Written by Sorenson Global Impact Leaders Rosemary Addis & Laurie J. Spengler with their partners in Mondiale Impact, Dolika Banda, Mario Calderini, Karim Harji & Rajiv B. Lall
First Published on Forbes.com on October 21, 2024
This year’s letter from Berkshire Hathaway sounded a bellwether for boards worldwide: “We got it wrong on energy,” they admitted. As Berkshire Hathaway’s utility companies continue to face litigation from communities and businesses for failing to shut down power lines quickly enough during the Oregon and California wildfires, leadership had to own up to the ramifications of their lack of action. In February, Berkshire Hathaway Chairman and CEO Warren Buffett conceded they “made a costly mistake” in not anticipating a more complete picture of the risks from wildfires. PacifiCorp, for example, recently agreed to pay more than $900 million to wildfire victims.
What seems like a rare concession will likely become more commonplace as even the most experienced players grapple with complicated, shifting changes in their operating environments, making past risk assessments unreliable. The burgeoning reality is that climate change is increasing the severity and frequency of wildfires. Power lines can not only trigger and exacerbate fire damage but also result in liability, physical assets, and insurance risk, as well as community backlash when residents are left without power or shelter. This is the compounding nature of underestimating the impact of climate change.
Social and environmental boundaries that once stopped at an organization’s front door have begun to cross the threshold. Regulatory bodies and consumers alike are asking more questions about how, why, and to what effect corporate decisions are being made. From financial services and investment to oil and gas and the fashion industry, companies and investors are more and more frequently under the spotlight when it comes to social and environmental effects. Answers that rely on following the letter of the law and contractual obligations ring increasingly hollow. Think of Rio Tinto’s actions in Australia that destroyed 47,000-year-old cultural sites at Juukan Gorge. The brazen destruction of Juukan Gorge, where Aboriginal people made use of caves as far back as the last ice age, was perfectly legal, yet the action shocked and upset investors, consumers, and the community. The flagrant desecration remains a defining feature of Rio’s reputation today.
Failure to confront and anticipate social and environmental issues and their consequences is being sheeted back to boards and executives. Failure to act in response to issue complexity and reverberating dynamics is not only costly with litigation mounting, but it is also becoming a measurement of board performance. As the boundaries for decision-making shift, so does the geography of the boardroom. Every board will be expected to be able to explain how it has considered the company’s influence on key social and environmental issues and how these same issues are affecting the organization. As risks crystallize, the board ultimately bears responsibility and must navigate a way through.
Regulators are responding with increasing focus on disclosure of sustainability risks and performance. Many companies will need to report social and environmental performance alongside financial performance within a few years as reporting requirements come online and stakeholder expectations continue to rise. Litigation mounts and calls grow for companies to account for their costs and benefits to society and the environment. Across the globe, 86 lawsuits have been filed against the biggest oil, gas, and coal producers, with roughly 40% of the cases seeking compensation for climate-related damage to the environment or communities. Those who wait to consider how the constraints and opportunities are shifting in this new geography may risk losing more than their good names.
A Purpose-Led Approach
Smart organizations and their boards will continue to build and strengthen their fitness to respond. Market leaders will go further to examine whether they have a complete picture and confront questions regarding what risks they need to be concerned about. These shifts toward doing more comprehensive due diligence lead to a line of inquiry that often reveals the real risks in the misalignment of an organization’s purpose and changing contexts. Testing, or even redefining purpose so that it is relevant to the changing context, will provide a steady and reliable anchor in turbulent times. It can ground a strategic approach to products, services, and resources that deliver new value because they harvest the insights that are now available and respond to social and environmental issues.
In the market, we see examples of the product of new boardroom geographies that range from the strategies of fund managers to companies that have translated societal issues into purpose. For example, Discovery Insurance orients its strategies around the promise of making people healthier. In the context of growing rates of chronic illness, this South African-based company has built a thriving insurance business focused on wellness and has reduced premiums and healthcare costs in the process. In a similar spirit, Bridges Fund Management is one example of a multi-fund investment firm built around the transition to a more sustainable and inclusive economy.
A purpose-led approach provides a lens through which to reframe decision-making. Whether the tipping point for a given board is regulation, stakeholder activism, a quest for differentiation and resilience or greater appreciation of their contribution to future-fit markets, there are straightforward, concrete questions that boards can wisely incorporate across their agendas today.
Below are some questions to help organizations navigate multiple social and environmental transitions.
- What do we stand for? Are we actively avoiding harm and delivering clear benefits? Are we receiving and assessing the correct information to make that determination?
- Where are our risks and strengths for making social and environmental issues count for performance?
- Do we have a complete picture of the potential consequences of the decisions to act and not act in light of the changing context we’ve identified?
- Does our reporting give transparent insight into what we are doing and achieving as an organization? Is it being utilized to provide an increasingly clear basis for decision-making?
- How is our risk appetite influencing decision-making? Where might seeking more risk in a managed way help us move beyond presumed trade-offs?
By embracing the rapidly changing context in which businesses find themselves, leaders can set a new performance framework where constraints and opportunities appear differently. That reframe offers a new perspective on the board’s role, ensuring the organization is fit for the future, bolstered by resilience and longevity in a changing environment.