Board director skills in need of revamp to reach net zero, experts say

Effective climate governance on boards will require a significant upscale in director skills and/or an openness to bringing in candidates from alternative talent pools.

Firms that have pledged to reach net zero by 2050 will have to reconsider the appropriate skillset of their directors in order to steer through the economic transition and appease stakeholder concerns on climate progress, corporate governance experts and investors told Responsible Investor.

“Companies need to rapidly upscale their sustainability expertise and so far that has predominantly happened on the operational side of business rather than at board level,” said Roger Barker, director of policy and corporate governance at the UK’s Institute of Directors. Climate governance will likely be an ESG priority for companies in 2022 as the composition of boards has not sufficiently been addressed in light of net-zero commitments, he added.

Experts who spoke to RI agreed that corporate boards have predominantly relied on external consultants for ESG advice and training but have not undertaken a re-evaluation of board profiles as such. They noted that, while the “greenification” of boards may seem a long way off, gender and ethnic diversity on boards has significantly improved thanks in part to pressure from investors and regulators. Reports suggest that climate expertise is now being seen as equally important when it comes to board composition.

Will Pomroy, head of impact engagement at investment manager Federated Hermes, noted that this is occurring despite director profiling being historically skewed towards traditional skills such as financial experience. He encourages boards to be more open in recruitment processes. “Once you start fishing in different talent pools, a diverse set of board candidates should arise as a straightforward result.” People with deep climate science knowledge acquired through academia, technology experts and more generally younger people with a better understanding of consumer trends and demands would all be suitable candidates to sit on corporate boards, Pomroy added.

Karran-Cumberlege, co-founder of board consultancy Fidelio Partners, noted that every board search she has worked on in the past six months included a screening for ESG competence, where candidates were challenged on their knowledge of ESG issues specific to the company they were interviewing for. “With every new appointment to the board, chairs are thinking about ESG skills also in light of reporting requirements and oversight,” she said.

Karran-Cumberlege, who also sits on the board of Chapter Zero – a think tank for non-executive directors looking to upscale their climate expertise – sees this as closely linked to company strategy as investors’ expectations on climate change competence intensify.

“Companies subject to heavy carbon emissions will already have considered adding technical expertise to the board – but given the increase of net-zero pledges, this is now incumbent on boards across sectors,” she said. “The focus for companies to deliver net zero is only going to grow in importance as companies focus on delivering net zero despite the big unknowns around reaching those targets.”

Voting against management

As part of their corporate engagement, responsible investors and larger asset managers have increasingly sent letters to company chairs demanding a scaling up of their climate knowledge and reduction targets in line with the Task Force on Climate-Related Disclosures (TCFD). Since April 2022, TCFD reporting has been mandatory for over 1,300 of the UK’s largest companies and financial institutions.

Climate-conscious investors secured a big win at last year’s ExxonMobil AGM after a campaign led by activist fund Engine No 1 successfully added three members with ESG expertise to the board. This unprecedented governance revamp has, however, left the investment community wondering what has changed at ExxonMobil one year on. The company’s AGM is scheduled for 25 May and environmental investor Follow This has filed a resolution asking management to set emission reduction targets aligned with the Paris climate agreement. It remains to be seen whether investors are reassured by the addition of climate competence to the board or if further voting rebellions will take place.

“Investors need to demonstrate they are worthy of the capital flowing into their ESG funds, so some of them will be more vocal about their ESG concerns to management – whether publicly or behind closed doors – in order to improve the ESG profile of their investments,” said Barker from the Institute of Directors.

This is particularly important at a time when pressure to divest from dirty assets is increasing. “Investors who stay invested can use proxy voting against directors as a means to show they are holding fossil fuel companies to account,” an environmental investor told RI.

For example, one of the investors to have adjusted its proxy voting guidelines for this AGM season is California’s state teachers’ retirement fund CalSTRS. The $318 billion asset manager has said it will vote against directors of the highest global emitters if they have not published a TCFD-aligned report, disclosed scope 1 and 2 emissions and set appropriate targets to reduce greenhouse gas emissions.

Investors could also hold the chair of the board to account since they carry the ultimate responsibility when it comes to appointing directors, added Karran-Cumberlege from Fidelio Partners.

Pomroy from Federated Hermes agrees that the heaviest carbon emitters could see more votes against directors but also indicates that more “wiggle room” will likely be allowed for directors in less-polluting industries.

ESG committees and expertise

One way in which boards have attempted to appease investor concerns around sustainability is by adding so-called ESG or sustainability committees at board level to create more scope for stakeholder issues. According to data compiled by BoardEx, 46 such committees exist across FTSE 100 and FTSE 250 companies, comprising 194 serving directors. Experts say these committees are helpful as they allow for a deep dive rather than a single discussion point on the board meeting agenda, but there is also scepticism about their capacity to address the scale of the net-zero challenge. Barker and Pomroy both noted that sustainability committees have an advisory role but decision-making power and responsibility lie with the board as a whole.

Barker suggested narrowing the scope of ESG committees to focus solely on net zero, with other aspects of ESG taken care of in other committees or by the board as a whole. By contrast, Karran-Cumberlege sees potential for ESG committees to act as “sustainability disruptors” by upskilling the rest of the board and liaising with the audit and remuneration committees.

In this context, investors would see the chair of the ESG committee as an ally in raising importance at board level, making it less likely that they would be targeted in a director vote, Pomroy added. If discussions between the ESG committee and investors are shallow and perceived to be a tick-box exercise, this should come out quite quickly during engagement activities, he adds.

Similarly to ESG committees, the role of chief sustainability officer has also become common across large companies in the UK. Data compiled by BoardEx identifies 139 sustainability officers across FTSE 100 and FTSE250 companies, of which 42 are flagged as being part of the leadership team.

CSO candidates with influence and authority are a sought-after addition for boards, Pomroy and Karran-Cumberlege agree. “These roles indicate experience of working across departments and require strong influence skills, which is what boards need,” Karran-Cumberlege said. She suggested that, since there is no long track record on ESG experience, a much larger pool of people from a range of backgrounds is available to sit on boards and add a different stakeholder voice. Internal heads of HR and marketing, as well as risk managers of various forms, should also have the right skillset to sit on boards, added Pomroy.

With ESG skills in vogue, the ongoing war to attract the most proficient sustainability experts will continue to gain momentum, according to Barker from the Institute of Directors. “Candidates that have existing board experience and additional green skills will be in very high demand,” he said. He also warned that being a board member requires a broad strategic approach, which a candidate with only a narrow technical or scientific profile would not be able to provide.

As this highlights, finding people with the right skillset to get companies to net zero will likely be an issue for a significant period of time. The consensus among governance experts is that either climate science experts will have to gain director skills through additional training or an existing board member will have to acquire climate change expertise, with the former having the most potential to rejuvenate boards and shake up the corporate governance status quo. Pomroy argues that hesitancy on the part of companies in hiring candidates with no prior board experience can be misplaced, as such an appointment would create an immediate sense of diversity and not form a barrier to progress.

Although most companies provide board learning resources, the upskilling in ESG might be more of a challenge for non-executives than executives, according to Karran-Cumberlege. She noted that the remit of a non-executive director is generally more broad, diverse and carries oversight responsibilities, whereas an executive has a departmental responsibility such as finance or operations, which is more focused and directional.