Transforming Board Oversight: Sustainability Is the Strategy

The race is on to transform companies for success in a decarbonized world. Trane Technologies' Chief Technology & Sustainability Officer Paul Camuti offers his perspective on the role of the board in strategy and oversight of ESG.

This article is adapted from an original article co-authored by Paul Camuti and Gib Hedstrom in Directorship, the journal of the National Association of Corporate Directors.

A good test of any company’s commitment to sustainability is the agenda for the meeting of its Board of Directors, a carefully curated list of the most important topics for the company. For Trane Technologies, sustainability is not an item (or several items) on the list. It’s the whole list.

The Executive Leadership Team and Board of Directors of Trane Technologies view climate change not as a problem to be managed through compliance, but as the defining issue of our day. We see climate change as a disruptive platform for innovation that has the potential to stimulate a significant wave of growth and create a more sustainable world. As a company specializing in heating and cooling buildings and refrigerated transport, connecting strategy to sustainability is not only our responsibility, but our core purpose and a strategic opportunity for our business.

Viewing ESG as a strategic growth platform

We know we are not in the majority. Many companies still view climate change and its associated impacts as problems to be monitored and managed. They review their core businesses and approve strategies that reduce negative ESG impacts. They react to important indicators rather than develop a deep understanding of the magnitude and scale of the business risks posed by ESG issues.

A board’s ultimate purpose is ensuring the long-term viability and success of a company. Directors should consider whether they are thinking about ESG the right way. To maximize long-term value for shareholders and create value for society, how should the board reflect the growing importance of ESG in its oversight?

Working alongside external experts, like Gib Hedstrom, founder of ESG Navigator, Trane Technologies has been on this journey for many years. We began to integrate ESG performance into our business in 2010 when we established the Center for Energy Efficiency and Sustainability and launched an internal Diversity & Inclusion Council. Shortly thereafter, we issued our first climate materiality assessment and sustainability addendum to the annual report.

Accelerating through strategic commitments

It was during that stage of transformation that our approach shifted, moving from an assessment of risk and compliance to be managed - to building a platform of growth opportunities tied to United Nations Sustainable Development Goals and global megatrends changing the business landscape. Today there is no separate view of ESG and the company’s strategy. Sustainability is the strategy.

In 2020, as Trane Technologies, a pure-play climate company, we launched the Gigaton Challenge, a first-of-its-kind, SBTi-validated, business-to-business commitment to reduce customers’ carbon emissions by 1 billion metric tons. In 2022, the company’s Net-Zero by 2050 targets were among the first in the world to receive SBTi confirmation, another demonstration of ESG leadership.

Leading with accountability

It’s not possible to set goals of this scale—and consistently deliver on them—without transforming every aspect of your business strategy, and consequently the board’s role in strategy design and oversight for performance. The support and engagement of our Board of Directors has been a critical component in this transformation.

Gib and I recently published an article in Directorship, the journal of the National Association of Corporate Directors, to share what we’ve learned with other boards of directors.

ESG demands a top-to-bottom rethink and redesign of every aspect of corporate governance and strategy. That is the role of the board. Companies need to transform to win the war for talent, to engage customers by helping them rapidly decarbonize and align with the circular economy, and to earn the trust of today’s and tomorrow’s stakeholders, including shareholders. This type of transformation requires unbridled transparency. As a company, we report on ESG in the same way we account for and disclose our business performance.

There are three questions we recommend every board reflect on today regarding ESG.

• How does our governance system stack up with respect to ESG?
• What would a sustainability audit of our business portfolio reveal?
• What is our carbon risk exposure and our strategy?

And there are three actions we recommend every board take today regarding ESG.

• Learn
• ESG is complicated. It encompasses global warming, world hunger, mass migration, social equity, community engagement and more. It is easy to get lost in the weeds. For each company, only a handful of truly material issues pose increasingly stark risks and opportunities.
• Benchmark
• Evaluate external ESG ratings through the lens they represent. They’re important, but are based only on information companies disclose publicly. At best, these ratings address half of the ESG topics that drive value creation. Conduct a robust examination of the full set of ESG issues by benchmarking peers, aligning your executive team internally and zeroing in on the critical few strategic priorities.
• Rethink
• Corporate transformation is the imperative. This can only happen if the CEO and board take the lead. Take a careful look in the mirror. How can you reorganize your board, your leadership team, your business to make ESG your North Star? A board with multifaceted diversity that spends sufficient time on ESG with full board and board committee agendas that drive deep engagement with ESG feeds directly into the board’s ability to have robust oversight of ESG.

You can read more of our ideas in the full article.

Leading by example

Why share what we’ve learned? Since 2014, when we set our first generation of commitments through 2021, this strategy has delivered financial results that significantly outperformed the S&P 500 in total shareholder return growth. Why wouldn’t we want to keep this lucrative secret to ourselves? Because the stakes are too high. And the possibilities are too great.

Our purpose is to challenge what’s possible for a sustainable world. Much like the Gigaton Challenge is demonstrating an ambitious but necessary path forward, we know that our accomplishments in board governance and oversight can inspire and encourage others to transform their companies into truly sustainable enterprises. And we know that together our impact grows by magnitudes.

For more related articles, visit our website at tranetechnologies.com.