How to build a board that's competent for sustainability
As Wall Street ratchets up the pressure on companies to be open about the risks they face from sustainability, the spotlight is falling on boards. Investors expect directors to understand these risks, so they can help companies prepare for them.
That's because it’s becoming impossible to ignore the connection between sustainability and how companies perform. Two recent examples make that clear. The one-two punch of hurricanes Irma and Harvey this year will cost $115 billion in total losses, estimated Goldman Sachs. And in 2016, multinational corporations disclosed that they faced $14 billion of water-related risks (PDF), a five-fold increase over the previous year.
When an environmental or social issue is material, boards have a responsibility to act on them. And it’s the job of the corporate staff, from investor relations to corporate secretaries to sustainability officers, to help the board become fluent in these sustainability risks — so that directors can understand why it matters to their business and what they can do about it.
In our new report, "Lead from the Top," Ceres lays out how corporate boards can build this competence for sustainability. Boards can integrate sustainability issues into board recruitment; companies can educate directors on sustainability issues and why it’s critical for directors to engage with external stakeholders, including investors and experts on sustainability issues.
The goal is straightforward but critical. Rather than focusing primarily on bringing on a director or two who is an expert in sustainability, we call for companies to build sustainability-competent boards. By tackling material sustainability risks as one cohesive deliberative body, the board can ask the right questions, support or challenge management as needed and importantly, make knowledgeable decisions on strategy and risk.
Corporate management and staff are key to building a sustainability-competent board, especially the sustainability department, the corporate secretary’s office and investor relations. In an earlier blog, we called on these departments to work together to ensure that "corporate boards are on board for sustainability." The sustainability department’s knowledge of key sustainability risks and programs, combined with investor relations' sense of investor expectations, can help fill in the gaps and enhance the board’s knowledge in a number of ways.
How can this work in practice?
Corporate boards should recruit directors with expertise or exposure to material sustainability issues. Sustainability staff could play an invaluable role in helping board nominating committees to outline the parameters of the company’s director searches to include sustainability expertise and even suggest potential candidates — not that a company should recruit people who are simply experts in sustainability. Directors need to be able to analyze and translate the potential impact of sustainability issues on business for the rest of the board. Sustainability has to go hand in glove with a company’s core business strategy.
Investor Relations is critical to this process. Investors have long paid attention to board composition, including leading the charge calling for more diversity on corporate boards. Now that focus has grown to include climate competency, with major investors including CalPERS, CalSTRS, Blackrock and State Street (PDF) calling on boards to bring on to bring on climate-competent directors.
The sustainability department and investor relations team can work with the corporate secretary’s office to help educate directors on sustainability issues. For instance, they can prepare educational materials and sessions, report on material sustainability issues and discussion to boards and involve boards in materiality assessments, including ongoing updates of the business case for managing sustainability issues.
Materiality assessments are particularly important. A growing number of companies are putting in place formal process to assess materiality sustainability issues as a part of their reporting on GRI and other sustainability standards. Board members could be involved in these processes to provide input, as well as to vet the results.
Finally, corporate staff can help the board engage with investors and other expert stakeholders on the topics important to the company. Ways to do this include doing the initial outreach to stakeholders themselves, putting together advisory councils that have sufficient expertise to engage with directors and helping brief and prepare board members for investor engagements on sustainability issues.
Climate change, water scarcity, labor inequality, product safety. These are just a few sustainability issues affecting the bottom line of businesses. By understanding the impact of these risks on their companies and making them part of decision making, boards can meet the demands of a growing number of investors around the world — and unlock real business opportunities.