To truly be greener, companies need to pay attention to management

Scandals related to “greenwashing” – the practice of misleading the public about the actions a company or organization takes to protect the environment – are becoming more and more common. As the climate crisis worsens, greenwashing poses a significant obstacle to achieving global climate change goals.

A recent example was the organizing committee for the Paris 2024 Olympic and Paralympic Games, which promised to design the greenest games in history by halving plastic waste. However, this involvement later raised concerns about green money laundering due to the overuse of plastic bottles and cups by its sponsor Coca-Cola. For its part, Coca-Cola said it “supports the ambition” to reduce single-use plastic and added that it has made soda fountains and glass bottles available at matches to that end.

Other famous examples include the oil company Shell, the airlines AirFrance, Etihad and Lufthansa and the bank HSBC, whose advertising has been banned in the UK due to accusations of misleading the public about the viability of their climate efforts.

Shell said it disagreed with the claim that the ads misrepresented the company’s environmental impact, while Etihad and Lufthansa changed the content of their ads after the ruling. HSBC said it would consider how best to engage its customers in the transition to a low carbon economy.

All of which begs the question: what the hell have the boards been doing all this time? Today, board directors are under pressure to implement environmental changes in their organizations. As part of their monitoring and advisory responsibilities, they are also expected to ensure corporate actions are aligned with global climate change goals.

We recently examined a group of large U.S. companies, examining their carbon performance and how the composition of their board of directors affects the company’s environmental performance.

The effectiveness of the board still depends largely on its composition and the independence of its members.

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Read more: Companies that try to tell the truth about their impact on nature may end up hiding more than they reveal

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The board of directors is a management body elected by shareholders to oversee the company’s operations. It is composed of internal and external directors, bringing different perspectives to balance power and improve strategic decision-making. The UK Corporate Governance Code is a model for effective governance for the country.

Co-opted boards occur when directors are appointed after the company’s chief executive takes office. Co-opted directors can play a key role on the board because they bring specialized knowledge and experience. At the same time, however, there are often concerns about their independence. They may not maintain the same level of impartiality and control over the CEO’s actions to avoid “biting the hand that feeds them.”

But it’s not easy. Some research confirms the “dark” side of co-opted boards, showing that they encourage corporate misconduct and promote poor decision-making. However, 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 argue that co-opted boards oversee fewer environmental controversies and improve waste management practices, others point to their negative impact on environmental, social and governance (ESG) performance, exposing them to greater risks from climate change.

Given these mixed findings, our study looked at co-opted boards to see how they affect the carbon performance of companies operating in industries where climate change affects their economic value. We examined a sample of large US companies included in the Russell 3000 index (comprising approximately 98% of publicly traded companies in this country).

We find that co-opted boards reduce the greenhouse gas intensity of these industries. In other industries where climate change has no impact on firm value, we found no impact. However, we also show that this relationship changes over time, and emissions may start to decline more slowly as R&D investments are made.

While co-opted boards can help improve an organization’s carbon performance, their presence also appears to be associated with overinvestment in inefficient R&D projects. These may include, for example, poorly designed carbon reduction programs or unproven renewable technologies. This means they may end up approving projects that are not actually aligned with the company’s financial and ESG goals.

Three ways companies can become greener

The first step is to prioritize the appointment of independent directors who have no ties to the CEO, other senior management, or key stakeholders to provide objective oversight and hold managers accountable for their actions (or inactions) to protect the environment.

Regulators have a role to play by establishing clear guidelines on the composition of boards and their independence. Investors, especially large ones, can also use their influence through resolutions and votes to push for more action on climate change.

The second step is to appoint directors with climate change expertise to ensure that the board has the skills needed to oversee the impacts and dependence of climate change on their organizations. Director training programs can also help build climate change awareness in boardrooms.

The final step is to provide greater clarity on directors’ roles and responsibilities in overseeing climate change initiatives.

Annual reports should disclose clear carbon reduction targets and more details on how environmental expertise is incorporated into decision-making to demonstrate the company’s commitment to tackling climate change and building trust with stakeholders.

These three steps can help ensure that co-opted councils actually drive action on climate change. Prioritizing impact over image will be key in tackling the eco-economy and building a more sustainable future.