Climate and Sustainability for Boards

Sustainability has never been a question of if. It has always been a question of when.

The when is now.

A company is not sustainable unless it can create long-term, profitable growth — while earning its license to operate, innovate and grow. To deliver sustainable growth going forward, companies cannot rely on strong financials alone. They must also demonstrate that they are sustainable — which includes achieving a track record of dealing with climate risk and helping their suppliers and customers do the same.

Here’s the rub: Most boards are ill-equipped to provide effective and robust oversight of sustainability — including, especially, exposure to climate risk.

That was my conclusion after detailed research and data analysis. I did not draw this conclusion lightly. For over 25 years, I have enjoyed a unique window into how boards operate, spending nearly 300 hours in more than 80 board meetings, often in executive session.

Directors overseeing a company’s transition to a decarbonized world must own the critical medium- to long-term focus, understand the climate story, and build new levels of fluency and knowledge.

The Critical Five-to-Seven-Year Focus

McKinsey & Co. research shows that companies that plan and execute with a long-term outlook of 5-7 years substantially outperform peers, with 47% higher revenue growth over 15 years. Since a pivot to long term often does not pay off for individual CEOs, boards have a particularly critical role in overseeing this five-to-seven-year horizon. That is especially true given the rapid growth of climate risk, as depicted in Figure 1 below.

Boards must, in collaboration with the CEO, own the climate agenda as part of their fiduciary duty. It cannot be delegated.

The Climate Story

After three decades of dancing around the edges of sustainability, it’s time for companies to look in the mirror. Sidestepping worked for a while, but the deadline stares us in the face. Fossil fuels are cooking the planet. The underlying trends are baked in.

Are boards comfortable with the current situation? Consider these two data points:

• More than half (59%) of companies believe they are meeting or exceeding expectations on their sustainability strategy.
• Fewer than 1% of 23,200 companies had credible climate transition plans as of early 2024, according to CDP.

The following is a short summary of the climate story for boards and executives. The story explains how hitting pause on rapid decarbonization across the value chain is a fool’s errand. Understanding the eight points below helps engage leadership to carefully understand physical and transition risks, explore various business scenarios and make smart decisions that will deliver truly sustainable growth.

It’s hard to make a good argument for being less smart than your competitors about the major trends impacting your businesses. Nowhere is this truer than with the growing risks and significant business opportunities offered by climate.

Enhancing Board Sustainability Fluency

Nobody expects directors to be technical experts in cybersecurity or sustainability. However, board climate oversight attracts the attention of major pension fund investors that want a company to decarbonize more aggressively. Therefore, directors need to demonstrate a reasonable level of fluency; otherwise, they risk having investors take more active roles to influence board-level decisions. That’s a challenge. According to Diligent Institute and Spencer Stuart, among 110,000 directors globally, from a sample of large global public and private companies across industries, fewer than 1% have professional backgrounds in sustainability.

With the onslaught of new European Union (EU) standards, such as the Corporate Sustainability Reporting Directive (CSRD), which went into effect Jan. 1, 2025, it is tempting for U.S. boards to view climate and sustainability as a compliance and disclosure issue. That is a big mistake. Compliance is critical, but strategy matters far more.

Over the past two years, I’ve conducted research to identify global best practices at enhancing board sustainability fluency. After interviewing board members and executives at leading companies, I identified nine levers, organized into three groups: structure, fluency and cadence. Here, I summarize each of these levers for improvement, alongside quotes from directors. Five of these levers include a four-stage maturity path showing the roadmap to tomorrow’s best practices. The stages progress from the starting point of stage 1 — engaging on sustainability — up through the optimal stage 4 — transforming the company.

Board Structure

The key qualities below characterize a board well-structured to provide robust sustainability oversight.

Board committees, charters and roles. A committee with clear oversight of sustainability can focus resources and demonstrate commitment to investors, especially for companies early in the sustainability journey. For more advanced companies, the better solution is often to fold explicit responsibilities for sustainability into other existing committees. The maturity path appears below.

Board evaluation process. Implementing a robust process to evaluate the performance of the board, typically annually, can be tricky. It requires strong leadership from the CEO and board chair to instill a board culture that facilitates candid self-evaluation. Several board chairs and other directors reinforced this:

• “Boards really don’t like to do board assessments — beyond an annual skills review.”
• “Some directors do not take it seriously; some start coasting.”

Boards at Transforming (Stage 4) companies routinely conduct thoughtful assessments of their oversight of sustainability risks and opportunities, resulting in a robust, multiyear plan to ramp up board oversight effectiveness.

Board Fluency

Directors face the challenge of growing their knowledge and fluency in multiple areas, including AI and sustainability. Companies can enhance board fluency via the following succinct curated learning opportunities.

Director self-learning. A board chair told me how critical it is to ensure that less knowledgeable yet more domineering directors defer to other directors who know something about sustainability. Another board chair says, “We want each director to elevate his or her degree of knowledge about sustainability.”

The challenge is that most directors may not actually want to dive deeply into sustainability.  Board members recently told me:

• “Most directors who need (or want) to learn more about sustainability may be embarrassed to ask.”
• “The classic pattern is that most directors don’t know much about sustainability. Many ask poor questions, and maybe one or two know something.”
• A board chair says, “I find that a lot of directors that reach a certain age do not do any of this,” revering to self-education about sustainability).

For Stage 4 Transformers, directors deepen their sustainability knowledge via expert panels, meetings with customers, investors and outside experts. One chair of a major energy company asks every director to report annually on sustainability education received.

External advisors. To gain a full and balanced set of perspectives, directors shared the following:

• “Boards cannot address these and similar questions with pre-reads, training courses or consultant presentations. We need experts in sustainability with considerable board and governance experience to provide the right perspective.”
• “Boards need an outside sustainability expert advisor. Otherwise, companies spin their wheels.”
• “A leading practice is to make private 1:1 coaching and mentoring available, so directors can access a sustainability expert who is also deeply experienced in board governance.”

At Stage 4, the board engages in special sustainability learning sessions on material issues across the value chain. They bring on highly respected sustainability and governance experts as ongoing advisors.

Formal courses. In my interviews, board members said:

• “Most directors don’t want to be told to take a course.”
• “Board members need to understand how little they really know about climate and sustainability.”
• “Every board member needs a bit of general sustainability training. Without that, they have no self-awareness.”

I recommend a course if it meets two criteria. First, is it well designed and taught by instructors who are both content experts and have extensive experience participating in and advising directors in full board and board committee meetings? Second, the course participants are entirely (or mostly) other directors.

Board Cadence

Directors, CEOs and corporate secretaries can build a cadence ofenhancing sustainability knowledge via the four levers below: board calendar and planning, meeting pre-reads and agendas, board meeting locations and dialogue with company staff.

Board calendar and planning. With board meeting dates, locations and agenda topics often locked in many months in advance, directors highlighted the challenge:

• “We need to build a robust cadence for the board to oversee sustainability; about six sessions a year with the board.”
• “As part of the cadence, we need to institutionalize a process for long-term thinking — including scenario exercises, innovation workshops, strategy sessions and capital expenditure planning cycle reviews.”
• “Scenario planning is key, leading to annual strategy meetings. Management drives climate (1.5°C and 2°C) scenarios; we drive business scenarios.”
• “We moved our strategy discussions from five years to 10-to-15 years.”
• “What investments do we need to make now to be the company we want to be when we grow up?”

Stage 4 companies establish a cadence through a full board and committee annual plan that includes strategy and scenario sessions and special sustainability learning workshops.

Board meeting pre-reads and agendas. The challenge, highlighted by these revelations from directors, is the linkage between pre-reads and the use of meeting time:

• “There is an overwhelming amount of information that we are obliged to report — and an overwhelming challenge to understand what the reporting requirements mean for our company.”
• “Risk people love to present data. Board members need to set the agendas to avoid overly focusing on details rather than discussing strategic implications.”
• According to a board chair, “I get very frustrated when most of our agenda time is spent listening to a presentation of slides we received in advance and I need to shut down board discussion because we run out of time.”
• “Our board meeting pre-reads are very robust. In the board meetings, we use no slides. It’s 100% conversation.”
• Says another board chair, “I have an advance call with every director. Our meeting time is mostly discussion.”

The table below contrasts the Stage 1 (Engaging) approach of providing updates with building a strong cadence of continued learning in Stage 4 (Transforming).

Board meeting locations. I enjoy being asked to participate in a January board meeting at a seaside resort in Florida. Board members like that also, especially when arriving by company jet. But that is a Stage 1 practice. As several directors explained, meeting locations can significantly enhance the director’s knowledge and fluency.

• “We should periodically meet at locations that represent our largest physical risks from climate across the full value chain.”
• According to a board chair, “I want to create an environment where the board and management team engage deeply on the right topics.”
• “Our last meeting was at a major supplier location; our next meeting is at the site of our largest customer.”

Dialogue with company staff. Having the board interact frequently and candidly with internal sustainability experts can be complicated, as these board members illuminate:

• “It’s critical that the board spend time with the top, full-time sustainability leader. Otherwise, we risk hearing a sanitized view of what may be critically important details we should delve into.”
• According to a board chair, “The CEO is comfortable with me engaging directly with the C-suite and sustainability executive. It is a fragile trust; I need to earn it.”
• “The CEO allows us to deal directly with his direct reports. I have quarterly 1:1 coffee with each director and C-suite member.”

The Stage 4 practice means the board leverages internal sustainability experts, engaging with cross-functional and sustainability leaders prior to, during and after board meetings and strategy sessions.

The Big Ask

Board members know climate change is important. Here’s the challenge: Working across the value chain, how can you build a profitable, growing company that approaches zero (negative) and even net-positive environmental and social impacts, while helping our suppliers and customers do the same?

That’s a big ask — nothing less than transforming each company from the “old economy” fossil-fuel-based model of the past 150 years to a new clean energy economy.

As the impacts of extreme weather, ocean warming and wildfires increasingly hurt capital values, the global outcry to decarbonize at pace will become impossible to ignore. High-emitting companies will be dinosaurs, unable to retain staff, leverage their balance sheets and win in new markets.

To paraphrase Rudiger Dornbusch’s Law:

“The crisis takes longer to come than you expect; then it happens much faster than you think possible.”

Game on!