Vice Chair, Board & CEO Services, Global Leader, CEO Succession Practice
Carbon Dating: Trying to Keep It Real
The year 2050 may sound far off, but it’s only 28 years away. So when the CEO pledged to shareholders at the annual meeting that the company would reach net-zero carbon emissions by 2050, one nagging question lingered in the minds of the board of directors: how can we get there in time and still keep the business financially viable?
In the race to save the planet, leaders can’t get to net zero fast enough. According to the majority of climate scientists, reaching net zero—balancing greenhouse gases emitted with those removed from the atmosphere—is critical to keeping the world’s average temperature from rising by more than 1.5 degrees centigrade. Maintaining this threshold would help slow the rise of sea levels and reduce the risk of potentially catastrophic natural disasters along the world’s coastlines.
But boards of directors are increasingly—and often privately—urging leaders to pace themselves. Achieving net-zero carbon emissions by midcentury would cost an estimated $1 trillion to $2 trillion of additional investments per year, or 1% to 1.5 % of the world’s gross domestic product, according to the UK’s Energy Transition Commission. Jane Stevenson, vice chair of Korn Ferry’s Board and CEO Services practice, says that balancing social impact and financial interests is more complicated for boards today than ever before.
More than 120 institutional investors controlling $43 trillion have signed on to the Net Zero Asset Managers Initiative, committing to finance only those organizations aligned with net-zero emissions by 2050 or sooner. That means that organizations that don’t make concerted efforts to reduce their carbon footprints could eventually find it difficult to attract capital. Still, while that money is key, directors need to make sure management runs a viable business. “You don’t want to be net-zero cash pursuing net-zero carbon,” says Dennis Carey, a Korn Ferry vice chairman and coleader of the firm’s Board Services practice.
A slew of companies have already issued bold statements promising to get to net zero, among them airlines, cars, and even Big Oil. But every organization has its own ideas about what net zero means and how to get there. Stevenson says that when it comes to things like figuring out a timeline for reaching this goal, boards and leaders need to work together proactively on commitments instead of managing them retroactively. “Boards and CEOs that have a strong working relationship really show up in these situations and can be a differentiator when it comes to setting expectations,” she says.
Just as they shouldn’t be devising business strategies, boards shouldn’t be drawing up an emissions reduction plan. But they can ask executives some pointed questions about how their business will survive and thrive in a world which has dramatically curtailed the growth of carbon emissions. At the same time, experts say, directors should make sure that executives have such a plan, along with key performance indicators that can highlight whether the firm is making progress. Part of that involves making sure management has a good idea of how large, exactly, the organization’s carbon footprint is, and—importantly—what it will be in 5 to 10 years based on the company’s business strategy. “Director oversight is needed to hold companies to account on their commitments to achieving a net-zero future,” says Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change.
That guidance might involve telling management to tone down the climate-related bravado. Promising to be net zero within a few decades may be flashy; more than one-fifth of the world’s largest corporations have pledged to reach net-zero carbon emissions by 2050. But it’s a promise that could be difficult to keep, and the CEOs who are making such commitments now probably won’t hold their current positions long enough to see this goal through. Directors might be better served guiding management to pursue more modest but still definitive goals. “Make sure the goals you enunciate are achievable, and that you have evidence that you are meeting those goals,” Carey says.
Another oversight suggestion: tell executives to seek outside help. No single organization can reduce the world’s emissions to net zero, and none will be able to completely offset its own emissions. Executives everywhere will need to work with their big suppliers and seek out new technologies from innovative organizations. And there is one other important detail for directors: making sure executives are incentivized to reach net zero. To get big organizations to take definitive actions, experts say, directors should tie a larger portion of executive compensation to hitting net-zero-related targets. “This is not just going to happen willy-nilly,” Carey says.