By now all major companies have some sort of policy on sustainability and/or environmental, social and governance (ESG) issues. There is mounting pressure on boards of directors from shareholders, customers and other stakeholders who are getting nervous about sustainability or ESG inaction.
The advantages of a sustainable and responsible business are simply too compelling: increased innovation, improved employee retention, shared value creation that ultimately leads to higher profitability, and so on.
But sustainability leadership and accountability couldn’t be more fragmented. Of the world’s 100 largest public companies, only 54 have committed to oversee the sustainability efforts of their organisations at board level.
The first edition of The Sustainability Board Report, a not-for-profit project on sustainability and corporate governance, showcases which companies’ boards of directors truly focus on sustainability and ESG, and who are driving the discussion and action. Drawing on the Fortune 2000 list, we have chosen to look at the first 100 of the world’s 2,000 largest publicly listed companies.
West to East disparity
We have generally found that every company in the report has some sort of sustainability reporting. Often vast sections on corporate social responsibility (CSR) and corporate sustainability can be found on their websites. Regardless of how comprehensive these reports are, in most countries corporations are forced or at least expected to issue sustainability reporting—often driven by stock exchanges and regulatory bodies.
Materiality of those reports is often questionable, as is its supervision from the executive branch and/or board of directors.
The good news is that over half of all companies do in fact have a dedicated sustainability board committee. US firms are leading the pack, with 71% featuring a sustainability, CSR or ESG committee. There is, however, a clear need for Asian countries including China and Japan to catch up. Only 22% and 25% respectively of their featured companies have a relevant board committee.
Although Europe is performing slightly above average, there is still some work to do. For example, none of Germany’s six companies features a dedicated board committee, whereas all four Swiss companies showcase comprehensive board policies on sustainability.
Russia (four companies) features two large oil & gas firms that do not have any commitment, even though this is material for extractive businesses. Their industry counterparts in the rest of the world are doing much better.
We have also found marked differences in the formulation and comprehensiveness of committee charters. One can almost tell the level of dedication to sustainability by reading those charters or proxy statements.
Diversity equals commitment
Although we identified a fairly large number of directors (232) who have formal membership in a sustainability committee, we found that only 36 of them really stand out as knowledgeable, determined or experienced in the topic of sustainability or ESG.
Our final takeaway is the importance of female representation on the relevant committees. Women have most of the relevant credentials, representing 64% of relevant directors. They are clearly driving the discussion and ownership of sustainability policy. This number is even more impressive when considering that women make up only 37% of all the identified directors.
The executive search firm Egon Zehnder finds that ever more companies are appointing a specialised committee, since the benefits are so obvious. But most companies are still struggling with the right composition in terms of skills and diversity. One conclusion from our research is that it would be beneficial to include women on sustainability committees. Women appear likely to engage more enthusiastically in the topic regardless of whether their particular expertise actually lies within sustainability.
A sense of purpose
To gain a competitive edge as a company it is necessary to connect governance to strategy and execution. This is where the executive branch comes in again, and where the support of middle management is needed—it is traditionally the most challenging part of any major corporate initiative, but achievable by giving people the right sense of purpose.
Millennials’ and Gen-Z’s consumer behaviour, which is already shifting markets and societies, is driven by ethics and sustainability, as is their approach to work. The “new” generations are guided by their purpose and eschew corporations that cannot link purpose to their job. Millennials and Gen-Z will make up over 50% of the global workforce by 2020. This means that the foundation of individuals excited about creating shared value, aka “doing well by doing good,” is there. Now it needs the right leaders to nurture this approach.
Jeanette Lichner, who is a leading corporate governance adviser, leadership coach and non-executive director on various international boards, and who contributed to the report, argues that it does not necessarily need a committee to set up a company for a sustainable and long-term future.
Moreover, the right board composition, as well as commitment from the board chair to incorporate ESG or sustainability into the corporate governance agenda, will go a long way. This applies especially to companies with smaller boards that might be constrained in setting up additional committees.
Companies that formulate the right purpose and lead from the front will be those that reap the benefits of more sustainable business.
Frederik Otto is founder of The Sustainability Board Report.