Our latest ‘Critical Conversation’ podcast features an exclusive discussion with Karina Litvack (Chair, Climate Governance Initiative; Non-Executive Director, Eni) on the role of boards in managing ESG and climate change, arguing that there is no longer an excuse not to act and that these issues fall firmly within the fiduciary obligations of boards.
Karina Litvack is a leading expert on corporate governance and sustainable investment. She serves on the boards of Eni S.p.A. and the CFA Institute, following a 25-year career in Sustainable Investment. Karina also co-founded and chairs the Governing Board of The Climate Governance Initiative, a project launched in collaboration with the World Economic Forum to enable Non-Executive Directors to place the climate transition at the heart of board strategy and decision-making. Karina is a member of Critical Resource’s Senior Advisory Panel.
In this 30-minute conversation, recorded on 21 December 2021, Karina shares thoughts on the duties of boards in relation to ESG, how climate change should be incorporated into board oversight, the importance of ‘double materiality’, and the influential role investors can have in encouraging change.
The discussion was moderated by Daniel Litvin, Founder and Senior Partner of Critical Resource.
Among the key points raised by Karina:
- The argument that boards are ‘breaching the boundaries of their role’ or ‘micromanaging’ if they involve themselves in sustainability issues is simply false. Questions such as climate change are existential – crucial to the success and even survival of the company. To suggest that this doesn’t fall within boards’ fiduciary obligations is absurd.
- Climate change poses a material risk to business and to the safety of human life. This means that we, as directors, must act. To ignore this would be for us to be negligent in our duties – we now need to reinterpret our traditional fiduciary duties through a different lens.
- Investors still play an important role in driving critical change within even the ‘dirtiest companies’. Divesting is not always the answer – the role of investors at ExxonMobil’s recent AGM is evidence of this. There is a strong case for being an active, intelligent, engaged and influential voice.
- Having climate or sustainability experts on the board can be helpful, but is not strictly necessary. Training is critical – it’s then up to the directors to work out how they can incorporate this knowledge into their oversight role. It’s really up to the board to open their minds, challenge themselves and then challenge management.
- Board members are increasingly worried about personal liability with regards to ESG and climate. In Italy, for instance, board directors could face a personal fine of up to €50,000 per person if the company makes a material error or omission in its disclosures.
- There is a huge debate around ‘double materiality’ emerging. This notion of materiality looks beyond the impacts of the external environment on financial performance to also consider the material impacts that a company has on society and the environment. To define a company’s activities as ‘green’ without any consideration for the latter is irresponsible.
- In terms of the oil industry, focusing exclusively on restricting production from the big international oil companies as the main catalyst for change will not work. The slack will undoubtedly be taken up by less scrutinised, smaller or unlisted companies. The smart thing to do is to shift attention more from reducing production and towards restricting demand for fossil fuels.