Eating the environment for breakfast?: Governance outtakes

If you missed the Environment breakfast session at the 2023 IoD Leadership Conference, we’ve captured “outtakes” from it. These highlight some key themes and insights from the session and outline a few specific actions for directors and boards arising from it.

2023 IoD Leadership Conference participants joined Abby Foote CFInstD, Dean Bracewell and Rob Hamilton for a Power Breakfast focused on governance and the environment.

Board members and their boards should consider:

- What natural resources are “consumed” by your business or organisation?

- How much do you understand the environmental performance expectations of your customers, funders and/or members?

-What process and approach does your board use to keep track of the changing environmental and natural resource regulation and policy, and understand the results these changes are intended to achieve from a governance perspective?

- How are you working with others in your sector to adapt your business/organisation to changing expectations and how is this integrated into your boards’ strategy and risk management approach?

Directors continue to hear a lot about the need to consider environmental, social, and governance (ESG) issues within their decision-making.

Different views continue to be expressed about the significance of ESG for directors and boards. Even within these discussions, there is also disagreement about what these concepts mean, simple as they sound on the surface.

Despite this, company law in the United Kingdom, and now New Zealand, contains provisions that refer to “the environment”:

• Directors in the United Kingdom have similar good faith duties to their counterparts in New Zealand, and in the context of a duty to promote the success of the company under section 172 of their Companies Act 2006:

“(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(d) the impact of the company's operations on the community and the environment,…” [emphasis added]

• In New Zealand a new subsection has been added to Section 131 of the Companies Act 1993:

“(5) To avoid doubt, in considering the best interests of a company or holding company for the purposes of this section, a director may consider matters other than the maximisation of profit (for example, environmental, social, and governance matters).” [emphasis added]

These legislative provisions leave something of a gaping hole that the Power Breakfast session at the 2023 IoD Leadership Conference sought to fill:

What should directors and boards focus on when thinking about “the environment”? 

While it might seem simple and obvious what “the environment” refers to, there has been a tendency to think about “the environment” using a climate change emissions reduction lens, and more recently a focus on climate change adaptation and resilience. The Environment Power Breakfast panel made clear that in their view the frame needed to be much wider.

Ongoing work internationally on a draft Framework for Nature-Related Financial Disclosures (TNFD) helps with this wider framing of “the environment”.  In this context “nature” is another word for the environment and is captured in four “realms” in TNFD – land, ocean, freshwater and atmosphere.

What should boards be considering from a governance perspective in relation to “the environment”?

The Power Breakfast Environment Panel regarded considering the impact of a changing environment, including but not limited to climate change, as central to business, as well as the impact of each business on the environment.

This for boards wasn’t just a “nice to do”; it was consistent with doing good business, as well as doing good.

They considered operating sustainably, including in the pursuit of environmental sustainability, as an essential part of businesses delivering long-term value (that is, over 30 years or more) for shareholders. This meant boards taking a “macro” view, with management taking a “micro” perspective to sustainability.

They also thought that to be effective, this strategic approach had to have real impacts on capital allocation.

Finally, the panel mostly saw a greater focus on their impact on the environment as providing opportunities rather than financial trade-offs for companies, hence something boards increasingly needed to focus on and steward. This required thinking about risk, board structure, the ability to strategically consolidate activity and board (and public) reporting.

Shifts in thinking: “aha” moments

In reaching these conclusions, the Panel noted that their perspectives on governance and the environment had developed over time. And all of them described “aha” moments:

• For one they had been spurred to further thinking about governance and the environment by the realisation carbon offsets were not real and by a David Attenborough book.
• Another had been swayed by being curious about their children’s views about the environment and awareness and direct experience of emerging environmental issues in New Zealand and internationally.
• In consideration of environmental risks in board audit and risk committee meetings, the final panellist had realisations about the risk impacts of environmental pressures in addition to climate change, such as the increasing size of the Tasman glacier lake and the glacier’s retreat as a result of global warming.

Some questions for directors and boards to consider

Those at the breakfast (and those that weren’t) were challenged to think about their own “aha” moments and to reflect on the role that their boards could and should play in relation to the ‘E’ in ESG, including considering:

• What natural resources are “consumed” by your business or organisation?
• How much do you understand the environmental performance expectations of your customers, funders and/or members?
• What process and approach does your board use to keep track of changing environmental and natural resource regulation and policy, and understand the results these changes are intended to achieve from a governance perspective?
• How are you working with others in your sector to adapt your business/organisation to changing expectations and how is this integrated into your boards’ strategy and risk management approach?