Why are boards reluctant to put sustainability on the agenda – and how can we change this?
Today’s corporations, faced with highly increased environmental as well as social challenges, are at a crossroads. They can take proactive steps to adapt or they can risk being left behind. Sustainability is a critical business issue. All companies should be focusing on it.
Wall Street research, academic papers, corporate reports and trends from major investors all deliver the same message: companies that adopt sustainable practices deliver superior financial results, are more resilient and better prepared for the future.
There is growing societal awareness of environmental issues and increasing demand for companies to conduct their business sustainably. Studies suggest that, currently, 50% of customers are influenced by key sustainability factors. This figure grows rapidly with each new generation – it is significantly higher amongst Millennials and higher again with Gen Z.
So it’s a no brainer – sustainability must be a major priority for Boards. Furthermore, the negative impact unsustainability can have on a company’s output and supply chain also presents great risks – not only environmental and social risk, but also economic risks. With environmental disasters, poor labor relations, safety incidents and scandals increasing, the risks are becoming more obvious than ever.
The World Economic Forum’s Global Risks Report, released every January, notes that environmental concerns top the global risk list. A survey conducted by Deloitte and Forbes in 2017 indicates that sustainability has emerged as the top risk for senior leaders.
The ecological and social risks materialize into financial and economic risks. Last but not least, there is also a reputational risk. We live in a digital era and demands on companies to disclose their carbon footprints via reporting are growing. This could be left up to each individual companies’ free choice to report – or it could become part of legislation companies must adhere to.
Surprisingly though, there is currently a huge gap between boards’ awareness of the issues and subsequent action. Non-Executive Boards tend not put sustainability on the strategy agenda and are often reluctant to adapt to incorporate sustainability into their structure and agenda. There is both a need to change and an opportunity to make it financially worthwhile. So how can they go about this? To develop a robust overview and ensure long term value creation companies should:
Define sustainability as a priority for the board
Boards need to acknowledge that the Non-Executive Board has a fiduciary and moral duty – as well as a business duty – to be in charge of sustainability. To make this happen, Boards need to ask themselves the fundamental questions to drive meaningful change: what does sustainability mean for their business? How can the Board ensure long-term value creation? What impact will sustainability have on the company’s inputs and outputs? Asking these questions will result in the Board taking charge of sustainability.
Formalize this in board charters and governance
Good governance is key for both Supervisory and Advisory Boards to work well. DSM is a great example of this. It has worked out a profound set of governance to ensure their external Sustainability Advisory Board can challenge freely and management is obliged to take their advice very seriously and incorporate it into decision making. This is in stark contrast to many Advisory Boards, which are set up to demonstrate the company’s sustainability interests or, even worse, set up for marketing reasons.
Integrate sustainability into the board’s agenda so it is an integrated part of the business
Non-Executive Boards are generally used to working with the usual nomination, remuneration and audit committees’ structures and the agenda points and topics that are traditionally associated with those. This has been a known way of working for a long time. To add sustainability topics, like ESG, sustainability reporting or a climate change approach, to the agenda incidentally is one thing, but to incorporate sustainability integrally into the Boards’ structure, agenda and way of thinking and working is quite another. This requires holistic change.
Form a sustainability committee chaired by a senior member of the organisation
It is advisable to appoint specific Board Members to a sustainability committee, like the strategy committee, the audit committee, nomination and or corporate governance committees. It is also important to ensure the committee doesn’t become a HR-like or soft skill committee. We are talking business here and the Board Members should reflect this. The Members of the Committee are as important as the structure. If such a committee is set up, it is crucial that the Chairman takes part.
Incorporate sustainability into company strategy and (annual) targets
Just how sustainability fits and is incorporated into the firm’s core products, business model and innovation strategy, are all considerations which demand the attention, drive and decision-making of a well-informed board. Being able to identify answers to these basic questions is the difference between having a superficial ‘check-the-box’ attitude to sustainability and a profound, holistic understanding of how an organization can drive transformation and ensure long-term value.
Boards should be informed about the good and the bad
The root cause of any negative incidents or underperformance should be analysed. When something has worked, it’s also crucial to analyse why it has worked. Both are important!
Include both the risk angle as well as the opportunity angle in the Boards’ role
Is the company still mostly managing risks and reducing its negative footprint? Is it on a journey to mission zero? Is it or does it aspire to be a frontrunner? If so, start with global challenges and then tie in the company’s solutions – aiming for positive impact. Each stage presents different sustainability challenges and organizational solutions. The Board’s way of working on sustainability should obviously reflect this. They must stay ahead of the company’s progress in order to stay in charge.
Marga Hoek is a global thought leader on sustainable business and capital, Non-Executive Chairman/Board Member and author of The Trillion Dollar Shift, which was awarded gold medal for best business book on sustainability. For more information go to www.margahoek.com.