Seven Steps to Implementing Board Oversight of Sustainability
Seven Steps to Implementing Board Oversight of Sustainability by Sandra Taylor published on NASDAQ’s Governance Clearinghouse.
Sandra Taylor is the CEO of Sustainable Business International LLC and a pioneer in the field of sustainability. She has helped many major brands including Starbucks and Eastman Kodak, develop and implement global corporate social responsibility strategies.
Many corporate CEOs and investors have accepted the premise that sustainability issues are material to the long-term success of any business. Effective management of social and environmental risks can improve business performance and produce tangible results. These can include more reliable availability of essential natural resources, significant efficiency gains, reduced transaction costs and access to new capital. The concept of sustainable business seeks to combine environmental and social improvements with financial success.
1. Start at the beginning and determine materiality.
As a starting point, boards should define what sustainability means for the company by conducting a materiality assessment. The risks posed and opportunities created by the shift towards greater sustainability present companies with complex, multi-dimensional, and sometimes interconnected issues. By developing a robust understanding of what issues are material to their operations, the environment and communities, companies can better prevent or mitigate these risks and gain access to these opportunities.
However, materiality in the sustainability context is not simply about reporting or disclosure. The materiality determination should reflect the organization’s significant economic, environmental and social impacts, and stretch far beyond just the production of a sustainability report: it should also touch on the company’s overall strategy, risk management, relationships, communications and even the design of products and services with sustainability impacts in mind.
Just as the board oversees or approves sales and financial targets, it should also approve targets (both long-term and short-term) for the company’s sustainability performance that can attain the same level of value and influence as other key elements of business performance by driving profitability, innovation and engagement.
In terms of sustainability reporting, there remain questions regarding whether sustainability report issuers, and investors as report users, identify the same topics as material. SASB is an effort to bridge that gap. SASB standards are designed to determine those environmental, social, and governance topics that are reasonably likely to have material impacts on the financial condition or operating performance of a company. SASB is able to identify and standardize disclosure for the sustainability topics that are most important to investors—those that are reasonably likely to have material impacts on companies in an industry.
2. Focus on the supply chain.
Of all the strategies, integrating sustainability into the supply chain and ethical sourcing may be the most critical. Ethical sourcing means ensuring that the products being sourced are created in safe facilities or under safe conditions for workers who are treated well and paid fair wages to work legal hours. It also means that the supplier respects the environment during the production and manufacture of the products.
3. Be innovative.
Rather than approving projects and then asking how the product, feature or service can be developed and delivered more sustainably, the board should add a sustainability lens (through scorecards, lifecycle analysis and indices) at decision-making points, ensuring sustainability is factored in before any go/no-go decision. The board should ensure that environmental sustainability and social responsibility values become important screens that are included in the company’s most senior hiring decisions and enterprise risk management framework, and considered when approving major decisions like capital projects, new business lines, mergers and acquisitions, new product launches and expansion into new geographic markets.
4. Be the impetus.
Through their core duties related to setting strategic course, audit and monitoring, and their long-term perspective, boards are uniquely positioned to ensure the full integration of sustainability into business strategy and practices. Integration means incorporating sustainability into the business strategy so that the business model itself creates social and environmental value in addition to financial value. In other words, by the very act of succeeding as a business, a company creates greater value for society and the environment.
Boards and senior management should ensure that corporate responsibility and sustainability are embedded into every part of the business, including planning, strategy, operations, marketing and human resources. Board compensation committees should incorporate sustainability priorities into both the recruitment and remuneration of executives and identify the most relevant and stretch targets to influence executive performance. A simple way to achieve this is to appoint a Chief Sustainability Officer (CSO) for the company who is part of the senior executive team and involved in all decision-making in much the same way as the General Counsel and Senior HR executive, including regular interaction with board committees.
5. Measure outcomes.
Once the company develops a sustainability strategy and policy, it then must identify major performance aspects, establish objectives, select specific indicators and metrics, and commit to achieving specific targets. Ideally, progress should be benchmarked against a set of time-bound, measureable goals laid out as part of the overarching strategy and publicly disclosed. For example, management systems should measure progress and provide assurances that the sourcing strategy a company pursues is delivering the intended results.
It is critical for the board to track performance, oversee reporting and set clear expectations for improving performance. Establish internal performance, communication, incentive and measurement systems for all sustainability goals and conduct quarterly business reviews. Boards should also set short and long-term sustainability targets — just as they do for financial targets — and ensure that the company’s sustainability strategy and performance are communicated at annual meetings and investor roadshows.
6. Be transparent.
Transparency is about reliable indicators of sustainability progress and honest communication with various stakeholders about policies, practices and progress, including formal external reporting. Whether an organization chooses a full-scale corporate responsibility report, following Global Reporting Initiative (GRI) guidelines, delivers a CSR report directed at consumers and community groups, or simply communicates progress on its website, external communication is critical to gaining consumer trust.
Reporting plays a pivotal role in communicating these management actions to a variety of stakeholders. Boards should review and approve disclosure of the company’s sustainability performance in mandatory and voluntary reporting. GRI Sustainability Reporting Standards are the world’s most trusted and widely used standards on sustainability reporting.
7. Align board structure and composition.
In a UN Global Compact-Accenture CEO study in 2010, 75% of CEOs reported that their board of directors take an active role in overseeing sustainability issues. However, when Ceres analyzed 613 of the largest publicly-traded U.S. companies in 2014, only 32% oversaw sustainability at the board level. Some notable international companies have established a stand-alone sustainability committee of the board, including Ford, Roche, Nike, Lockheed Martin, Monsanto, McDonalds, Coca-Cola and HSBC.
Board oversight can take several forms. In some companies the role is combined with the governance committee. This combined committee supervises compliance of internal business principles and principles of behavior with respect to legal as well as safety and environmental matters, diversity and also oversees the preparation of the sustainability report.
The type of committee is less important than the scope and ambition of its mandate, which should include company-wide oversight on issues such as climate change, human rights, sustainable supply chain management, health and safety, as well as sustainable products and services. Nike provides board members with regular training and education on key sustainability issues. This education promotes a more strategic, long-term approach to the board’s overall assessment of the company’s business performance.
Companies should actively seek to recruit directors with relevant knowledge and expertise – including executives from corporations with a sustainability track record or topical experts coming from specialized positions in business. Ceres found that only 19 percent of directors serving on board sustainability committees of large U.S. companies have discernible expertise in relevant issues. Even if there is just one board member with relevant expertise, he or she may be able to significantly improve the quality of the board’s deliberations and, over time, improve the understanding of sustainability among other directors.
Sustainability is a proxy for good governance. Shareholders and other stakeholders look to board engagement as an indication that sustainability risks and opportunities are adequately dealt with at the highest level.
Sandra E. Taylor is the CEO of Sustainable Business International LLC and served on the Sustainability Committee of DE Master Blenders NV of the Netherlands and the Compensation Committee of Capella Education Company. Sandra previously served as the senior vice president of corporate social responsibility for Starbucks Coffee Company and the vice president and director of public affairs for Eastman Kodak Company.
The views and opinions expressed herein are the views and opinions of the author at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular company, industry or security mentioned herein and nothing contained herein should be construed as legal or investment advice.