Aaron Grunwald: How much of a priority are sustainability and climate issues for board directors today, both specifically in the financial sector and across the entire economy?
Carine Feipel: In the financial industry, there is certainly a big focus around these topics. Investment funds, for example, must now be categorised depending on how much they consider sustainable objectives. This forces boards to take some strategic decisions about how to position the funds. Investors more and more demand that the funds they invest into have sustainable objectives.
Banks and insurance companies will progressively also have increased disclosure requirements to comply with. These boards therefore spend time understanding the new regulations, their impact on the existing business, and incorporating sustainability into their strategies.
More generally, a proposal for an EU directive on corporate sustainability due diligence was adopted in February. Based on this text, it will become mandatory for certain large companies to take account of sustainability objectives in their corporate purpose. Even if not many companies in Luxembourg will be within the scope of this directive, it brings a new mindset to companies. And there are now a number of corporates which are seeking to obtain labels or certifications about their sustainable activities and priorities. The Luxflag environmental label and the B-Corp certification are renowned examples.
Within companies, boards are, of course, the corporate bodies that decide the strategy of the company, that set the tone within the entity. As such, they have a fundamental role to play: sustainability comes from the top.
Which types of companies will have to comply with the new EU directive on corporate sustainability due diligence and which ones will not?
The proposed directive states that it will be applicable in two different phases. The first phase will only be for companies that have more than 500 employees and a net turnover, worldwide, above €150m. That reduces, obviously, the horizon of companies that will be within the scope. Then, there will be a second phase, where the criteria will go a little further down, but it will only be in limited sectors. I’m not sure that in Luxembourg we have many of those companies. But what the EU commission specifically wants is not to include SMEs, so not to put additional burdens on small companies. That’s a specific goal that the commission has set out.
How have board director roles and responsibilities evolved in recent years?
Nowadays, a board is not just about approving the accounts of the company once a year and setting some general strategic directions. Boards are much more engaged in defining the goals of the company. What is its culture? What are its values? Directors want to make sure their companies think about climate change, that they at least reflect about incorporating ESG objectives in their strategies, that they have diversity and equal opportunities policies which they apply, that they do not engage in social injustice, etc.
There are so many topics covered by the acronym ESG, and there is probably an expectation that all of them are dealt with by a company, and hence its board. This is new for a number of companies and can be a challenge for smaller entities which do not necessarily have the resources to address all of these topics. So, a level of proportionality must be applied to ensure everyone can contribute to these priorities according to their scale.
Do board members really like having these new responsibilities thrust upon them? I mean, it used to be easier work, and now, there’s much more pressure and second-guessing?
Well, it’s true that all this brings additional work and responsibility for directors. But I think that also evidences how the job is getting more professional. It’s no longer just appointing a friend to your board and asking them to sign a couple of documents here and there. It’s a real job, it’s a real profession. And people need to be aware of that. So, I would say, those who don’t like that additional workload, the responsibilities, they shouldn’t be on boards. If you do that job, you have to do it in a professional way, and you have to make sure you have the skills necessary to do what is expected and what is required.
Do you think the changing role of board directors has changed the type of person who’s attracted to the role?
Yes, I do think that’s the case. Today, you have to be, as I said, professional about what you’re doing. You have to be engaged, you have to be committed, you have to be available too. And you have to be able to speak up on issues, to challenge, to question--and it’s not just saying yes to anything and signing everything that is put in front of you. So, you have to be interested in taking training [courses] all the time, because you need to keep up-to-date with all those changes that come. Training is, in my view, extremely important for directors. And that changes the profile, yes.
Is this leading to opportunities for younger people to serve on boards? Or are the profiles still kind of the same?
No, I think it definitely leads to new profiles on boards. We often speak about diversity and that everyone thinks just about gender diversity. But diversity goes way beyond that. You mentioned younger people. When we talk about digital skills and sustainability, environmental issues, the younger generation are very much involved in those topics, they have interest in them. And sometimes, they know more about these topics than older generations do. I’m certain that there is room for younger people on boards.
At an organisational or operational level, how exactly do boards of directors examine sustainability and other ESG issues? Do they engage in Q&A with management, commission their own research and reports, debate during board meetings on how to set targets and indicators?
Fortunately, there are very competent and skilled experts in these areas, both within companies and working for various service providers. As a consequence, boards receive updates, reports, etc., from these experts. It is then the duty of the directors to challenge these presentations, to ask questions, to discuss whether the right direction is being proposed, to reflect on the future strategy of the company. The experts can, of course, help the board, but at the end of the day, the board must take decisions and assume responsibility for its decisions.
You mention targets, KPIs [key performance indicators]. I would say that this is work in progress. How do we define our performance indicators? This is non-financial. So, by nature, difficult to measure. But still, it is necessary to find appropriate indicators. Again, experts can help the board here to define these criteria which, of course, must remain flexible and evolve over time.
In your opinion, are Luxembourg board members sufficiently versed in sustainability and climate issues to guide their organisations? Or are more skills and training needed?
This is a challenge, indeed. If one expects board members to be experts in climate change or environmental engineering, this is typically not the case. Even though it would, of course, sometimes, be beneficial to have such experts on the board. What is important is that board members have an overall understanding of these issues, sufficient to grasp the main aspects, enough to ask questions, understand the challenges and risks. And to engage in discussions with management.
This is no different from other specialist topics that the board must address. Digitalisation is an example here. Board members are generally not tech geeks. They are not experts in IT coding and digital sales practices. But they need to have enough knowledge to understand the issues and risks, and to be able to contribute to the definition of a digital strategy for the company.
Can you think of some examples of companies that have fallen short and that have performed well on sustainability and climate?
In the financial industry, many Luxembourg companies are subsidiaries of large groups or investment funds set up by international promoters. Sustainability is often handled at group level, with experts focusing on this day-in, day-out. These companies often have more detailed approaches to sustainability. Because they look at this not only for one company in one jurisdiction, but they have a broader perspective, and hence a broader skill set. On the other side, this is more difficult for smaller companies that do not have the necessary resources to handle these matters adequately. There, the focus might then shift to a minimalistic approach, doing what must be done, but without looking up to higher goals.
Overall, companies are very aware of the risk of greenwashing. This is a huge reputational risk that every board must avoid. So, the board must make sure that what the company presents as being ‘green’ is indeed ‘green’. And there are many shades of ‘green’, so this assessment is not always easy. There has already been some finger pointing against various companies in the international press.
How can board members prevent greenwashing?
It’s a good question. And the answer is not straightforward. You can do it by questioning, by challenging. And if you have doubts about things, then you may need to get a second opinion, ask external experts to make an assessment. It’s also important to see the basis of which criteria you are assessing, whether a certain investment strategy is green or is not green. I mentioned there are different shades of green. So, in which one are you? Is it more green than brown? Or is it more brown than green? That’s not always easy to assess. So, sometimes, external experts can help with that.
Not to be too cynical, but are there cases that you’ve seen where board members are complicit in greenwashing?
Fortunately, I have not.
Do you think that happens in Luxembourg, in Europe and other places?
Honestly, I don’t know. I think it’s not in the interest of directors, obviously. So, I would say, ‘why would they be complicit?’ Especially external directors, so non-executive directors. I don’t see them being involved in any sort of that at all. But they need to play their role and challenge classifications that companies put forward.
Are there certain characteristics--such as sector, geographic roots, etc.--that make a big difference, in your view, in how companies perform on ESG issues?
European companies are certainly leading in this area. The US is following suit, but they are not yet where the EU is. Asia needs to evolve to the EU level also. In terms of sectors, I believe the financial sector is more focused on this than others, because of the regulations that exist in this sector.
What else is important to know about board members and ESG?
I would say that no board member today can ignore ESG. It is not something which is ‘fashionable’ and which will go away…. So, it is fundamental that directors get up to speed and make sure they have sufficient skills to engage in strategic discussions around these topics.
Professional posts: Carine Feipel is an attorney with her own practice in Luxembourg City and chairs the Luxembourg Institute of Directors (ILA), a standards and training body. She previously was a partner at Arendt & Medernach, including five years as head of the law firm’s New York office.
Board directorships: Feipel currently serves on the boards of several financial firms, including AIG Europe, Banque de Luxembourg, CNP Luxembourg, Fidelity Funds, Morgan Stanley Investment Funds, Swiss Re Europe and Wellington Luxembourg.
Training: The native Luxembourger studied law at the Université Libre de Bruxelles and has obtained several continued education certificates from Harvard Law School, the French business school Insead and ILA.
This interview originally appeared in Delano magazine’s May 2022 print edition.