- Category: Sustainability in Business
- Published: Monday, 16 November 2015 21:03
- Written by forbes.com
Last month, I wrote here about how the UN’s Sustainable Development Goals create real opportunities for business leaders based on market opportunities in solving the world’s greatest environmental and social challenges. I followed this with a post about the new ERISA regulations regarding sustainability, and how pension fund fiduciaries can now consider material environmental, social, and governance (ESG) issues facing the companies in their investment portfolios. But what progress are we seeing in how boards of directors of public companies demonstrate leadership in sustainability?
Here, sadly, U.S. corporations are lacking. A 2014 report by Ceres, a non-profit organization advocating for sustainability leadership, found that only 32 percent of the largest 613 publicly traded U.S. companies had board oversight over sustainability. The irony is obvious here. For most companies, ESG is really ES and lower case ‘g.’ Consider for example Volkswagen, where weak corporate governance has seriously undermined the company’s “E” efforts and could ultimately jeopardize its “S” efforts. Since the board is responsible for representing the interests of the corporation, I would argue that weak corporate governance on sustainability inhibits companies’ ability to profit from sustainability. And investor desire to see companies do so in the interests of long-term profitability will also be inhibited.
A new Ceres report published last week, “View from the Top: How Corporate Boards Can Engage on Sustainability Performance,” is therefore most timely and welcome. In it, insights from dozens of interviews with senior corporate leaders and corporate governance experts can all be boiled down into two clear guidelines. Firstly, sustainability needs to be integrated into board governance systems and processes. Secondly and crucially, sustainability needs to be integrated into board actions.
Commenting on this report, Mindy Lubber, the CEO of Ceres, said that: “Given the scope and scale of corporate action needed to address climate and other sustainability challenges, we are looking for corporate boards to exhibit leadership for corporate action on sustainability – and to do so smartly and effectively.”
But what does this mean in practice? The report provides a number of recommendations for implementing these guidelines, along with examples of companies that others can learn from. Three of these recommendations are I think particularly important in addressing the “sustainability communication conundrum” between companies and investors. That is, where companies complain that investors are only focused on short-term profits and aren’t interested in sustainability. And where investors complain that companies are only focused on short-term profits and don’t explain how they are managing the sustainability issues that affect long-term performance.
First, rather than dealing with “sustainability in general”, the board should instead focus on the material ESG issues that affect the company’s financial performance. The work of the Sustainability Accounting Standards Board (SASB) shows that these issues are industry-specific and limited in number, from around five to seven. A good example here is Unilever with its Sustainable Living Plan, which is a critical part of the company’s business strategy. Second, the board should embed sustainability and longer-term thinking in strategic planning. This should be reflected in how the company communicates to the market. For example, Coca Cola, National Grid, and Unilever are moving away from providing quarterly earnings guidance. Thirdly, disclose the role of the board in prioritizing sustainability. Without a clear public statement from the board, both management and the company’s investors will doubt the board’s genuine commitment to sustainability. This is the one area unfortunately where no good examples can yet be found, but work is going on here which will be the subject of a future blog.
How likely is it though that corporate boards will adopt the recommendations in the Ceres report? Personally, I’m not too optimistic about this in the short term. It is hard to change deeply entrenched practices quickly, particularly the legalistic and formalistic approach to corporate governance practiced in so many countries including the United States. Furthermore, “sustainability” is still too often seen by boards as the responsibility of an often ancillary management CSR department.
However, I am more optimistic about this over the long term if investors, particularly large institutional ones, make it clear to company management and the board that they are as interested in long-term performance as short-term performance.
With this changing investor perspective, the board will therefore need to ensure that the corporation is focused on a limited number of material ESG issues rather than making sweeping, green washing statements about its commitment to sustainability. And since every company wants more long-term investors, they will increasingly have a clear incentive to focus on materiality.
The time for company boards to get ‘on board’ with sustainability is fast approaching.