Resources

• Harvard Business School Business and Environment Initiative
• HBS Accelerating Climate Solutions conference (May 2023) website (videos of sessions available here)

Guests and resources

• Carter Roberts
  • World Wildlife Fund
  • Science Based Targets
  • Climate Rising episode: How Science Based Climate Targets Work
• Bonita Stewart
  • Gradient Ventures
  • Diligent Climate Leadership certificate program
• Lauren Taylor Wolfe
  • Impactive Capital

Guests

Climate Rising Host: Professor Mike Toffel, Faculty Chair, Business & Environment Initiative

Moderator/Panelists:

• George Serafeim, Charles M. Williams Professor of Business Administration, Harvard Business School
• Carter Roberts, President & CEO, World Wildlife Fund
• Debora L. Spar, Jaime and Josefina Chua Tiampo Professor of Business Administration; Senior Associate Dean for Business and Global Society; Board Director, Thermo Fisher Scientific
• Bonita Stewart, Board Partner, Gradient Ventures
• Lauren Taylor Wolfe, Cofounder & Managing Partner, Impactive Capital

Transcript

Editor’s Note: The following was prepared by a machine algorithm, and may not perfectly reflect the audio file of the interview.

Mike Toffel:
This is Climate Rising, a podcast from Harvard Business School, and I’m your host, Mike Toffel, a professor here at HBS.

As part of a back-to-school series of Climate Rising, we’re sharing a session from our recent climate conference held here at HBS. The conference, Accelerating Climate Solutions, was co-led by the HBS Business and Environment Initiative and was part of the Harvard-wide Climate Action Week. Many of the session videos are available on the BEI website, which we’ll link to in the show notes.

The session we’re sharing is called Driving Climate Performance through Accountability and Governance. Moderated by my colleague Professor George Serafeim, the panel features Carter Roberts, President and CEO of World Wildlife Fund–and an HBS alum and previous Climate Rising guest, fellow HBS professor Deb Spar, Bonita Stewart, HBS alum and Board Partner at Gradient Ventures, and Lauren Taylor Wolfe, Cofounder and Managing Partner of Impactive Capital. They’ll discuss how companies and their boards can improve their accountability and transparency to both meet climate goals and signal to their customers that their actions are real.

Note that the audio has been lightly edited for clarity. I hope you enjoy this session from Harvard’s Climate Week.

George Serafeim:
I would like to introduce the panelist right next to me. I have Lauren Taylor Wolfe, who's the co-founder and management partner of Impactive Capital. Bonita Stewart, who is a board partner at Gradient Ventures. Carter Roberts, who is the president and CEO of WWF. And my colleague Deb Spar, who is a professor of business administration here at the Harvard Business School and the senior associate dean for Global Business in Society.

So what I would like to discuss is the fact that thousands of companies around the world have committed to targets, sometimes net-zero targets, sometimes they call them carbon-neutral targets, carbon-reduction targets. But there are ambitious targets out there. Setting publicly those targets and then implementing operating efficiencies, energy efficiencies, process efficiencies, procuring low carbon energy, introducing product innovations.

So products can be recycled and reused and refurbished, working with suppliers to reduce supply chain emissions. And as they're doing that, they're spending real organizational resources. So the question is how can we make sure that those resources are properly allocated to realize both good organizational and economic outcomes, but also the intended climate outcomes.

And when we're discussing about governance and accountability, we can think about multiple institutions. We can think about the role of the boards. We can think about the role of institutional investors in the market fulfilling a governance role. We can think about the role of NGOs that are creating certifications and monitoring mechanisms in the marketplace around the products and services that companies are providing. And of course, we can think about the role of the state and regulations as part of that.

So with that, I want to start Bonita with you. You sit on the board and you also chair Sustainability Governance and Nomination Committee. And maybe you can tell us a little bit about how do you think about the role of the board inside an organization that has an ambitious climate target? And I will follow that with how should we think about this from the role of maybe different committees as well, from a noted committee perspective, from a compensation committee perspective, from a governance and nomination committee perspective?

Bonita Stewart:
Well first, George, it's a pleasure to be back at HBS. So from a board perspective, let me just start with just the overarching. There's really two areas. One is the duty of loyalty to the shareholders, stakeholders, and then there is the duty of care, which is around business judgment. So I think taking on ambitious climate sustainability goals involves three areas in terms of experience that I've seen.

It all starts with the strategy. So in the boardroom, it's working with management, understanding how the sustainability goals that are being set are infused throughout the organization. So that takes into account the product lifecycle, the supply chain, as well as the employee base.

So strategy from a board perspective, making sure that you are seeing it. Is it showing up? Is it being discussed within the board meetings? And then secondly, it's the roles and responsibilities. We've actually took a look at all three of our committees and we actually restructured them. Some are putting in separate committees or subcommittees, but we thought about it a little differently because as we looked at just all of ESG, we needed to make sure we had a horizontal view because it was so ambitious to think about it. And so within the audit, it's really that's where the risk management resides. And so it's making sure that we have the elements of understanding the risk and then the metrics associated with that.

On the talent and compensation side, it's actually understanding the role and the corporate responsibility because the employees that are coming in, they're looking for purpose within the organizations. And then lastly, the committee that I chair, which is the longest name, corporate responsibility, sustainability as well as governance. So we have the opportunity to look across and make recommendations on metrics to the talent and comp committee. And at the same time we do a deep dive every quarter on just the sustainability area.

And then lastly on the accountability, who's actually responsible and, how are you going to hold everyone accountable? And if you have ambitious goals, you should have ambitious metrics. But we have checks and balances across the committees.

So we're making a recommendation coming out of our governance committee to the comp committee, but then we have audit and risk, actually looking at the metrics. And so I do think having that cross horizontal approach across the committees, I found that that has worked best.

George Serafeim:
And maybe I can go to you, Lauren, and just reflect on what Bonita is describing, right? Because what Bonita is describing is the integration actually of those sustainability and climate targets throughout the board committees from an audit committee perspective, developing the right metrics and measures that then you can use to create incentives as part of the compensation committee, reflecting on the talent side and so forth. I want to ask you, you lead an activist investor firm. So you're not leading an investment firm that just uses quant strategies and you actually deeply understand the firms that you're investing in and then you're engaging with them. What are some of the best practices that you have seen across companies that are able to drive effectively climate strategy forward either on the side of developing solutions, products that are needed for the economy to decarbonize or decarbonize its own operations?

Lauren Taylor Wolfe:
So we operate as investors, we're usually anywhere between 5% and 10% shareholders, sometimes north of 10% shareholders of our portfolio companies. And we have a very concentrated portfolio of 10 companies. So we are very engaged at the management level, at the board level. We happen to sit on two out of those 10 company boards. In terms of best practices, we operate in the small and mid-cap space, all public companies. There are no real best practices that we've seen sort of plug and play across the board yet. It really depends on the business, the industry and the sophistication of the board, and really the management team.

What I would say though is that when we first start engaging with a company, we tell them to look inward. Right now, the passive guys, BlackRock, State Street, Vanguard owned 20 to 30% of every one of these public companies. Many of you sit on boards, you're being bombarded with questionnaires to fill out. You're being told you have different ratings from Sustainalytics versus MSCI. And it's very difficult to understand how you should be checking the box and meeting every criteria in order to get an A on the ratings.

I think it's very confusing and there's a lot of information out there. What we say to boards and management teams is look inward, focus your sustainability or ESG practices on one, something that addresses a business problem and two, can directly link to economic returns. And I think that's the most important piece. And so in terms of best practices, you mentioned productization or thinking about how when companies are making these very audacious goals, we're going to reduce emissions by 50, 70% by 2030. We need to understand exactly how they're getting there.

And I think the most important thing in terms of a best practice before I get to the product side is can you link executive compensation to it? Because what we know is incentives drive behavior. So we have only one of our 10 portfolio companies has gone so far as to link 5% of the long-term incentive plan and some are linking down the line bonuses to certain emission goals if they've already set them or DEI initiatives. And those are usually around not necessarily minimum women and minority on boards. I think the more important thing is actually retaining, promoting, developing and hiring diversity through the ranks. And to the extent you can get the comp committee to identify a certain amount of executive linked to achievement of those goals, it gives you a way to, we know what the end state is either a diversity goal or an environmental goal.

Let's backtrack it and monitor it in the sort of the baby steps in the near term.

From a product perspective, where I can bring this to life in two examples. One of our companies they have three segments, but the biggest segment is a fleet car segment. And everyone thought for sure when we get a hybridized fleet, the revenue per vehicle is going to go from $70 to $50 per vehicle. So substantial downdraft because this company was going to sit still and it costs that much less to charge a vehicle versus fill up a nice vehicle. But we surveyed over 100 of their customers and we said, "Hold on, There's real demand for as your 18 million commercial vehicles in your network become hybridized right between now and 2030." We're not sure what the pace of that curve looks like, but we know we're going there.

Your customers are demanding unified reporting. They want to know, gosh, can we link our emissions to carbon offsets so we can get some credit for it? Can you tell us electricity pricing optimization? It's a fifth of the price to charge a car in California at 8:00 PM at home versus at midday. And so we help them think about how they can invest in innovation by linking it to the returns associated with, we don't think you're going to have $70 a vehicle in this future with a hybrid commercial fleet. We actually think your revenue per vehicle and profit per vehicle could go up 50%.

And so demonstrating to the board and the management team, wow, there's huge economic value here for you to take. Now it's time to make these investments. And that's how we justify some of the investments. But that's just an example of how you can think about what matters to your business and make sure you focus a strategy on linking your environmental or social efforts directly economic returns.

George Serafeim:
I love that example. And I just want to just follow up briefly about what is the role of investors actually in mobilizing that change, right? Because the traditional economic view of the world would be, why do you even need Lauren to come and say that? Why are they not discovering it themselves?

Lauren Taylor Wolfe:
Most people think I'm useless.

George Serafeim:
What is the obstacle in that change?

Lauren Taylor Wolfe:
I think the obstacle to the change was it's easier to do nothing than to go out there with risk and uncertainty and say something. And so until the market started downgrading the stock and pricing the stock lower, it was easier for them to just focus on what they were doing. Most especially, in the small and mid-cap space, most management teams are really just thinking about the blocking and tackling and meeting their quarterly numbers, the role of investors, at least long-term investors, we're holding our portfolio companies for three to five years. So we have the true luxury of looking out over that long-term time horizon. This is not true for most hedge funds, but it is true for the passive guys too. So to the extent, and I believe it's our responsibility as good fiduciaries to start the conversation, and especially with some companies that have set these audacious goals to hold them accountable through those repetitive conversations and potentially using your vote against the board or putting up proxy proposals for the board and other shareholders to vote on.

It's our responsibility as owners to make sure we're holding the company accountable to the commitments they've made, but also to put out ideas around how to make these companies more profitable and more valuable in the long run. And frankly, it's a win-win for me because I own 6% of the stock, so.

George Serafeim:
It works well.

Lauren Taylor Wolfe:
Yeah.

George Serafeim:
Carter, I want to come to you because you lead an organization that has tremendous knowledge in terms of environmental science, but also the capabilities and the scale to really engage with businesses and drive change. WWF has been behind many just product certifications that we're observing out there in the market when we buy our coffee or some other commodity, but also many collaborations have been built across industries. What works, how effective have those efforts been at mobilizing change inside the organizations?

Carter Roberts:
Thanks, George.

At WWF we're by many measures the largest environmental group in the world. We have 8,500 employees. We work in other countries and we work with corporations in many ways because we think that corporations are engines of innovation and scale at their best and engines of disruption at their worst. And we've created certification programs like Forest Stewardship Council. I bet your annual reports are printed on FSC Stock, Marine Stewardship Council for Seafood, all kinds of commodities. We co-created something called science-based targets. They're now 5,000 companies in the world that have committed to science-based targets is basic table stakes for meeting their portion of the Paris Agreement goals.

And by anecdote, all of those have been engines for good things where now at about 20% of the market is sustainably certified of many commodities. I mentioned science-based targets. You can look at how companies are moving and yet by the numbers 20% isn't enough. By the numbers, science-based targets, a lot of those companies, and I would wager net-zero companies really don't know how they're going to reach the goals they have. And more and more so, companies, civil society investors, NGOs are wary of self-reporting and without independent monitoring and verification of progress against those goals, not only are we wary, but employees are wary and investors are wary and they want to know that the numbers are real.

And so for us, as we look ahead, if you don't have that kind of independent monitoring and verification, your stakeholders will be concerned. If you don't have the ability to drive those goals all the way through your company, you probably are not going to get there. And then the last thing is what we've observed is there is a moment with every company we work with when the CEO will lean over and whisper, "I can't get all the way there without that guy."

And he will be pointing to a minister of some other country or a head of state that doesn't yet have the policies or the enforcement or the governance in place to support the change that you want to make. So I heard a speaker earlier today said, we're just going to focus on scope in one and two. Well, I'm here to tell you that scope three is where the action really is. That is the iceberg underneath the surface of the water of your greenhouse gas emissions.

And when we look at places like Brazil or the United States or Indonesia or wherever, where raw materials come from, the only way you're going to get to scope three is if you build a partnership with government on policies, on enforcement, with NGOs and civil society on making sure communities are protected in relationships with investors and relationships with, dare I say, your competitors.

And all this comes together in the Cerrado in Brazil where the world's agricultural traders grow soy and beef and other things. They're sent to China and to Europe, and then they end up in a lot of products that are sold throughout the United States and elsewhere. There are immense greenhouse gas emissions bound up in that production. And the only way you're going to get to controlling that is if all their biggest customers are engaged in putting pressure and requirements, the government of Brazil passes the right laws and if financing comes in to make producers whole.

So in my point of view, in terms of accountability, I think the traditional table stake stuff is pretty obvious. You need a board committee that is first-rate, 60% of boards have that. Only about 7% of the boards out there have strong sustainability committees. And I love the whole of house vision that you painted, but I would argue you need a standing sustainability committee to keep management honest, hold them accountable, to drive goals throughout the compensation system. And then you need independent monitoring.

But I would say the last thing you need if you really want to dig into governance and accountability is you need to attract the talent that can build bridges between sectors. The gold in our work are people who can build bridges between the policy world, the world of science, the world of civil society, the world of finance, and the world of production.

I would argue that if you really want to get governance and accountability right, it starts with hiring people who can do just that and who can look beyond the particular footprint of a company, but create the framework to solve the problem as a whole, not just with their company but many others.

George Serafeim:
I wanted to bring Deb to the discussion and maybe you can reflect a little bit on what Carter said, right? Because you also teach here a course on the state and capitalism. And the state actually has played a very big role in holding companies accountable for a very long time. What is the role of the state in this context? Because usually when you think about that, you think about it in the context of problems that are a little bit more local rather than truly global because there is no real state for global problems, which is part of the challenge. So how do you think about that?

Deb Spar:
One of the central problems in this whole area is that there is no global governance. But I think we just have to acknowledge that as a problem and work around it because I don't believe we're going to get global governance in this area or anywhere else anytime soon. But I will reflect directly on what Carter said.

In order to have accountability, you need to have accountability to some entity. And this is still where governments for all of their flaws are still the best thing we have because as I teach in my course on capitalism in the state, ultimately governments have a monopoly on force, which we don't think about very often, but that's what they have. And we actually want them to have that because we don't want other entities to have that.

And I think you and I would agree that if you look at the whole history of corporate self-regulation, it's not a very successful story. Years and years ago, I wrote my doctoral dissertation on commodity cartels. And it turns out, with the exception of De Beers, world's most successful cartel for many years, commodity cartels don't work because the members of the cartel, by very definition, are competitors. And competitors aren't very good at accountability to one another.

So in order to have any kind of accountability system, you need to have some external governor. And sometimes those can be industry associations, but they don't have any enforcement. They can scold, they can wag fingers, but they don't have any real enforcement. Sometimes you can have a super powerful firm. Saudi Arabia plays this role or has played this role in OPEC, De Beer's played it in the diamond cartel. But if you look, I sort of got into this field years ago looking at Nike and what they were doing with labor standards in their supply chain. And the answer was not much because it was very hard for Nike to even track all the things you mentioned.

But ultimately, until they started getting beaten up in the public press, they weren't accountable to anyone. So I think this is where the activists can come in, in holding firms publicly accountable, but ultimately, this world will start to change when the accountants get involved and we have standards, but then they have to be enforced.

And we're not talking hopefully here about military enforcement. We're talking about the SEC [U.S. Securities and Exchange Commission]. We're talking about FASB [Financial Accounting Standards Board]. We're talking about really boring bureaucratic entities that hold companies accountable to commonly agreed upon standards. And then it's the role of the board committees and the investors to kind of do what we do now with regular old, boring accounting standards. How are you reporting X, Y, and Z? But everybody who sits around the board knows that we have to report these things accurately because ultimately, there's a sanction if we don't.

And really the only governing body that can sanction is a government. Thankfully it doesn't have to be the global climate crisis body. It can be SEC. It can be FASB. Maybe not local governments, but national and regional governments. It's not collaborative in the sort of happy sense, but it's collaborative in the sense that every part of every piece of society is playing the role for which they're most fit. And together, slowly and painfully, you can imagine a path forward.

George Serafeim:
Carter, I'm wondering if you can reflect a little bit on that because that goes to your point about many times with those certification mechanisms and so forth, we get to 20%, we cannot get the other 80%.. And what Deb is saying also is that there are limits to those self-regulatory structures because of the absence of sanctioning and enforcement mechanisms and so forth. But at the same time, you share the story where that person is trying to make progress and says, but I need to get that person and that person is not moving. How do we go from 20% to 100%?

Carter Roberts:
There is no way around government, and I'm just telling you. It's inescapable that at some point you need to have elected officials either put a price on carbon or create a regulatory framework that motivates people, not just the leaders but the laggards. I think in the meantime, the only thing you can do is begin to emulate what a government might do. And I'll give you some examples of what that looks like. What that looks like is, I may get into trouble what I'm about to say, but what that looks like-

George Serafeim:
Please say it.

Carter Roberts:
... is when you have a very large company that buys from almost every other company in the world and sets expectations for what their supply chain looks like. And when you sit down in their buyer's rooms that they look you in the eye and expect you to have a plan, a science-based target and a plan for reducing your emissions. And they will prefer to buy from you instead of someone else. That begins to create the kind of influence and the kind of expectation at a scale.

And we work with companies like McDonald's, like HP, like Walmart, like Mars, who not only set their own targets, but they have expectations for everybody they buy from. And I think then you're beginning to get to a scale of influence. You also begin to watch companies jump together, not in setting price, but jump together in saving the commons. We've seen it in the world of salmon. We're hoping to see it in the world of agricultural commodity traders, although they haven't quite jumped very far. But you're beginning to see sectors move, and I think then you're beginning to see something that emulates what you would hope government would do in the absence of good government.

George Serafeim:
I want to jump on this because what you're describing, what you both described is in some sense, companies actually adopting very ambitious targets such as science-based targets. And at the same time, expanding the scope of accountability beyond the scope of control.

Carter Roberts:
That's right.

George Serafeim:
With scope three, because now you actually require other people to behave differently, suppliers, customers, and so forth. So I want Bonita to go back to you and then to Lauren, to ask you the question about what are the skills that we actually need in this world from board directors and management to have to lead that kind of change? Because actually we're asking firms to do ambitious things and to collaborate across the value chain or even sometimes across competitors. And firms traditionally are not that great at doing exactly that. So I want to discuss a little bit about skills. What do you think?

Bonita Stewart:
So annually we all go through the board skills matrix. And Carter, I know you say having a separate sustainability committee, but you think about the Fortune 1000, we talked about human capital actually having expertise in this area. And so one of the things that we did, because Lauren, you said some just don't do anything. And we said as a board, as management is driving and bringing on analysts and investing and making sure that we could look at the complete supply chain across science-based targets in scope three, we can't have a committee and board members that are not fluent.

And so we committed within my committee and we opened it up to the full board to say that we would at least take the step of certifying ourselves. So we had management actually review a number of different courses. There are many others, but we settled on the Diligent Climate Leadership and we all went through the course. And so that was a first step in terms of making sure that we were investing in our own education so that we could come in and have at least robust conversations with management.

But I think that the first step is to have a level of fluency. You'd be surprised. Scope one, scope two, scope three, all of the acronyms associated with this area. And is that happening? Is that education in the boardroom? And if we don't have recruiting for specialists, but I think every board should absolutely take the first step in educating themselves.

George Serafeim:
I teach many times in board programs and I like to say that a few years ago they would say, "Scope what?" And now at least they will just confuse scope two and scope three, but at least they will know what it is. Lauren, how do you think about it? What gives you confidence inside the firm in terms of skills, especially in the context of what you have described, which is technologies are changing very rapidly. All the transformation that is happening in the mobility sector. Similar changes are happening in the energy sector, in the build environment, in agriculture. Regulations are changing. What gives you confidence as an investor when you're looking at the board and the management team in terms of the skills,

Lauren Taylor Wolfe:
You never really know what's going on in a board unfortunately from the outside. So it's very hard to get confidence without being inside the boardroom. I'll answer this in a second. I think what you said was so fascinating about getting all these constituents in a system to work together. I'm always a skeptic, but we have to think about it. I wonder if that will still be the case because it makes so much sense and I want to buy into it, but the economic rationality or the reality today is that rates are three times where they were, I think when a lot of these initiatives got started.

And so I like the consequence that you with the SEC, which they're coming out with mandated disclosure because we know people want to avoid pain and they'll expend more energy to avoid pain than to seek gain, And just to answer your question on the skills that we look for, really, again, I think it comes back to really understanding why all of these efforts make sense from an economic perspective. And I really do think they do.

I think it's harder to prove them out, but you have things like just for instance, we can gain confidence just looking at how government's changing. With the IRA, the Inflation Reduction Act, we see massive amounts of capital that are being allocated to these longer term oriented energy transition initiatives that have much, I think probably not the highest payback, but an attractive payback over a long enough period of time.

I do think there's global concerted effort to move the energy transition along again, but it comes back to government. What I think is really important, at least in corporate America, because boards, I think they still need to be brought over the hump that this makes sense economically in the long run is that we need to look at incrementality, right? When we talk to companies about capital allocation change, if you spin off this segment or reduce your cost here so you can get to pure margins or make this acquisition, those have a natural immediate return almost. It's very short term appreciation of value.

I'm toying with this notion of how can we compare the incrementality and cumulative nature of environmental, social and governance initiatives to make it almost like a compounded interest, almost the way that investors think about things. Can we convince companies to do these miniature little things that eventually snowball almost in a way that you have this compounded interest effect on the overall value of the corporation?

George Serafeim:
Deb, the same question to you. And you have actually a unique position because you're a professor here, but also you're a board director. What are the kinds of skills that we need to be able to lead organizations in the era that Carter is describing?

Deb Spar:
I think sadly the change won't come from the board directors, particularly for public company board. There's just lots of stuff that you're responsible for and boards don't spend a huge amount of time relative to management. So at the risk of repeating myself, I think until the standards actually change so that the boards have a fiduciary and duty of care to actually demonstrate adherence to some standards, I think the change will be limited and probably to those boards that have a particular interest or concern for this.

So I think right now we're in a moment where society generally feels like we are moving and gee, we better figure out what scope three emissions are, not just because our kids are telling us they're important, but because we fear and feel that we're going to have to actually manage towards them. But I think it's similar to industry self-regulation. Until there's some kind of sanction involved, I think relying on boards to be the agent of change is overly optimistic.

Bonita Stewart:
And Deb, I agree with you in terms of the board, but when you have a company and the management and it's infused all the way down throughout including the employees, then I do think it is the fiduciary responsibility of the board to ensure that they can have an informed conversation.

Deb Spar:
I think what you said at the beginning is crucial, that if there is a firm and goodness was there are some, and I think the numbers are growing, whose deep purpose is to advance the green agenda, then absolutely the board will move in that direction. But where I'm more skeptical is in which firms that are doing X and now they want to be good and clean up the environment, but it is still at this point more of an add-on than being central to their purpose.

George Serafeim:
We'll open up for questions.

Speaker 7:
I just wanted to have the professor tell us the skills and assuming that you have a green agenda, what would you recommend in that regard?

Deb Spar:
I think a basic knowledge of the regulations of the science. I mean, I don't think one needs to be environmental scientists, but if you're in the fishing, seafood industry, you're going to have to understand the basics of that sector and the basic of the environmental science insofar as it's informing the regulations and your business.

So I mean it's a relatively small investment to make in one of these board courses. Just like if you join an audit committee of a board and you're not an accountant, it's wise to take a course in audit committees and in financial governance. So again, I think the more we can normalize for this responsibility and this set of skills, the more we make it something that you do as part of your regular business rather than something special, I think the further along we'll get.

George Serafeim:
Carter.

Carter Roberts:
I would add something that we have gone through a lot at WWF and we were talking about this earlier, is the enormous expectations on companies and institutions and NGOs like ours about meeting the needs of marginalized communities and being really good and true in acknowledging and respecting the rights of indigenous groups, the disparities among groups in our society.

And one of the things I've learned in our work is if we're going to work in the area of Pine Ridge Reservation in the Dakotas, we ought to hire somebody from those communities to understand those communities and build bridges. If we're going to work in the border of India and Nepal, we ought to hire somebody from the Chepang migrant communities who are there. And we have. But I would say on boards, I would encourage you to take the step of actually considering, dare I say, putting somebody on the board who is a professional environmentalist, who has that kind of background.

Procter & Gamble just elected two new board members. One of them is a legendary senator Rob Portman from that part of the world who was a leader in the Senate. And the other one is a woman named Sheila Bonini who spent her career at McKinsey before doing corporate partnerships for a small NGO called WWF. I think we're seeing that as more and more of the norm in larger companies is to bring in people who've spent their career on these issues. And I would encourage you all to think about doing the same.

George Serafeim:
And if I can just add to what Deb and Carter were saying, I think there are some really fundamental questions one need to ask. The first one is how good are the data that the organization is actually using in creating targets or making decisions? The second one is why an organization is setting a target? And third, and importantly, what is the action plan for following up on the target? And what is the pathway? Is an organization trying to achieve that through efficiencies? For example, energy efficiencies and process efficiencies is fundamentally different than buying carbon offsets, for example, which is again, fundamentally different from working your suppliers, which is again, fundamentally different from redesigning products. All of those things have fundamental differences in terms of difficulty, but also the outcomes that they're going to generate. But it requires real skills and real information and real confidence to ask those questions and drive accountability on those things.

Speaker 8:
Thank you. A lot of this conversation is focused on people who are already buying into the climate change argument. But we have a situation in the United States, and I think of in some other countries too, where we have states actively pushing back against institutional investors like BlackRock, State Street and the others who have put too much of an emphasis on climate and who are saying ... Texas for an example, if you're not going to invest in our oil and gas companies, then we're not going to invest in BlackRock.

What is the argument toward people, companies and officers and investors, by the way, who don't buy into this whole thing we're selling right now.?

Lauren Taylor Wolfe:
There was so much capital flew to ESG funds and it was very confusing and there was a lot of inauthenticity. And when the pendulum swings one way, it naturally swings back the other way. And so there's been a lot of politicization of ESG funds and you have a governor in Florida and politicians in Texas saying, "My fiduciaries are not to consider ESG as a factor." However, that is very shortsighted and irresponsible in my view, right? Risks are risks. And as investors, part of our fundamental function is to understand risk and evaluate a risk adjusted return.

It's like saying I should invest in PG&E without thinking about the risk of fire and explosion. I would've taken a zero in my equity, right? And so I think unfortunately, it's been taken to the public zeitgeist and the headlines, and that was expected just given how much swayed in one direction. But I actually think it's going to make these types of conversations happen more frequently. And frankly, I think it's undeniable that fiduciary should care about risks associated with their investments.

And I think specific to companies in Texas or maybe oil and gas companies, listen, I think they need to listen to their key constituents and stakeholders, including their employees, including their customers. But it's very difficult to go to a corporation whose sole profit is derived from extracting hydrocarbons from the ground and say, "That's it. Stop extracting hydrocarbons from the ground because it’s not going to work." But there are baby steps. There are things that a company can do to reduce its impact on the environment, to invest in renewables and to sort of shepherd us into this energy transition world. And I think taking a black or white approach is just shortsighted and I think I'm hopeful that it'll pass.

George Serafeim:
Yes?

Speaker 9:
How much of a catalyst could the European border tax have on this entire conversation? I mean, is it just a seed or is it something that could really affect its trading partners to such an extent that there must be change?

George Serafeim:
The question is about the border adjustment mechanism. Carter, I don't know if you want to comment.

Carter Roberts:
I would just say I think even though we don't have a legally binding global agreement, we don't have a global governance mechanism. But as you watch states and regions start to impose border taxes and the like, there's going to be a response and a counter response and it's going to get very interesting, and I think in various ways, various industries are going to impose penalties on poor sustainability, actions and products and companies and the rest.

And that's going to be in the absence of a real global governance, you're going to see more and more of that, not just from Europe, from other parts of the world. And we better get used to it. I think it's a new norm and we're going to have to navigate it. And it's an interesting thing for me because in Europe, the consumers are powerful and they will punish a company that doesn't do the right thing.

In the United States, we're not really quite there yet and we're waiting. And so it's very interesting how California is a different kettle of fish than some other states. So I think any company that is of a certain scale is going to have to navigate all these realities.

Speaker 10:
Today, I'd say in DC, it seems like there's a remarkable lack of advocacy dollars and lobbying efforts going towards asking for the standards and broad-based policy that will actually bring the laggards up to the point where the leaders are. What can boards and executives do to begin to change that move towards asking for the things that will be required for all companies to actually deliver, not just the leaders?

Deb Spar:
This stuff is hard. It's complicated if you haven't lived in this world. It is a new language, it's technical. And I think just as we've been talking about board directors educating themselves, I think if one presumes best intentions for a moment, which is a huge presumption, but let's just go there, legislators and government officials are going to have to be educated on these things as well. It's not just the elected officials, it's also the bureaucrats in these various agencies who will be writing the standards that subsequently shape behavior.

And clearly partisan issues are a big piece in this. And I don't mean to downplay that, but having the standard writers understand what kinds of standards are most optimistic, are most doable, are most realistic, we're not going to get it right the first time out. But I think it talks again to the importance of collaboration without the kumbaya element, just kind of education across these sectors and trying to make sure that you don't get a lot of chances to re-tweak legislation or standards,.

So that the ones that come out there are as good as they can possibly be. And the last thing I'll say, I think the IRA has come up, of course. The IRA makes me quite hopeful. It's aware of the fact that the US isn't Europe, regulation isn't going to work. We need incentives and it's got to work. If the IRA doesn't work, and by working, it means it's got to create jobs. It's got to be good for marginalized communities. If it doesn't work, terrified that we will have missed an opportunity for this generation. So everybody should try and do whatever they can to make sure that the IRA works in terms of climate change and also works in terms of economic growth for this country.

Lauren Taylor Wolfe:
One thing that you might be able to do, just to pick up where Carter was going, at the board level, is I believe that markets move faster than government. And so there are ways, right? Well, we know if you read any of the NPD or consumer data, there's one thing that people will pay more for almost indiscriminately with very little elasticity. And that's sustainability.

So to the extent in the boardroom you can say, "Oh, how are our products?" Have we AB tested a product that's more sustainable than that just to create pricing power? I think the free market, and we have a company that does aluminum cans as opposed to single use plastics. And I think that's about to take off. But if you can in the boardroom, use your voice to question, how are we driving more sustainability in our products so customers can speak and demonstrate a willingness to pay more, which might have more margin? Maybe that's one way to move the needle.

Bonita Stewart:
You're absolutely correct. Look at the UGG sugarcane product. And so when that product came out, it flew off the shelves, but it was also because of the consumers. It was the demand. It was the fact that how the material was developed. And then you can see the economic imperative. And once you have the economic imperative and a case study, you have a win, it starts to change the entire organization.

George Serafeim:
Join me in thanking Lauren, Bonita, Carter and Deb. Thank you.

Mike Toffel:
That was a panel session on accountability and governance from the HBS conference, Accelerating Climate Solutions, featuring George Serafeim, Carter Roberts, Deb Spar, Bonita Stewart, and Lauren Taylor Wolfe.