Sustainable Corporate Governance: The Implications of Climate Action and Sustainable Business Transformation for Corporate Governance

31 Jan 2023
Sustainability is here to stay, but Environmental, Social, and Governance (ESG) measurements in businesses lacks credibility, and even transparency. Steen Thomsen, Novo Nordisk Foundation Professor of Enterprise Foundations at the Center for Corporate Governance (CCG), Copenhagen Business School, shared his insights at Sasin Research Seminar, “Sustainable Corporate Governance.” The global sustainable goal is to get to net-zero. “Carbon dioxide degrades slowly over time, so any new addition to carbon in the next thirty years will just be an addition to the carbon intensity in the atmosphere,” he said. He cited Bill Gates’ book, How to Avoid a Climate Disaster: The Solutions. Professor Thomsen went through the five main factors in corporate governance- regulation, ownership, board, management, and operations. First, he talked about how regulation failed to improve sustainability goals, despite economists lauding carbon taxes as an effective way to regulate climate change. He gave an example of France, where yellow vests protestors took to the streets to protest against President Emmanuel Macron’s attempt to introduce green taxes. Sustainability may require long-term ownership, businesses which spans more than ten years, as they are more sustainable. However, Thomsen stated the evidence for more sustainability in family businesses is mixed, what matters is whether they are committed to act as stewards for the company. Professor Thomsen also talked about Sustainability Corporate Sustainability Due Diligence (SCDD). He went through a list of points in the SCDD Proposal, which requires mandatory net zero climate plans, climate incentives for company directors, and the duties of directors to include climate action, human rights, and the environment in their business plan. Directors are to be liable for the entire value chain and for both short and long-term future consequences. He pointed out that due to these liabilities, directors may become risk adverse, some may leave the company, invest less in innovation, director quality may drop and director pay may increase. Therefore, board liability may have unintended effects. Since regulation is not working, Professor Thomsen examined whether at purpose statement may be helpful by detailing how the company contributes to sustainability. “Purpose may be good, but if it is not rooted in the ownership, it is not meaningful,” he said. He gave an example of IKEA, where low prices permeate not only their products, but through their working culture, where executives are accountable for how much they spend, even travelling by low- cost planes. One solution, Professor Thomsen advised, is for ESG investors to stop herding behavior. By holding companies more accountable and getting them to disaggregate ESG components, breaking down ESG components into scopes, there can be more transparency. “Actually, this idea of a sense of urgency is true — the world is heating up — but that doesn’t mean you have to jump on things, because you might jump in the wrong direction if you don’t know what you are doing,” he warned. Moreover, Professor Thomsen said that companies need to get beyond ESG, focus on a purpose to define materiality, because “Purpose will indicate what is material.” In addition, businesses should ensure ownership and board commitment, rewarding managers for materiality. “There is more reliability in individual numbers – break it down so we have numbers, which we can trust. Indicators like carbon emissions, injuries or employee satisfaction may be more meaningful, ” he concluded.  
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