31 January 2020 by Melissa Scully
Board members need to lead meaningful sustainability improvements in the organisations they manage
The concept of sustainability, which encompasses environmental, social and governance (ESG) concerns is not new. Indeed one of the most commonly referenced definitions, “meeting the needs of the present without compromising the ability of future generations to meet their own needs” was set out over 30 years ago by the Brundtland Commission. What is relatively new however, is the worldwide awakening that action needs to be taken quickly to address the huge economic, social and environmental challenges facing our planet to ensure a sustainable future. This action is the responsibility of everyone - governments, businesses, investors and each and every individual.
In this context sustainability is now recognised as a critical business issue. Boards have a key responsibility in driving action. However, ensuring the topic is covered appropriately by boards is difficult as they face a number of challenges: the topic covers a vast array of complex matters; good practice is still developing; there is ‘no one size fits all’ framework; and the need to balance focus on long-value creation versus achieving short-term results.
The stakes are high not only for our planet – sustainability is central to corporate competitiveness and will impact both a company’s ability to operate and its reputation. Board members need to act now and lead meaningful sustainability improvements in the organisations they govern. Our six steps set out below can help boards tackle these challenges and embrace sustainability in the boardroom.
Stakeholder expectations are increasing and they are exerting pressure on businesses to have a clear purpose that promotes operating responsibly and having a positive impact in society. The starting point for any board embracing sustainability therefore will be to establish a purpose that promotes the long-term sustainable success of the organisation in the interests of all stakeholders. This purpose will provide guiderails for choices around strategy, culture and sustainability priorities. Without a clear purpose there is a risk of disconnect across these areas which could call into question the authenticity of the organisation’s commitment to a better world.
Sustainability means different things to different people. It covers climate change, resource consumption, labour relations, human rights, ethics, health and safety, diversity and inclusion, supply chain management, and much more. While boards need to take a holistic view and have an awareness of all material sustainability risks and opportunities, they should focus on the most strategically important priorities. This means concentrating on issues that are specific to their organisation and the sector it operates within, which are most likely to impact business operations and revenues. To support determining these key sustainability priorities boards should ask management to present a sustainability risk assessment that covers the whole organisation, as well as supply chain, and also engage with stakeholders to help inform their views.
The function of the board has traditionally been - and fundamentally remains – one of supervision and one of stewardship. As the number of sustainability issues making their way into the boardroom expands these functions need to be adapted to integrate sustainability within their core responsibilities. Illustrative examples include:
In addition to these evolving core responsibilities, to embrace sustainability boards will need to consider the latest trends and ESG factors as part of their decision-making processes for all key board decisions.
To enable boards to effectively discharge their responsibilities sustainability needs to be embedded into all board governance practices. This starts with looking at board structure and processes, making sure there is: an appropriate committee structure; adequate time on the agenda; access to individuals with responsibility for sustainability; and high quality information. What can be more challenging are the people and softer dimensions of board governance. For example, the board will require a Chair that effectively leads the board on the matter in addition to directors with skills, competencies and experience that align with the organisation’s sustainability priorities. Any gaps should be identified and addressed through succession planning, future board appointments and the director development process. The provision of relevant training will be important to ensure that all board members are up to date on developments, enabling them to effectively challenge management and hold them to account for sustainability performance.
Investors, regulators and other stakeholders are interested in sustainability strategy, performance, compliance, not to mention specific issues. Boards need to understand stakeholders’ perspectives on sustainability matters to inform debate in the boardroom, enabling directors to take their views into consideration. It is critical that boards both support engagement with key stakeholders (as appropriate) and have a mechanism in place to keep them updated on management’s engagement. Embracing sustainability also means providing transparent, high quality disclosures to stakeholders through communication channels such as the annual report and accounts or organisation website. Organisations leading in this area are moving away from high-level information towards meaningful narrative that goes beyond compliance with reporting requirements and leverages leading sustainability standards. In this regard there are a number of initiatives to consider such as the Global Reporting Initiative or Sustainability Accounting Standards Board.
The culture of the board directly affects its ability to effectively lead the organisation towards achieving both its purpose and its sustainability goals. Unfortunately research from INSEAD indicates that there is a big gap between board members’ aspirations regarding sustainability and its integration into the heart of their organisations. They also identified notable differences in directors’ attitudes which range from ‘out-and-out scepticism to fervent belief’. All boards have a responsibility to ‘set the tone from the top’ and lead by example championing a culture of sustainability throughout the organisation. To do this each director needs to be aligned with, and fully committed to, the sustainable purpose of the organisation and demonstrate the desired values, behaviours and attitudes. This last step is arguably the most important – without the right culture and leadership, it will be impossible to truly embrace sustainability in the boardroom.
As the urgency of addressing sustainability issues intensifies, we can expect stakeholder pressure on businesses to continue to increase. Boards need to ensure that the topic is a board priority and they have a clear grasp on their role and responsibilities. Organisations that are truly committed to a sustainable purpose and engage with their key stakeholders will be better positioned to not only mitigate risks but seize opportunities. Embracing sustainability in the boardroom is critical to drive this at business level and ensure a sustainable future.