Elevating Sustainability on the Board Agenda
A recent HBR study surveyed 300 directors and found that 75% of their respondents said they recognised climate change as being very important to their companies’ strategic success. However, a 2018 Ceres survey found that only 31% of 600 large, publicly-traded U.S. companies had board oversight of sustainability.
And while these statistics may have moved on, it is likely to still be representative of the knowing versus doing gap for many businesses.
This was reflected in the Chapter Zero NZ launch* survey which indicated that of the 750 attendees, only 9% of Directors felt ready for upcoming climate related disclosures. We also predict that the gap is even more likely for the existing medium sized, privately held business, versus a purposeful start-up or for larger ‘corporate’ or listed entities who may be further ahead on the sustainability journey.
The environmental and social performance of organisations is under increasingly intense scrutiny by consumers, investors, regulators, employees, and other stakeholders. Doing enough to be ‘seen to be green’ is no longer good enough. So we need to elevate sustainable practice for businesses – and it starts at the top by making it important via governance and executive leadership.
Many people when asked about sustainability automatically think climate change – and while this is the immediate challenge, sustainability also includes the mega trends of increasing social inequality and increasing bio-diversity loss. The ESG (Environmental, Social and Governance) approach has elevated the expectation of businesses to manage across this measuring the sustainability and ethical impact of an investment in a business or company. New Zealand arguably rates highly in the G of governance practice, but how then do we elevate and govern more across the E&S.
In particular, as a business how do we perform as a steward of our natural environment, focusing on: responsible consumption; resource depletion; waste and pollution; greenhouse gas emissions; deforestation and habitat reduction; biodiversity loss and climate change. Similarly, how does the Company treat people, and concentrate on: employee relations & diversity; working conditions, including child labour and slavery; impact on our local communities, especially if operating in lower socio-economic areas; social inequality and wage disparity; and health, safety & well-being. And not only directly within our business, but influencing wider through our value chain.
Taking the Governance Expectation Across E&S. Governance shouldn’t have to be divided into sustainability governance and normal corporate governance ie ES ‘&’ G. Good governance should include all aspects that are material and important to the business that governance should have oversight of.
Successful integration and effective management of sustainability as a company requires having committed leadership, clear direction, and strategic influence—and none of this will happen without a robust governance structure. Sustainability governance helps a company implement sustainability strategy across the business, manage goal-setting and reporting processes, strengthen relations with external stakeholders, and ensure overall accountability. It requires us to look further up and down your value chain than our immediate business operation, and influence wider than our immediate business walls.
Blending the financial and sustainability systems. Businesses were traditionally set up as purely financial systems, and we find it somewhat easy to look at the fiduciary duty of the financial and investor lens as the primary requirements as the reason for governance, but we need to blend the financial and sustainability systems oversight to consider the greater value generation. It’s about balancing the immediate short term needs and sustainable long term value creation. It’s about doing good, by doing good.
Having a plan. Many businesses are doing work to reduce or have a positive impact in key areas, but the activity isn’t lined up with an intentional sustainability strategy or framework within the business – we are just implementing the next good idea. How and where sustainability fits into the overall corporate structure can be very revealing of a company’s direction and priorities. Sustainability shouldn’t just be bolted onto the side of our strategy, but become part of what the business does. While a bolt-on might be a start point, it then needs to become part of the fabric. Start with revisiting the company statement of purpose - is this consistent with contemporary sustainability demands and principles? Is there an aligned plan for how to make an impact, and to focus and prioritise initiatives? Where will sustainability feature in our future decision making?
Developing Measures. Once you have a plan, develop some measures, and then get a baseline. And as you implement and measure, you will be able to tell your story with confidence. Find what works for your business through existing reporting frameworks such as: Global Reporting Initiative (GRI) Sustainability Reporting Standards; Integrated Reporting (IR) Framework; or Sustainability Accounting Standards Board (SASB) Standards. And once you have measures – get a baseline of today’s impact against these measures. Utilising the UNSDGs as a common language to articulate your desired impact and progress is also useful. In doing so, require the executive team to set specific sustainability goals for the next three years. Sustainability for many organisations falls into a sort of grey area because if we can’t measure it, we don’t really worry about it. Dame Therese Walsh, who chairs the new Chapter Zero NZ Steering Committee stated recently, “Climate governance is in its infancy…We don’t have decades to come up with a really robust financial reporting system equivalent. But we need to do it really quickly and to the best of our ability".
Oversight & Future Focus. With that in place, good governance should be probing management to understand that they have a robust system in place for reviewing what impacts are being made, what the interdependencies are, what corrective actions are being made. When Chapter Zero NZ attendees were asked, what the single most important thing boards need to do to effectively respond to climate risk, 23% wanted dedicated time on the board agenda and a further 23% prioritised external support and/or expert advice. If an issue is not on the board’s agenda, it’s unlikely to be at the heart of an organization’s strategy. Bring Sustainability as a specific item on the Board agenda and have management report specifically on it. Also, create an expectation that it should be part of strategic reviews and annual business planning. Similarly, Boards need to be asking the tough questions to ensure the long-term investment, long-term growth and long-term adaptation of the business.
Increasing Insights. Conduct a short board effectiveness review specifically targeting climate change, social inequality and reducing biodiversity – what is our existing knowledge and mindset? HBR research shows 85% of Directors need to increase their knowledge on climate change. Bring new voices and insights into the Boardroom. Bring specialists to challenge, educate, and revitalise perspectives that inform the strategy to include Sustainability challenges. I recently elevated sustainability on one Board by renaming Audit & Risk to be the Audit, Risk and Sustainability Sub-Committee. Similarly, who is the Exec Team is the head of Sustainability? Who brings the expertise to the Board and management?
Reporting. For most businesses in NZ, there isn’t yet a government requirement for sustainability reporting or disclosures. However, the mechanisms for reporting to Board and shareholders, and other stakeholders elevates the expectation of our performance and seriousness in the sustainability space because sustainability has gone mainstream in the corporate/public world. However, as businesses further down the ‘food-chain’ want to do business with those who are required or desire to disclose, the expectation for proof of impact will be required in tenders etc as those businesses desire to work with like-minded sustainable businesses. The primary components of your reporting should include: the material ESG issues to stakeholders, set out the company’s policies and practices and performance in relation to these, the framework being utilised, your targets, and a statement by the Board to the effect that it has considered sustainability issues as part of its strategic formulation, and overseen their management and monitoring.
Lastly, Leaders Lead. How are the Chair and the Board leading with management to demonstrate it starts at the top? The commitment to sustainability must be shared by the whole board, and the executive otherwise it will be a source of continual boardroom tension. Board members need to lead by example which will include backing difficult decisions where trade-offs are needed between short-term profits and bearing the costs of making the transition to a more sustainable future for our planet. What is our mindset for change? Does the culture, purpose and values enable the right behaviours? How are we leading sustainability through our actions, focus and behaviours? As Directors, it starts with us. So What are seeing? What are we trying? What is working? How are we adapting?
* https://www.chapterzero.nz/news/only-9-of-directors-feel-ready-for-the-upcoming-climate-related-disclosures/
This article was contributed by Greg Allnutt, Partner & Strategic Advisor