Sustainability is steadily becoming a mainstream consideration for the majority of organisations worldwide. Increasing public awareness provoked by the effects of climate change, coupled with a strengthening collective social conscience, means that boards cannot afford to be on the back foot where environmental and social governance are concerned. In an era that values transparency and accountability higher than ever before, stakeholders are scrutinising corporate performance in areas far broader than profit and loss. They want evidence of an ethical, responsible approach to business and are quick to condemn businesses that break moral trust with society.
Forward-thinking organisations are recognising the shifting sustainability paradigm and discovering that discharging their responsibilities as corporate citizens can also deliver commercial and operational benefits. Weaving sustainability through the heart of the organisation can, according to Morgan Stanley, help the organisation perform better, engage better with employees and shareholders, and position itself to better navigate the uncertain waters of global business. Success in harnessing the benefits of a sustainable approach to business is inextricably linked with corporate governance, and this is where the boardroom faces the challenge of ensuring that sustainability is led from the top.
1. Risk and reward – the compelling drivers of sustainable governance
In launching its ground-breaking “Plan A” environmental strategy in 2007, multinational retailer Marks & Spencer underlined both the strength of its commitment to sustainability and our finite opportunity to address environmental challenges with the statement: “Plan A, Because There Is No Plan B.”
For boards, the relevance of this sentiment has been emphasised in the 11 years since Plan A was launched, as the material impact of climate change on business risk has become clear. Organisations must now factor in the impact of environmental events from tsunamis to tornadoes, from floods to famine, on their operations, supply chains and objectives. As corporate sustainability non-profit organisation Ceres puts it: “Where sustainability is material to a company, boards have a ﬁduciary responsibility to act.” It is logical for boards to consider not only the potential risk and risk mitigation of these events, but also the way that corporate actions might help to address the causes and, in so doing, prevent that risk from escalating.
Attracting investment and satisfying shareholders is another reward for strong environmental and social governance. Increasingly, investors are putting their money where their morals are. A recent example reported in the FT saw investor BlackRock write to its portfolio investors stating that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” This is just one recent example of traditionally finance-oriented businesses diversifying their interests into the wider corporate responsibility field.
Early adopters of sustainable business practices have long known the performance benefits that derive from aligning sustainability and business objectives. Multinational Kyocera Corporation was the first Japanese company to sign on to a formal environmental charter and, as a result of its sustainable approach, developed products that not only reduced waste but also cut costs for consumers. The result was amplified into a highly successful line of business and a credible and enduring reputation for authentic environmental responsibility.
At the other end of the carrot of sustainable business benefits is the stick of compliance. From the Waste Electrical and Electronic Equipment (WEEE) Directive to carbon dioxide emissions targets, businesses are required to comply with a growing number of environmentally focussed directives. Understanding the impact of these on the business and overseeing compliance are important functions of the board.
So the drivers of sustainable business are powerful, but to achieve credible success, effective governance is critical.
Find out how Diligent’s Governance Cloud helps organisations monitor compliance with legislation.
2. Pitfalls – avoiding greenwash
There are many examples of where an organisation’s attempts to promote sustainability have failed through lack of oversight and governance. Commenting on the VW emissions crisis, Dr Bob Eccles, Visiting Professor of Management Practice at Said Business School, University of Oxford, wrote in Forbes that: “Since the board is responsible for representing the interests of the corporation, I would argue that weak corporate governance on sustainability inhibits companies’ ability to profit from sustainability.” Sustainability programmes that don’t have proper oversight run the risk of misaligning sustainable values and corporate actions, amounting to no more than greenwashing programmes that don’t address underlying issues.
Having environmental and social governance on the board agenda demonstrates that the company’s commitment is more than skin-deep, but directors have got to be active to guarantee that oversight is effective.
3. Boardroom practicalities – building awareness and leveraging expertise
A key factor for a successful sustainability programme is commitment to longevity. Creating an authentic culture of sustainability is about more than short-term initiatives, it is about thinking strategically about how the organisation should look in the future and the programme of change that will take it there. For this reason, the board is the right place for such discussions to take place. Directors can take a longer-term view, beyond next year’s profits, and challenge management to do the same.
Increasing diversity is a key area that can help boards develop sustainable governance, but identifying potential directors with the right combination of sustainability and business experience can be difficult. The Ceres Report on Building Sustainability Competence on Corporate Boards suggests that: “Nominating committees should recruit effective sustainability-competent directors that can assess the potential impact of sustainability issues on a business and ‘translate’ it to provide context for a board’s decision-making.”
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Recruiting a director with specific experience in sustainability is important, but raising awareness across the board is also essential to ensure that competence isn’t siloed around individuals. Education has an important role to play. The board should have regular opportunities to learn about social and environmental impacts on the business and to engage with sustainability experts within the business to gain an informed view of the company’s performance and areas of concern.
Above all, the board must demonstrate its commitment to corporate sustainability by weaving a sustainability mind-set throughout its decision-making and challenging management to think broadly about the organisation as a corporate citizen. In this way, the organisation can go beyond compliance and start to unlock the operational efficiencies, competitive edge and investor approval that a sound sustainability strategy can deliver.
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