Is your Board ready to embrace Sustainability?
Today more than ever before, we are being challenged by fast moving, unimaginable events which have a profound impact on businesses – the Covid-19 epidemic is clearly front of mind for the time being. What current developments are forcing us, as board members and C-level executives, to consider, are the impacts that externalities (i.e. elements external to a company, not yet recognised in its valuation) might have on the future value of our company. This concept links nicely to sustainability and the opportunities and risks generated by embedding environmental, social and governance (“ESG”) elements into our business strategy.
The time is right, now more than ever, to ask how executive management are embracing opportunities and managing risks related to sustainability and non-financial value drivers, be those positive or negative.
So as a board member, what does this mean? Directors considerations can be summarised into a five-point framework:
1. Articulate your corporate purpose and how sustainability fits into your vision and strategy
The word “sustainability” means different things to different people. Some call it CSR, others ESG and others sustainability. But what is important is to reach a common understanding and agreement on what sustainability means to a company. More and more research and case studies are published that demonstrate a strong business case for sustainability. If these factors are not considered as an integral part of strategic discussions, then many stakeholders will challenge boards and executives as to whether they have appropriately exercised their fiduciary duty. Certain governments including Sweden, UK and Canada are also taking steps to redefine fiduciary duty, making the key role of Board members to focus on the whole picture even more essential than just focusing on the “financial picture” which is what many have done until recently.
2. Assess which sustainability factors are of strategic importance
Once your vision and approach to sustainability is clear, it’s time to focus (only) on what is of strategic importance. If you are on the board of a bank and the CFO tries to spend 15 minutes explaining how much electricity costs have decreased due to reduced use of offices during the Corona virus period, most board members would tell them to shut up after 5 minutes. Some would also do the same if the CFO spent 15 minutes explaining the method by which the building captures rain water which is then pumped into the toilet system for flushing toilets. Interesting though this is as a sustainability concept, Board members should be more interested in understanding how the bank is analysing exposure to climate risks of new borrowers and therefore what exposure the loan book has to default due to climate risks. Executives and boards need to first identify which sustainability factors are material i.e. what impact ESG factors will have on the company – financial materiality which is generally most important for investors, and what impact the company’s activities have on the wider planet - environmental and social materiality, which are of interest to all stakeholders. From those material topics, it’s key for the Board to identify and focus on those few areas of strategic importance.
3. Integration of strategic sustainability across the business
Strategic decisions made at Board and C-level need an effective roll out and implementation plan throughout an organisation, whether they are related to sustainability factors or other business drivers. It’s no good for men (and a few women) in ivory towers preaching about sustainability if the masses don’t understand and embrace what they are talking about. Integrating sustainability needs behavioural change across an organisation – and it is not a few super-motivated individuals in a CSR committee who are going to manage to get staff at all levels to engage. Converting corporate values takes time and energy and the whole team has to be in for the long haul.
Everyone has heard the quote from Peter Drucker “You can’t manage what you don’t measure”. An investment in internal systems, including human resources, to capture ESG performance information is a must. Every business needs a proper system to appropriately monitor and manage ESG performance and the Board needs these KPIs in order to exercise appropriate oversight.
4. Shaping effective communications
Investors expect the Board to support executive management with and ensure that a consistent message about a company’s sustainability vision and strategy is delivered. This is through both higher-level communications and more traditional sustainability reporting options. Telling a coherent story about the company’s sustainability strategy and how that has translated into actual performance through ESG related KPIs can be challenging and getting it wrong can have a serious impact on a company’s reputation and so a negative knock-on impact on corporate value. Too many organisations have fallen into the trap of overzealous sustainability marketing, or green washing, with often disastrous implications, and the Board must not be complacent when it comes to shaping such communications.
5. Effective Board oversight of ESG
The structure and processes a Board will create to oversee sustainability factors will vary based upon a number of elements including nature of business sector, size and complexity of a company’s activities, the magnitude of sustainability related opportunities and risks impacting a company as well as the level to which sustainability is central to the strategy or not. Finding the right board oversight mechanisms is likely to be an iterative process, subject to change as the company and its sustainability opportunities and risks evolve. Oversight of these issues like oversight of any issue that significantly impacts long term value creation requires the right people sitting at the boardroom table, information to keep the board sufficiently informed and allow directors to follow up on progress and processes to allow the board to exercise appropriate oversight.
Global events, regulation and investor influence are all driving the sustainability agenda. More and more stakeholders are taking the view that the Board has a fiduciary duty to consider sustainability factors in the execution of their role, and this is supported by regulatory developments throughout the corporate value chain. This is clearly a highly topical area which Boards cannot afford to overlook.
ILA’s Sustainability Strategy for Boards Committee members will be regularly covering Sustainability Strategy topics in ILA communications. Watch out for the upcoming article about Taxonomy Regulation appearing in our next newsletter.
Written by Jane Wilkinson, Independent Director, sustainable finance expert and member of ILA’s Sustainability Strategy for Boards Committee.