragmented, and skewed towards women.

What is the key gap in aligning boards with ESG standards, and how can Boards of Directors efficiently enhance their skills in this area? What are the key priorities for Board Chairs in this context?

Indeed parts of our research focus on assessing individual board member engagement on ESG. Using a simple checklist across all of the past five years, we find three key criteria for ESG engagement.

  1. Firstly, business experience, like executive or non-executive involvement in sustainability strategies or governance.
  2. The second criterion is personal or non-business experience, such as engagement with relevant non-profits.
  3. The third point is formal education or certification in sustainability, or being a thought leader on the topic.

No hierarchy exists among these criteria, and in our opinion experience can be gained through various avenues. ESG engagement signifies personal commitment, either visible through public engagements like conference and round table attendance, thought leadership on social media, or communicating the business strategy actively in board disclosures or on capital markets days. The level of formal education required depends on the board’s complexity.
As for the role of the chair leading on ESG engagement, jurisdiction surely matters, with American chairs still often doubling as CEOs. Here the role of the Lead Independent Director is just as important. This said, assigning too much accountability on one person should be avoided. The chair, especially if independent, is vital in holding the board as a system together, facilitating resource allocation, enabling committee formation, and overall governance of sustainability. The key is ensuring cohesive board operations with checks and balances for effective sustainability governance.

How do sustainability practices of privately owned or family companies compare to large publicly traded companies, considering the report’s emphasis on the latter?

I’m also an investor in a fast-growing, private UK startup in the food industry, and can see the different governance dynamics very closely in comparison to large public enterprises. For a start, private entities, unlike public companies, have fewer and more personalized interactions with stakeholders, especially investors. The accountability is simply to less people and entities, with private companies generally smaller and less rigorously regulated. That also makes gathering data on sustainability more manageable. Structurally, most private companies aren’t burdened with the same disclosure and reporting requirements as public counterparts. However, they can learn from ongoing standardization efforts and voluntary adopting sustainability governance practices.
Family businesses have a unique opportunity to drive sustainability, especially during generational succession. Newer generations are attuned to sustainability concerns and aim to build a positive legacy. Family businesses can leverage their organization’s might beyond philanthropy, acknowledging and reconciling with, say, environmental impacts caused in the past. Decision dynamics within family businesses, public or private, allow faster implementation of sustainability initiatives compared to non-family controlled companies.

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.

ESG x Governance (1): The Pulse of EU Regulation

This is the first of a series of interviews intended to help our IDN members grapple with the ESG topic. Given the recent  importance of EU regulation in the area of ESG, and reporting specifically, we chose to conduct the first such interview with a truly long-standing expert in the matter.

Pascale Moreau, Ohana Public Advisory

Pascale Moreau is a seasoned professional with over 15 years in public affairs across diverse industries including textiles, ICT, and healthcare.
As an active citizen and nature enthusiast, she specializes in sustainable development strategies and adeptly navigates complex legal landscapes. Throughout her career, Pascale has excelled in facilitating discussions, bridging differences, and guiding stakeholders toward common goals, driving positive changes. In 2019, she founded Ohana to help companies formulate sustainable development strategies tailored to their markets’ challenges and opportunities.

In your view, drawing on your experience, what is the essential role of a board of directors in public affairs and policy engagement?

In the realm of public affairs, the pivotal role of shaping strategy is essential for aligning agendas with business needs, extending its impact to associations and multi-stakeholder initiatives. The Board of Directors plays a crucial role in navigating this landscape, bridging internal workings with external dynamics. Larger organizations in familiar sectors often designate roles within the Board for public affairs, while in newer sectors, its introduction is met with urgency and the need for preparedness.
In my experience, organizations attuned to public affairs quickly respond to its nuances, ensuring the Board is well-versed. During the 2017-2019 transition, this was evident in the textile industry. In multi-stakeholder initiatives, boards may appoint a specific individual for public affairs, but their effectiveness relies on influence and the ability to drive recommendations, contributing substantively to boardroom decision-making.

You mentioned the unique default structures in different industries, particularly noting the relatively recent engagement of the textile industry. From a European standpoint, which industries have historically been firmly established in public affairs, and, in broad terms (excluding specific businesses), which ones generally demonstrate a greater inclination for such engagement?

In sectors like ICT and electronic equipment, a sustainability lens is integral, driven by long-standing regulation. Leadership in these industries comprehends the importance of sustainability investments. Similarly, food, beverages, and agriculture, well-represented in Brussels, showcase heightened awareness and robust organizational structures. Operational roles handle day-to-day tasks, but top executives from these sectors take the lead in significant events like COP 28, indicating maturity in global sustainability engagement.
Conversely, some sectors, like textiles, historically lagged in sustainability but are now catching up. This observation highlights a proactive stance in regulated industries, contrasting with a slower initial embrace in sectors like textiles.

How can boards of directors augment their capabilities, particularly in the context of public affairs and policy development, building upon our recent discussion?

In organizations with dedicated public affairs teams, fostering collaboration is crucial. Spending quality time with the head of public affairs and national teams in key markets ensures a nuanced understanding of legislative landscapes, focusing on areas like sustainability, trade, and digital domains. Regional nuances in public affairs, whether in the US, EU, or Asia, underscore the importance of engaging with governments, even where public affairs practices may be less prevalent, as such engagements yield tangible business impacts.
Promoting dialogue between business and public affairs professionals, especially in the same room, facilitates mutual education on legislative changes’ financial and strategic implications. For organizations without a dedicated public affairs team, integrating this perspective into MBA programs ensures early recognition of the broader business advantages of engaging with stakeholders. Seeking insights from organizations with established public affairs functions or hiring specialized consultants becomes invaluable in navigating an evolving landscape, emphasizing collaborative stakeholder engagement for a sustainable future.

What are your anticipations for policy trends in the mid and long term, both globally and within Europe? How do these expectations influence the role of a board of directors?

Navigating policy expectations, especially in the realms of digital and sustainability, proves challenging, signaling heightened regulations for industries like textiles. In the mid-term, the EU Green Deal holds significance, serving as a foundational benchmark. For businesses, compliance with voluntary legislation becomes a pivotal board-level decision, prompting a comprehensive reevaluation of processes and external communication to shareholders about the nuanced balance between profitability and compliance.
In the long term, the momentum for sustainability initiatives persists, albeit with a potential EU-level slowdown for implementation focus post-2024 elections. Businesses seek guidance for compliance, placing the Board of Directors in a central role to identify hotspots and manage risks during implementation. Globally, Europe’s lead in sustainability trends, such as extended producer responsibility, might influence global replication. The Board’s responsibility extends to understanding and supporting the entire supply chain, allocating funds for implementation, and advocating for a smooth transition, emphasizing a holistic, 360-degree perspective for a sustainable future.

In your view, what are the primary priorities for boards of directors in the short term, specifically in 2024? Given the ongoing developments within the EU and globally, what aspects should boards emphasize?

Key directives, namely the Corporate Sustainability Reporting Directive (CSRD) and the European Corporate Sustainability Due Diligence Directive (CSDDD), are currently at the forefront, emphasizing due diligence. Despite potential reductions in board liability in the CSDDD, companies must exhibit due diligence for responsible business recognition. The Board of Directors holds a pivotal role in shaping policies and driving transformative change in response to these directives.
The Taxonomy Regulation, initially perceived as relevant mainly to investors, extends its reach to companies, notably impacting the Board of Directors engaged with investors. Mandating reporting on investments, it requires the Board to establish proper reinvestment processes, accentuating its role in driving impactful change.
In 2024, a crucial year of transition in the EU, marked by elections and industry reevaluation, significant legislative changes are anticipated. The Board must proactively address this, allocating resources and initiating comprehensive compliance projects for short-term action. Obtaining insights from public affairs or legal teams is crucial for informed business decisions, not only within the EU but also globally, emphasizing the paramount role of the Board in navigating evolving regulations.

Concerning directors’ liability, particularly amid the ongoing deliberations on the European Due Diligence Directive, where does this aspect align within the broader European legislative framework you are navigating?

The Corporate Sustainability Due Diligence Directive (CSDDD) represents a significant move by the EU to hold businesses accountable for their social and environmental impacts. While the official text is pending, a crucial political agreement was reached in December 2023, with finalization expected in Q1 2024. The scope of the directive includes companies with 500+ employees or a global annual turnover of 150+ million and those with 250+ employees and a turnover of 40+ million in high-risk sectors like textiles, food, and minerals. The construction sector is also under consideration for inclusion. Parent companies of large groups and non-EU companies meeting turnover thresholds in the EU are encompassed, while the financial sector is partially included, focusing on “upstream” due diligence and climate-related obligations.

A key feature is the requirement for companies to adopt a climate plan aligned with the Paris Agreement. Compliance with the Corporate Sustainability Reporting Directive (CSRD) is linked to the adoption of CS3D climate plans. Larger companies, with over 1000 employees, can tie additional financial incentives, such as variable remuneration, to plan fulfilment. The directive introduces civil liability for damages caused by a company through intent or negligence, with a minimum 5-year limitation period. Notably, director duties have been deleted from the provisions. While these provisional agreements provide a framework, the final text is pending, and technical meetings are scheduled to address open questions, with the European Parliament voting in plenary in April and Council approval anticipated in April/May. The financial sector’s extent of inclusion and additional details may be refined in the final legislation.

You noted an anticipated release of a substantial volume of legislation at the end of Q1 or the beginning of Q2 2024. Could you offer an overview, at least by name, of the key legislations you expect to be significant?

In 2023, notable sustainability regulations reached finalization, including the Deforestation Regulation, EU Corporate Sustainability Reporting Directive (CSRD), and Empowering Consumer Directive. While the Empowering Consumer Directive’s final text is pending, an agreement outlines a framework for sustainability communication. Anticipated finalizations in Q1-Q2 before the EU elections include the Packaging Regulation, Forced Labour measures at the EU level, Eco-design Legislation, and the Right to Repair. However, advanced regulations like Green Claims Directive and the Waste Framework Directive are unlikely to be finalized.
The urgency to avoid disruptions before the elections is evident, even if subsequent guidelines and secondary legislation are needed for clarity and refinement.

How should the Board of Directors respond when companies see impending policy and legislative changes, particularly related to ESG, solely as compliance requirements rather than strategic opportunities?

The establishment of common rules marks a satisfying moment, potentially mitigating free rider issues. Anticipating stress among companies, a crucial response involves creating a compliance team and undertaking a comprehensive compliance project. This intricate exercise requires mapping sustainability, digital, and trade considerations, necessitating a dedicated individual reporting directly to the Board of Directors. The seriousness of compliance is underscored by its potential impact on the business’s existence, demanding a proactive stance and ongoing commitment, especially in allocating resources and enhancing IT infrastructure. Ensuring the board’s dedicated focus is crucial, with potential reconsideration of its composition if necessary, reflecting a commitment to evolving landscape expectations until 2028-2030.

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.