ESG And Sustainability In The Boardroom: A Fundamental Conversation

ESG And Sustainability In The Boardroom: A Fundamental Conversation

ESG litigation is making waves in two new and distinct ways. On the one hand, in 2023, we saw ClientEarth launching legal action against the board of directors of Shell, arguing that the energy firm’s ‘flawed’ transition strategy was putting shareholder value at risk. Although the lawsuit was eventually dismissed, it can be seen as the beginning of a trend of corporate directors being held personally accountable for ESG inaction. On the other hand, not even one full month into 2024, ExxonMobil was making news for pursuing a lawsuit against two activist investors who had called on the organization to set new targets for reducing GHG emissions. This lawsuit is a cause of concern for investors using shareholder resolutions to pressure organizations on sustainability issues, and may potentially undermine their influence.

As of December 2023, the US Climate Change Litigation database had over 1,600 cases, with several significant decisions expected this year. It comes as no surprise that in 2024, ESG disputes have become the top litigation risk for organizations.

How are corporate boards engaging with sustainability matters?
In an increasingly complex and convoluted ESG and sustainability landscape, it is important for firms, and their boards of directors, to engage with sustainability concerns in a thoughtful and informed manner. Verdantix has observed that the overall engagement of boards with sustainability matters is increasing, with a deliberate and explicit expansion of their oversight responsibilities to encompass these issues. However, different boards interact with ESG and sustainability matters to different degrees: some treat ESG as a compliance exercise; others view sustainability matters as material factors for risk management and governance; while a few forward-looking boards recognize ESG performance improvement as a key market differentiator.

How can corporate boards improve their engagement with sustainability matters?
For boards to engage with sustainability matters effectively, conscious and continuous effort is crucial. Staying fully informed about the firms on whose boards they serve, along with the ecosystem in which these firms exist and operate, is a huge challenge for board members. An important means of navigating this is to ensure that the board has the right resources to remain properly informed – and able to make the necessary enquires and obtain useful input from third parties. This could entail:

• Constant upskilling and sustainability education and training for directors, to ensure the board can take a more strategic view on ESG matters.
  
  
• Establishing a sustainability sub-committee at the board level, to ascertain the type of ESG information shared internally and externally, determine the space for ESG on the board’s agenda, and translate the language of sustainability into a form that is easily understood by directors.
  
  
• Leveraging digital tools, to make it easier for board members to read data, and to foster communication by enabling them to comment and enquire (through the use of a chatbot, for example).
  
  

For detailed analysis of how boards can prepare for a new way of functioning in a rapidly changing business environment, read Verdantix Strategic Focus: The Evolving Role Of The Board In An ESG & Sustainability Landscape.