Mind the Gap – Translating resolutions to effective action calls for 21st Century governance

With the year well underway, the good intentions reflected in commitments made in forums from COP 26 to the G7 Impact Taskforce remain largely in the sphere of resolutions to do more and better. 

As we move through 2022, will the pledges of billions of dollars, critical reductions in deforestation and methane emissions, and calls to put capital to work on the front lines of climate action, ensure the transition is just and equitable? Will these pledges and statements of intention to drive sustainability performance translate into meaningful action?  How can we make sure actions speak louder than words? The answer, at least in part, lies with governance and the fortitude of directors who are prepared to confront, engage and decide how to respond to the challenges of now.

The stakes may never have been higher to ensure capital is deployed and commitments translate to rapid, deep and transformational action.  Setting out his priorities for 2022 to the United Nations, Secretary General Antόnio Guterres named reform of the financial system as critical to meeting the urgency and scale of the climate crisis, moving beyond the global pandemic and ensuring recover and resilience. 

Accenture named COP 26 a wakeup call for global action after their survey of CEOs for the United Nations Global Compact found that while 73% of CEOs feel increasing pressure to act on climate change, only 57% have progressed action alongside pandemic response and 2% have validated effort against science-based targets to keep warming below 1.5o.  Broadening that picture across the United Nations Sustainable Development Goals (SDGs), PWC’s SDG Survey indicates that while 90% of citizens say it’s important for business to sign up to the goals, only 41% plan to embed SDGs into strategy, 13% understand the tools needed, and 1% plan to assess their impact across all SDGs.

These disconnects have real world consequences.  Trillions poured into socially responsible and ESG investment in 2020, yet progress toward the SDGs went backwards.  As more people seek to invest aligned with their values, failure to deliver and be accountable for performance carries risks for reputation, credibility and performance.  Consciousness of the risks of green and impact washing is growing.  The EU Sustainable Finance Package’s do no harm foundations represent a watershed in what the Principles for Responsible Investment dubbed the inevitable policy response. 

The probe into Deutsche Bank’s ESG credentials and sustainability claims is a case in point.  Other bellwethers also signal the changing public sentiment and norms.  The Wall Street Journal reported on~US$50bn in corporate commitments after George Floyd was killed not finding its mark.  Rio Tinto was on the wrong side of the public, Parliament and institutional investors when they destroyed 40,000-year-old Indigenous heritage sites at Juukan Gorge. 

Commitments are necessary but not sufficient.  Ultimately, these are issues of governance, at every level.  Cataloguing the global challenges for 2022, the UN Secretary General named that they are all, ‘at heart, failures of global governance’; failures that reveal systems not or no longer fit for purpose.  For corporates and investors, the most powerful roles and requirements for Boards are to set strategy and translate strategic priorities into concrete action, steward performance to deliver in accordance with the firm’s strategic objectives and hold the organisation to account for its results over the short, medium and long-term.  Increasingly, these results will be assessed more holistically based on financial, social and environmental performance criteria.

This last decade has already demonstrated that the need to build our collective muscle in better integrating social and environmental impacts into performance.  Leaders are increasingly called upon to look beyond shareholder primacy and manage systemic risks and the nature and role of governance must respond.  21 Century governance has at its centre a unifying principle of elegant simplicity: everything has impact. 

This governance principle means that every decision has impact. The Board’s domain is to probe the consequences of its decisions – whether they result in positive or negative impact and which impacts are most material.  That is a foundation stone for Boards to set strategy and performance expectations and incentives around which impacts matter and orient culture, people and remuneration, investment and divestiture, accountability, compliance, reporting and risk management accordingly.  In doing so they deepen capacity to make informed decisions, identify tools for risk management and value drivers for future performance.  Despite its simplicity, many Boards struggle to integrate impact into their portfolio of decision-making; operationalizing impact as a decision-making guiding principle is perhaps the most meaningful challenge of today for directors of successful organisations. 

21st Century Governance provides the navigation system by which leaders can chart a course through the complexity and the interdependencies between climate action and the other social, environmental and governance issues to create a more sustainable future.  For example, Boards can, and will need to, steward their organisations to climate action that enables sustainable industries that are inclusive of workers and close existing and emerging gender gaps so that the net effect does not compound the challenges and create new ones. 

Now is the time for leaders to step forward and act decisively, enliven a compelling vision for the future, cut through entrenched feedback loops, call for the information they need to make informed decisions and ensure pledges result in accountable action.  Those that fail to do so, whether corporates or governments, can expect to become increasingly less attractive to investors, consumers and employees – and miss opportunities to drive value creation.

The legacy of Boards and other decision-makers leading through complex and urgent issues including climate change, inequality and the pandemic will include whether and how effectively they engaged in governing for the change our times demanded.  There is a window of opportunity not to be missed.  Future generations will thank those who go beyond good intentions this year and step in with courage and tenacity to embed governance and decision-making that ensures a better future. 

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