Are the boards on board with sustainability?

What role does a company board have in the sustainable transition? Are Norwegian boards up to speed on their responsibilities? If you are a current or future board member in a Norwegian company, or interested in corporate governance and sustainability, here is a guide for you.

Boards’ evolving responsibilities

The board’s role, according to the general rules in company law, is to act in accordance with the company’s interest. These interests include both the interest of shareholders and creditors, and the interests of employees and the society, including sustainability considerations.

For board members to successfully follow up on sustainability in their company, they need to have a certain level of knowledge on the subject. A new report from Copenhagen Business School states that 65 per cent of boards in Norwegian companies on the stock market have no relevant competence on sustainability. Only 5 per cent of the companies in Norway meet most of the criteria on expertise in this area. This shows an urgent need for board members to increase their sustainability knowledge.

These sustainability considerations should include specific goals and actions in line with the United Nations Sustainable Development Goals and the Paris Agreement pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels.

Boards wanting their company to succeed with sustainability should also be familiar with the planetary boundaries framework which are safe limits to maintain a stable and resilient Earth.

The board’s duties are continuously evolving, especially on sustainability. Both regulatory changes as well as financial and legal consequences are affecting the role of the board.

Regulatory changes

The Norwegian Transparency Act was introduced in July 2022, building on the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct and the United Nations Guiding Principles on Business and Human Rights. In September 2024, the first infringement fee based on the Act was imposed by the Norwegian Consumer Protection Authority. Four high school students asked the fast fashion company Lager 157 for information on their supply chain. After failing to respond in accordance with the Act, the company was fined 450 000 NOK. In Norwegian companies’ supply chains there have been examples of poor working conditions and breaches of human rights. This recent example that non-compliance will have consequences, creates a stronger incentive for boards to comply with the Act.

European regulatory changes are also impacting Norwegian boards. As a part of the European Green Deal, two of the most recent legislative instruments are the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). These directives are enhancing the rules on social and environmental information that companies must report on and ensures that companies address the human rights and environmental impacts of their actions. Both the CSRD and the CSDDD also specifically emphasize the importance of the business model and strategy of the company to be compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5°C in line with the Paris Agreement. With the board being overall responsible for the business model and strategy, this strengthens the requirements for boards to implement sustainability into their work.

Legal and financial consequences

If the board does not understand its role in keeping up with sustainability there can be both legal and financial consequences for the company and the board itself. We see a rise in the number of sustainability legislation coming up in Europe and globally, as well as fines being imposed on companies for breaching climate and human rights regulations.

In the recent case Milieudefensie v Royal Dutch Shell, although the ruling favored Shell, the Dutch Court of Appeal stated that companies that affect the climate ‘have an obligation to limit CO2 emissions in order to counter dangerous climate change, even if this obligation is not explicitly laid down in (public law) regulations of the countries in which the company operates’. The court applied both the European Convention on Human Rights, as well as the OECD Guidelines and the UN Guiding Principles to their ruling, to clearly establish that companies around the world have reduction obligations. These obligations apply to Norwegian companies and their boards setting climate strategies for their company. Lawsuits like this around the world are creating a clear trend that sustainability is, and will be, enforced by courts.

There are financial consequences in getting involved in climate litigation. A UK study from last year showed that a filing in a climate case or an unfavourable court decision in climate litigation decreases a company’s value on the stock market. Fines for breaching sustainability regulations can also be a costly affair for a company. In Germany last year, the asset manager company DWS was fined 19 million dollar after greenwashing claims in breach of the US Investment Advisers Act.

To avoid such negative repercussions for the company, board members in Norway need to be aware of their responsibility on sustainability and act accordingly.

The way forward for Norwegian boards

There are three questions Norwegian boards can ask themselves going forward, to get up to speed on their sustainability duties:

1. Does our company comply with all applicable legislation and guidance on sustainability? This includes existing rules in Norway, Europe and internationally, as well as foreseeable regulations that will impact the company in the near future.
2. Has our company made sufficient financial investments and allocated the right resources towards a sustainable transformation?
3. Does our board have the competence needed to uphold our responsibilities in this area?

If the answer is no on either of these questions, follow-up is needed.

Business has a big role to play in transitioning our society towards sustainability, in both climate and environmental, social and economic aspects. Only with the boards on board can we make this shift happen. Let’s do this!