Geopolitical events over the last two years, coupled with the rise of generative artificial intelligence and an economic system that follows few rules from the past, have shifted the priorities of business leaders worldwide. These factors have also put a strain on sustainability initiatives and priorities. But what exactly is sustainability again?

Let’s define it as the aim to sustain or improve the current state of planet and society (including business). In this context, most short- and long-term issues are captured within ESG frameworks.

These issues vary significantly across different industries and geographies and go far beyond just climate change and diversity & inclusion.

According to the Sustainability Accounting Standards Board, the material sustainability issues for a software company, for instance, include energy management, customer privacy, data security, employee engagement, diversity and inclusion, competitive behaviour, and systemic risk management. These are certainly all key business drivers and, for board directors, understanding them is critical to fulfilling their governance roles effectively.

The board’s responsibility is to ensure that sustainability is integrated into the core business strategy. This involves asking the right questions and providing strategic guidance to management on risks and opportunities related to sustainability. Directors must have a foundational knowledge of these material issues to oversee and steer the company toward sustainable practices.

Structuring sustainability governance

All board members should possess a baseline knowledge of material sustainability issues. More specialised directors are necessary for chairing board committees tasked with overseeing sustainability matters, such as ESG committees. Audit committee members need to be fluent in sustainability standards, reporting, and disclosures.

Remuneration committees need to advise on ESG-linked executive compensation which has become widely accepted best practice. Other committees might have further fractional ESG responsibilities.

This structure allows for in-depth examination of issues in committees and collective decision-making should then be done by the whole board. Smaller boards might do with fewer committees or have more shared responsibilities.

Current state of ESG engagement

Despite the obvious importance of sustainability, many boards still lack sufficient ESG-engagement. According to The Sustainability Board’s research, fewer than half of committee members and chairs responsible for sustainability oversight at global large cap corporations demonstrate meaningful engagement with material sustainability issues.

The pressure for boards to enhance their ESG capabilities varies globally. Regulators everywhere have stepped up reporting and disclosure requirements significantly. In Europe, where regulatory pressure is the highest, asset owners and managers also have sophisticated expectations regarding board accountability for sustainability risks, articulated in stewardship guidelines.

Conversely, businesses in the US face amplified reputational risks due to social and political polarisation, necessitating robust policies and issue management strategies. Meanwhile, boards in emerging markets exhibit a growing, albeit nascent, willingness to improve sustainability governance without much outside pressure.

Board sustainability expertise

To effectively engage and upskill the board in sustainability issues, it is helpful to reassess the traditional board skills matrix. Distinguishing between baseline ‘ESG consciousness’ (capturing foundational knowledge) and more advanced ‘ESG competence’ (enabling effective strategic action) is a wise starting point.

Too many boards still make do with a tokenistic sustainability checkbox, rather than digging into each director’s actual experience. Admittedly, establishing these profiles can be challenging, as it requires balancing fiduciary responsibilities with specific sustainability knowledge. However, this comprehensive approach offers key benefits:

Depth of expertise: Understanding the existing sustainability knowledge among directors and identifying gaps resulting in a more robust governance system.

Stakeholder assurance: Demonstrating the board’s commitment and leadership in sustainability matters to pre-empt challenges from stakeholders and shareholders.

Strategies for knowledge acquisition

As boards strive to enhance their ESG engagement, they must also focus on the resources needed for continuous learning and development. Boards have several options to consider:

• Appointing new directors: tasking search firms to find directors with track records of material ESG-engagement through succession planning and new appointments
• Internal and external advisory boards: leveraging advisory boards for continuous insights. These can be ‘horizon boards’ made up of younger generations, or external domain experts, or both.
• External advisers and workshops: Regular input from external advisers and participation in collective upskilling exercises, such as workshops and retreats.
• Certification and training programmes: requiring certifications from specialist education providers and clearly articulating the necessary engagement levels for new directors.

Lastly, board effectiveness reviews and benchmarks should incorporate these expanded skills requirements, ensuring that board functioning aligns with the business’s sustainability agenda.

By elevating the board’s expertise in sustainability issues, companies can better navigate the complex challenges and opportunities that lie ahead.

Frederik Otto is the founder and executive director of The Sustainability Board.