Etienne Develay, Manchester Metropolitan University and Nader Virk, Manchester Metropolitan University
October 3, 2024
Greenwashing scandals – the practice of misleading the public about what action a company or organisation is taking to protect the environment – are on the rise. As the climate crisis intensifies, greenwashing represents a significant obstacle to meeting global climate change goals.
A recent example was the organising committee for the Paris 2024 Olympic and Paralympic Games, which vowed to design the most eco-friendly games in history by halving plastic waste. However, the commitment later sparked concerns of greenwashing because of the overuse of plastic bottles and cups by its sponsor Coca-Cola. For its part, Coca-Cola said it “supported ambitions” “to reduce single-use plastic and added that it had also provided soda fountains and glass bottles at the games to that end.
Other high-profile examples include the oil major Shell, airlines AirFrance, Etihad, and Lufthansa, and the bank HSBC, all of which have had adverts banned in the UK because they were accused of misleading the public about the reality of their climate efforts.
Shell said it disagreed that the adverts misrepresented its environmental impact, while Etihad and Lufthansa changed the wording of their adverts after the ruling. HSBC said it would consider how best to engage its customers in the transition to a low-carbon economy.
All this begs the question: what on earth were the boards doing all this time? Board directors these days are under pressure to drive environmental change in their organisations. As part of their monitoring and advisory duties, they are also expected to ensure that corporate activities align with global climate change goals.
We recently examined a group of large US companies, looking at their carbon performance and how the make-up of their board affects the business’s action on the environment.
The effectiveness of a board still largely depends on its composition and the independence of its members.
A board of directors is a governing body that is elected by shareholders to oversee the activities of a company. It is made up of a mix of internal and external directors, bringing different perspectives to balance power and enhance strategic decision-making. The UK corporate governance code serves as the country’s blueprint for effective boards.
Co-opted boards are when directors are appointed after the chief executive of the company assumed office. Co-opted directors may play a pivotal role in the boardroom as they bring specialised expertise and experience. But at the same time, there are often concerns about their independence. They may not maintain the same level of impartiality and scrutiny over the chief executive’s activities to avoid “biting the hand that feeds them”.
But it’s not straightforward. Some studies support a “dark” side of co-opted boards by showing that they encourage corporate misconduct and foster erratic decision-making. But other studies have shown a “bright” side as they provide more informed advice and bring unique expertise that lowers the cost of capital and facilitates innovation.
The same contradictions can be found when it comes to environmental performance. While some researchers maintain that co-opted boards oversee fewer environmental controversies and improve waste management practices, others point out their negative effects on environmental, social and governance (ESG) performance and leave them facing higher risks from climate change.
Faced with these mixed findings, our research looked at co-opted boards to see how they are affecting the carbon performance of companies operating in industries where climate change impacts their economic value. We studied a sample of large US companies that were part of the Russell 3000 index (comprising around 98% of the country’s listed companies).
We found that co-opted boards are decreasing greenhouse gas emissions intensity for these industries. In other industries, where company value is not impacted by climate change, we found no effect. However, we also show that this relationship varies over time and emissions can begin to fall more slowly when there is research and development investments.
While co-opted boards may help to improve the carbon performance of organisations, their presence also seems to be associated with over-investment in inefficient research and development projects. This could be things like poorly designed carbon-reduction programmes or unproven renewable technologies. It means that they can end up approving projects that are not actually aligned with a company’s financial and ESG goals.
Three ways companies can become greener
A first step is prioritising the appointment of independent directors who have no ties with the chief executive, other top executives or major stakeholders to provide objective oversight and hold managers to account for their environmental action (or inaction).
Regulators have a role to play by establishing clear guidelines for how boards should be made up, and their independence. Investors, particularly large ones, can also use their influence through resolutions and votes to push for more action on climate change.
A second step lies in appointing directors with climate change expertise to ensure that the board possesses the skills to oversee the impact and dependencies of climate change on their organisations. Training programmes for directors can also help to build climate change literacy in the boardroom.
A last step is being more transparent about the roles and responsibilities of directors in overseeing climate change initiatives.
Clear carbon-reduction targets and more details about how environmental expertise is integrated into decision-making should be disclosed in annual reports to demonstrate a company’s commitment to addressing climate change and building trust with stakeholders.
These three steps can help ensure that co-opted boards really drive climate change action. Prioritising impact over image will be crucial to fighting greenwashing and building a more sustainable future.
Etienne Develay, Lecturer in Accounting and Finance, Manchester Metropolitan University and Nader Virk, Reader in Finance, Manchester Metropolitan University
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This article is republished from The Conversation under a Creative Commons license. Read the original article.