April 30, 2025
Key Points
- In this highly uncertain environment, boards and executives are facing heightened challenges in managing risks and opportunities on topics like supply chains, energy transition, attracting and retaining diverse talent, and more.
- Companies may wish to reduce perceived short-term political risk by scaling back sustainable business efforts, but this can create new problems and may lead to neglect of fundamental board duties.
- By emphasizing foundations of strong sustainability governance through thoughtful leadership and strategic oversight, companies will be better positioned to navigate turbulence, build resilience, and create long-term value.
There is no playbook for this moment. Boards and executives are facing heightened challenges in a rapidly changing and highly uncertain geopolitical, regulatory, and economic environment. Many of these changes focus on corporate sustainability-linked efforts to manage business risks and opportunities related to supply chains, energy transition, extreme weather, attracting and retaining diverse talent, human rights, and even anti-corruption. In this context, a rigorous review and refresh of sustainability efforts is healthy. But as scrutiny mounts, many companies are responding by cutting their investments and attention in these areas.
While a desire to reduce perceived short-term political risk is understandable, informed, strategic governance of sustainability-linked risks and opportunities is vital to long-term business success and fiduciary obligations.
As part of our continuing series on sustainability governance, we take a closer look at what this means for boards of directors.
Underlying risks and opportunities are growing
Companies now simultaneously face increased risks and opportunities from sustainability-linked factors, and constraints on their ability to manage those risks and opportunities.
While politicians debate, real-world issues linked to climate change, corruption, and supply chain labor problems continue to create real business impacts for companies—in risk management, operational efficiency, innovation, market access, employee turnover, reputation, and more.
For example, U.S. government pullback from decarbonization will likely accelerate climate risks for companies (e.g., extreme weather, agriculture risks), just as government reduces support for resilience and recovery and threatens to undermine initiatives that mobilize climate action. Additionally, recent changes by governments worldwide are poised to increase risks and harms to people, especially among historically marginalized communities, while concurrently undermining corporate actions to address those risks and harms (e.g., through restrictions on inclusion efforts or cutbacks in corporate diligence rules).
Scaling back sustainability can create its own risks
Under threat of government and activist pressure, many company leadership teams will first opt to retrench. However, companies that slash governance and management of sustainability risks and opportunities may create new problems for themselves.
Companies that have already identified some risks as “material,” but cut their oversight and management of those risks, could face future legal, shareholder, or reputational risks. Pro-DEI advocates are tracking company action, highlighting “increased liability risk in backing away from DEI initiatives” and filing shareholder resolutions.
Business leaders must also navigate an increasingly fragmented regulatory environment, including state-based demands for increased disclosure (such as in California and Colorado) and international expectations (such as Japan’s new climate and energy policies).
Finally, Boards and C-suites set a “tone from the top,” either intentionally or by default. Those that backtrack risk losing credibility with employees and other critical stakeholders. The most attentive stakeholders are those who show up to work every day: employees are experts on the gap between what companies say and what they do, and a disgruntled or disengaged workforce can have costly consequences. Just a few years ago, many company leaders proclaimed deep commitments to social and environmental values and causes. Abandoning or gutting those commitments now feeds the growing sense of grievance against business, government, and inequality permeating societies around the world.
The path forward is informed, strategic board oversight of sustainability
Informed, strategic governance of sustainability is vital to navigate turbulence, build resilience, and create long-term value.
With shared understanding and leadership among boards and management teams, companies can strengthen their approaches by continuing to emphasize the foundations of strong sustainability governance.
- Get the right information and expertise: It is vital for boards to have expert information and insight on relevant sustainability topics to balance the realities of short-term caution with the imperatives of long-term value creation. Such data and expertise help companies provide thoughtful oversight and responses to the radically changing external landscape and related risks and opportunities—geopolitical tensions and trade disputes over climate policies, supply chain disruptions over forced labor concerns, access to natural resources, etc. Boards can get this insight from Directors with relevant expertise, through ongoing capacity building, or through external partnerships or advisory councils. In any case, it is crucial that this expertise incorporates a range of perspectives in an environment that fosters rigorous discussion.
- Incorporate risk, strategy, foresight, and stakeholder engagement: Boards that develop an understanding of the links between sustainability risks/opportunities and business strategy can better avoid ideological battles and navigate evolving expectations. That can come from a well-executed materiality assessment (to offer breadth) as well as a clear articulation of the top few strategic sustainability priorities (to offer focus). Sustainability risks can also play an important role in enterprise risk management, including for emerging issues like responsible AI or nature. Foresight techniques, such as scenario planning, emerging issues analysis, or even short-term simulations, are useful tools for examining how different material issues could impact the business in different ways. This enables directors to get hands-on exposure with grappling with major questions and identifying solutions. A robust understanding of stakeholder views is also key to considering the environmental and social impacts that drive potential risks and opportunities.
- Provide oversight, accountability, and tone from the top: Even—or especially —as companies navigate uncertainty and volatility, boards have a role to play in stewarding the vision, values, and expectations in an organization. Boards safeguard that company strategy, values, and commitments are operationalized effectively. This includes setting expectations on workplace culture, conduct, and talent management in an increasingly politicized and acrimonious political environment. If the gap between stated commitments and values and their implementation widens, companies open themselves up to risk and liability, loss of trust, and organizational entropy.
- Maintain your values and judgment: Recent debates over sustainable business practices raise concerning questions about the ability of company boards and management to make independent decisions in the long-term interest of the company. Directors should be prepared to explain how their business judgment applies to sustainability and to clearly define red lines for business. We’ve already seen a few powerful examples. In response to an anti-DEI shareholder resolution, Costco offered a clear-eyed argument for the business relevance and ethical imperative of its diversity efforts. Apple, too, urged shareholders to reject an anti-DEI resolution, emphasizing that “the proposal also inappropriately attempts to restrict Apple’s ability to manage its own ordinary business operations, people and teams, and business strategies.” Shareholders at these companies, along with those at Goldman Sachs, Levi Strauss & Co, and The Walt Disney Company, rejected these and similar proposals at rates of 97 percent and higher.
In the face of adversity and complexity, it can be tempting for boards and management to just “shut it all down.” Yet increasing business risks and opportunities related to sustainability, as well as the inherent risks of pulling back, instead point to the value of stronger, more thoughtful leadership and strategic oversight of sustainability. Boards and management teams that rise to the occasion will preserve their integrity, steward long- term business value, and help shape more resilient companies and economies.
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