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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 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.

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 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 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.