From the Conference Board: Embedding Sustainability Issues in Corporate Boards

(Pix © Larry Catá Backer 2016)

Corporate sustainability has become quite fashionable of late.  It has the great benefit of fusing together issues of long term profitability, targeted projection into sectors of consumer markets (especially for higher end products), risk management and mitigation, and corporate social responsibility in a way that makes a "business" case  for reducing the traditional business subsidy from free riding the "commons." It focuses on long term consumer value, and incorporates the terminologies and viewpoints of corporate social responsibility and risk management (the later in the sense of mitigating risk--legal, social and reputational) within a business climate that increasingly tends to seek "rents" for use of "public" spaces and resources once treated as "free." The later, in the context of the business and human rights sector, also includes issues touching on constraining employer freedoms to exploit labor as a commodity consumed in the production process.  

But like other initiatives undertaken by large institutional actors with complex bureaucracies (for example, the state) and dynamic stakeholder communities (for enterprises--investors, consumers, the state, competitors, creditors and labor), enterprises have scrambled to define and develop consensus about the appropriate architecture for the exercise fo sustainability and the initiatives assigned to that category of enterprise activity. 

To that end our friends at the Conference Board  have just completed and published quite interesting data on the ways in which sustainability is being institutionalized within global business enterprises.

Matteo Tonello, the Managing Director, Corporate Leadership, recently circulated a Press Release about its latest report, Thomas Singer, The Seven Pillars of Sustainability Leadership (CB  RESEARCH REPORT R-1604-16; 2016).

A survey by The Conference Board shows executives point to board engagement on sustainability issues as a strong indicator of leadership in corporate sustainability. Yet a separate survey of 307 SEC-registered businesses shows only 36% of businesses assign responsibility for sustainability oversight to the board. However, there are significant variations by company size, as almost 68% of companies with revenues of more than $20 billion assign this responsibility to the board. Among these larger companies, sustainability oversight is most often assigned to a dedicated standing committee of the board or to an existing nominating/governance committee. Among smaller companies – those with revenues below $1 billion – sustainability oversight typically falls to the CEO or to a senior executive reporting directly to the CEO.

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There is no consensus definition for sustainability.  This Post includes the definition of sustainability used by the Conference Board in its Report and the Executive Summary.

The Conference Board defines corporate sustainability as the pursuit of a business growth strategy that creates long-term shareholder value by seizing opportunities and managing risks related to the company’s environmental and social impacts. These impacts include elements of corporate citizenship, corporate governance, environmental stewardship, labor and workplace conditions, supply chain and procurement, community involvement, and philanthropy. (Seven Pillars, pp. 5)
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Executive Summary

Business leaders increasingly recognize the sustainability imperative. They understand that the companies they lead cannot expect to be successful in the long term without considering the communities they work in and with and the natural environment they operate in and depend on. They understand global trends will ultimately reward companies that successfully balance their natural, social, and financial capitals, and that companies that fail to adapt to these global trends risk becoming irrelevant. The challenge is converting this recognition into action. How can business leaders prepare and steer their organizations for leadership in sustainability?

Input from senior executives at more than 80 member companies of The Conference
Board sheds light on this question. Their collective input reveals leadership in corporate
sustainability boils down to the following seven most impactful practices:

1. The board of directors is actively engaged on sustainability issues

Sustainability oversight is now a board-level issue, driven increasingly by the scale of business risks and opportunities posed by sustainability issues and a sense of urgency given these impacts. Global megatrends such as resource scarcity and climate change are becoming ever more relevant to board discussions about strategy, risk, and performance. Boards that are engaged on sustainability issues are more likely to take a longer-term view and thus are able to better foresee and prepare companies for potential risks and opportunities.

Board engagement on sustainability is a function of oversight, time, and expertise. There is no one perfect board structure for sustainability oversight. Some boards choose to assign responsibility for sustainability to one of the “typical” board committees (e.g., governance and nominating; audit and finance), while others dedicate a committee largely or entirely to sustainability or assign responsibility to the board at large. While the structure chosen can vary, what ultimately matters is that directors allocate sufficient time to discussions of sustainability. There is significant room for improvement here, as surveys indicate the amount of time directors spend on sustainability issues is relatively low. One reason for this is that many companies do not have adequate sustainability expertise on their boards. Companies should consider appointing board members with relevant expertise or enabling regular access to sustainability experts, both within and outside the company.

Notably, while input from more than 80 senior sustainability executives points to board engagement on sustainability issues as the business practice most indicative of leadership
in sustainability, CEOs appear to be missing the mark: When asked about their top strategies for meeting the sustainability challenge, CEOs ranked “strengthen board oversight of sustainability issues” last.

2. The CEO and C-suite champion sustainability

The companies most often recognized as sustainability leaders are typically led by a CEO who actively champions sustainability. It may seem obvious, but companies where CEOs and senior management take an active role in sustainability are more likely to experience success with their sustainability strategies. While not all CEOs can be expected to lead sustainability strategy, companies should strongly consider ensuring their head of sustainability (a chief sustainability officer, for example) has a direct reporting link to the CEO and regular access to the board of directors. Sustainability steering committees also offer a useful mechanism for developing and implementing a company’s sustainability strategy. To ensure sustainability is elevated to a strategic level, these committees are most effective when chaired by the CEO or a member of the C-suite. For instance, Siemens’ sustainability steering committee is not only chaired by the chief sustainability officer, it also includes four out of the seven members of the company’s managing board. It is perhaps no coincidence that Siemens’ Environmental Portfolio accounted for almost half (43 percent) of the company’s overall revenue in 2015.

Some companies also choose to form sustainability committees composed exclusively of external advisors, who can provide additional subject matter expertise and an objective perspective.

3. Sustainability is embedded in strategic planning

Sustainability-related issues can no longer be ignored by companies wishing to remain competitive in the long term. Environmental risks, such as climate change and water scarcity, have been climbing up global rankings of business risks. In fact, an environmental risk has topped the World Economic Forum Global Risks Report for the first time since the report’s inception in 2006. The “failure of climate change mitigation and adaption” was ranked the number one global risk in terms of impact.2 Companies are beginning to act: More than one-fourth of S&P 500 companies now include discussion of the risks associated with climate change in their annual SEC filings, up from just 5 percent in 2013 (see page 46).

Companies need to be prepared to manage environmental and social risks that can have significant business implications. To do so, it is important for companies to consider and integrate sustainability issues in their strategic planning process. Companies can begin by developing a priority list of sustainability risks and opportunities most material to their business, with input from internal and external stakeholders.

4. Sustainability goals are strategic, ambitious, and long term

A fundamental change in the way companies think about value creation is evident in the types of sustainability goals leading companies are setting. Many of these goals are not just about operational efficiencies—doing “less bad”; they are increasingly about adding value.



For example, as part of DuPont’s 2020 sustainability goals, the company will measure and report on the quantifiable safety, health, and sustainability benefits from DuPont’s major growth innovations.3

Setting corporate sustainability goals helps companies create accountability for improving sustainability performance and helps focus attention on the issues that matter most to the company and its stakeholders. The right sustainability goals can also help employees rally behind their company’s sustainability strategy and can reinvigorate a culture of innovation. To be most effective, sustainability goals should be strategic, ambitious, and focused on the long term.

Strategic goals ensure targets are in line with a company’s most important sustainability issues, typically identified using a materiality analysis process. Ambitious goals can help kick-start innovation and create a sense of urgency. Companies that set bold stretch goals—goals that are seemingly unattainable—often achieve significant improvements in performance, even if those goals are not ultimately met. The time frame is also important, as goals with target dates of 2020 and beyond help ensure companies adequately prepare for future risks and opportunities. LEGO, for example, in 2012 announced a commitment to make all of its products from sustainable materials by 2030, thus replacing oil-based plastic.

5. Executive compensation is tied to sustainability performance

It is no secret that incentive compensation of the C-suite drives focus, attention, resource allocation, and performance. Companies that are serious about sustainability are placing sustainability performance metrics squarely in their incentive compensation schemes. This is crucial as business leaders point to a lack of incentives as a significant obstacle to achieving their companies’ sustainability potential. Linking incentive compensation to a set of sustainability targets helps make sustainability a priority for the organization and can steer company leadership to consider initiatives with long-term benefits that may otherwise have been ignored.

While the number of companies that have introduced pay for sustainability performance is growing, the sample remains fairly low. For companies that introduce this practice, the sustainability benefits can be significant: Incorporating pay for sustainability performance can reward long-term thinking, elevate sustainability issues to the CEO’s agenda, and drive performance against sustainability targets. DSM’s short-term incentive scheme, for example, takes into consideration the percentage of successful product launches that meet the company’s ECO+ criteria (products that offer a superior performance and lower environmental footprint than competing mainstream products over their entire life cycle). The impact on performance has been significant: By 2015 DSM’s ECO+ solutions accounted for 91 percent of the company’s innovation pipeline (see page 67).

6. Sustainability is part of the innovation process

The motivation for launching corporate sustainability strategies is shifting significantly from achieving compliance, risk, and operational efficiencies to spurring innovation and market growth opportunities. Companies are increasingly pointing to revenue growth and business opportunities as a primary reason to get started on sustainability.

In many ways, this is a result of growing demand from customers for solutions that help address sustainability challenges. Companies seeking to improve their sustainability profiles are generating demand for products and solutions to meet these needs. Suppliers are responding with innovative solutions that in some cases redefine an entire product category or open a new market, in the way that Lighting as a Service solutions have done for companies such as Philips.

Products and services with improved environmental and/or social profiles can represent significant revenue growth opportunities. For this reason, several leading companies are investing heavily in sustainability innovation to meet growing customer demand for sustainability solutions. Industry leaders such as GE and DuPont, for example, invest about half of their R&D budgets in environmental innovations (see page 67).

The capacity to recognize and act upon the revenue potential that sustainability offers is ultimately an outcome of many of the practices mentioned above. To companies that dedicate sufficient board time to sustainability, have champions within the C-suite who ensure sustainability is part of strategic planning, and adequately incentivize sustainability performance, sustainability represents an obvious opportunity and source of competitive advantage.

7. Sustainability is woven into company reporting and engagement

Companies at the forefront of sustainability excel at transparency; they are comfortable with openly reporting sustainability challenges and not just opportunities, and they see value in discussing company financial and nonfinancial performance side by side. For these companies, sustainability is woven into communications with stakeholders and is an integrated and core component of the company’s reporting process.

While the reporting of sustainability information has become common practice among large companies, there is still wide variation in the quality and scope of this reporting. Following standard guidelines helps ensure comparability, consistency, and materiality of reported information. And closer integration of a company’s sustainability and financial reporting—still an emerging practice—also offers an opportunity to further embed sustainability into company strategy. Transparent communication can also improve sustainability engagement with company investors, a much-needed benefit as engagement levels remain low for many companies.

CEOs also play an important role, as their rhetoric can be influential in strengthening the sustainability profile of the organizations they lead.

The past couple of years have seen a rapid acceleration in the pace of corporate sustainability initiatives (or core strategic initiatives, as the most forward-thinking companies view them). Some of the world’s biggest companies are embarking on bold strategic initiatives that are having a significant impact on their investments, sales, growth, business models, and environmental footprint. These initiatives rarely emerge by chance; they are a result of specific actions that pave the way for sustainability leadership.

Corporate sustainability leaders recognize that the more time company directors,
CEOs, and C-suite executives spend in serious deliberation and debate about
sustainability issues:

• The more engaged they become;
• The more they begin to grasp the magnitude of the transformation that a low-carbon, resource-constrained world will offer;
• The more bold they become about the goals and investments they commit to; and
• The more excited they become about the upside opportunities for sustainability-led innovation and growth.

NOTES

 1 The Conference Board CEO Challenge ©2016, The Conference Board, Research Report 1599, January 2016, p. 67.

2 “The Global Risks Report 2016, 11th Edition,” World Economic Forum, Switzerland, 2016 (http://www3.weforum.org/docs/GRR/WEF_GRR16.pdf).

3. NB: A merger between DuPont and Dow Chemical is expected to be completed by the second half of 2016. The combined company, DowDuPont, is expected to be separated into three independent, publicly traded companies.