Board Diversity Key to Net Zero Transition

Compliance mindset to diversity must change, says Babcock chair, urging firms to abandon ‘one-and-done’ approach.

Greater diversity on company boards is a pre-requisite for effective transition to net-zero business models in the energy sector, according to the chair of a leading supplier to the industry.

As businesses in the energy industry decarbonise their operations, representation at the board level will have to change, said Ruth Cairnie, Chair of UK-based engineering services group Babcock International.

“The sector has to undergo a complete transition, which involves different business models, business partners, and relationships with consumers,” she said. “If we cannot bring in new and different people to board rooms and enable them to contribute effectively, if we have the same groups of people on boards as we have had in the past, there is no hope of getting the transition under way,” she said.

Fossil fuel extraction and usage are key contributors to carbon emissions causing man-made climate change and as such firms across the energy sector, including power utilities are increasing pressure to decarbonise their business models.

Speaking yesterday during a panel discussion on the ethics of diversity convened by the UK’s Institute of Business Ethics (IBE), Cairnie warned firms against taking a ‘one and done’ approach to board room diversity, where one appointment of a woman or person of colour is made to a board position in order to demonstrate diversity. While having visible diversity at the board level is necessary in terms of providing role models, it is not sufficient, she said; appointments must be made to “power-specific roles” rather than as a compliance exercise to meet diversity targets.

IBE’s December 2020 ethics report states that the need for greater diversity of thought and life experience on boards has “never been more compelling” following the disruption of the Covid-19 pandemic and the systemic risks that are posed by climate change.

UK companies are obliged to increase board-level diversity following recent government-backed reviews on the representation of women and ethnic minorities.

According to Investec’s inaugural quarterly Sustainable Investment Research report, achieving gender diversity at management level is “a long-standing challenge that companies have struggled to meet, due to a variety of complex issues that are deeply embedded throughout societies around the world”.

Gender diversity is a key social ambition for investors, policymakers and companies, not to mention for society at large, said Investec. “It is estimated that increased education levels for women are responsible for c. 50% of the economic growth in the OECD countries over the past 50 years, but despite this progress, women remain significantly under-represented on boards and in management positions, as well as in government,” said the report.

Across the G20 countries, women hold only 20% of board seats and just 3.5% of the CEO positions at listed companies. Despite a shrinking overall gender pay gap, the UK has a relatively high pay gap at management levels, while only 5% of the FTSE 100 have a female CEO, making for a lower participation rate in than in the US, Australia or Hong Kong. The report also cites a study by the International Labour Organization, which found that firms with gender-balanced boards are 30% more likely to report favourable outcomes such as enhanced profits or innovation.

Investec expects a wave of net-zero targets from UK companies as the COP26 meeting in Glasgow in November approaches. “Management teams will need to clarify their climate-related targets and strategies, which will be a new challenge for many.” As Cairnie pointed out, the transition implied by these targets will require some “big thinking” at the board level over the next steps that businesses must take.

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