Boards must put sustainability at the top of their agenda to thrive
It's not just a risk factor. Sustainability offers opportunities for long-term value creation and unlocks new markets.
Amidst the global COVID-19 crisis, there have also been glimmers of hope. A significant one is its impact on climate change. It’s estimated that global carbon emissions from the fossil fuel industry could fall by 2.5 billion tonnes in 2020. U.K. road travel has fallen to 1955 levels and the number of flights operating worldwide has fallen by about 40 percent.
However, as soon as we phase this out, we will face the same challenges as before. COVID-19 makes it clear we can address sustainability issues and implement measures that have a significant impact. But now we need to do so on a continuous basis. This needs to come from the top.
The evidence suggesting that boardrooms should prioritize sustainability is growing rapidly. On the one hand, there are increased risks associated with not prioritizing sustainability. On the other hand, the figures show the huge opportunities sustainability offers businesses. As a result, more and more, sustainability is positioned at the top of boards’ agendas.
The risk factor
The risks are more obvious than ever. Environmental disasters, poor labor relations, safety incidents and environmental scandals are all increasing. 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 also has emerged as the top risk for senior leaders.
In this digital era, transparency is key, whether one likes it or not. Reputations are at stake, as well as investments. The risk lies clearly in non-sustainable business practices and investments, rather than sustainable ones. Policies on integrated reporting, procurement and disclosure are progressing, pushing companies in the direction of sustainability — even if this isn’t happening apace quite yet. ESG risks are common knowledge by now and are not only investor-related.
The opportunity factor
However, for boards, sustainability is not only a risk factor. Sustainability influences financial returns both on the risk as well as the opportunity side. It offers opportunities for long-term value creation, unlocks new markets and, thus, can drive profitable growth.
Surprisingly though, there is currently a huge gap between awareness and subsequent action. Non-executive boards are generally used to working with the usual nomination, remuneration and audit committees’ structures. They do not put sustainability on the strategy agenda and to be honest they are, overall, reluctant to adapt to incorporate sustainability in their structure and agenda. There is both a need to change and an opportunity to make it financially worthwhile. Thus, I foresee and support change.
The frontrunners: best practices
Frontrunner companies show us the way forwards, and I am happy to be able to contribute to a number of them. Nestle, for instance, recognized the significance of sustainability for the company and installed a combined nomination and sustainability committee, that ensures their managerial sustainability and oversees the long-term succession planning of the board. The committee ensures the company’s sustainability and how its long-term strategy relates to its ability to create shared value. It is interesting to see that Nestle has recognized that long-term succession planning and sustainability are intertwined.
Even more importantly, the board structure of Nestle demonstrates the recognition that sustainability presents both risks as well as an opportunities, which is to be pursued by a shared value business model.
As forward-thinking companies now recognize, the 2020s will be the decade of sustainability. The next 10 years will open up many business opportunities — if shared value (generating economic value in a way that produces value for society by addressing its challenges) is deployed. It not only secures the risks, as the company is constantly set on both reducing its negative and growing its positive impact on society. It also points the company constantly to new markets opening up — for instance in offering solutions to issues such as food waste, recycling materials and reducing waste, renewable energy and beating poverty. Typically, shared value-oriented companies align with the Sustainable Development Goals, the SDGs, as described in my book "The Trillion Dollar Shift."
Good governance is key when setting up committees and councils
Good governance, however, is key for both supervisory and advisory boards to work well. DSM — another frontrunner in its practices — has worked out a profound set of governance to ensure its 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.
Supervisory boards need to integrate the sustainability council well in the overall supervisory board structure and mandates. Just adding one sustainability expert to the board does not suffice, if they are not formalized, embedded and synergized with the other committees and board members. In the end, the CEO and chair of the non-executive board need to support this fully and implement it carefully. The selection of members is as crucial as the structure. It is a business challenge and opportunity and although members and sustainability chairs need to be experts on the topic, it is just as important that the overall sense of the committee is a business one. If not, synergy will not arise — let alone grow.
The chairperson must drive change
Boards need to prioritize sustainability and the chairperson must drive this change. He or she must either chair the supervisory board committee or at least be a member. In case of an additional advisory council, the chair must make sure governance is set up in such a way as to ensure the impact of such an advisory body.
It is crucial to bear in mind that the board has or creates access to relevant information. Beyond disclosure strategy, many boards do not feel they have access to the sustainability information they need. The board can use new reporting and disclosure standards to drive change here. It’s also key to ensure the entire board, as well as the sustainability entity, really understand how sustainability is tied to business value and operate as such. Only then will sustainability be perceived as a business and growth driver, which in itself is a condition for success.
Preceding the set-up of these sustainability bodies, the chairperson and board members can get going right away, organizing some quick wins.
For instance, establish or increase the frequency of management reporting on sustainability risks to the board. Establish or clarify the responsibility of a board committee with a sustainability mandate. Establish a disclosure strategy to stakeholders and embed this in (sustainability) reporting. Review the sustainability executive department and professionalize this, whilst connecting it clearly to a shared value model. Improve data systems to enhance the possibility of gathering relevant data. Make sure sustainability risks are identified and embedded in risk management. The list goes on.
Realize: This change is here to stay. Any board should adapt, as soon as possible.