Field Notes: Good Business Needs Good Leadership

More investors are looking at company ESG metrics when investing but a Ceres report indicates that corporate boards have been slow to take on a managing role.

A 2014 analysis of 600 of the largest publicly-traded U.S. companies by sustainability-advocacy-organization Ceres, revealed that only 32 percent had board-level leadership on sustainability practices. In its latest report, “View from the Top: How Corporate Boards can Engage on Sustainability Performance”, Ceres recommends that more corporate boards take a leading role in overseeing sustainability practices across business operations as well as ways to engage stakeholders, board members and staff in implementing sustainability.

More than executives and other employees, members of corporate boards are responsible for ensuring long-term shareholder success and overall value creation. Directors have a duty and a mandate to promote sustainability priorities in corporate strategy, risk management and performance in order to meet this fiduciary responsibility.

The report suggests combining meaningful action with the integration of sustainability into board governance systems in order to have a higher chance of accomplishing substantive improvements. The recommendations include:

Focusing on company-specific material issues rather than looking at sustainability broadly. The report notes that those industries that understand sustainability-related regulatory or reputational risk are the ones that most readily adopt sustainability at the board level.

Embedding sustainability in committee charters and strategy discussions. Mainstreaming integration is important so that sustainability is not considered in silos within the business.

Enhancing the link between executive compensation and sustainability goals.

Avoiding preoccupation with short-term quarterly earnings. This can be done by embedding sustainability and longer-term thinking in strategic planning.

Integrating sustainability in risk oversight. The report notes that at present only 25 percent of large U.S. companies link executive compensation with sustainability issues.

Providing robust disclosure on board sustainability oversight. This enables stakeholders to identify linkages between robust accountability systems and performance impacts, notes the report.

A greater number of investors (including large institutions, private foundations and millennials) are tracking a company’s Environmental, Social and Governance (ESG) performance when investing. As Merrill Lynch’s recent publication “Impact Investing: The Performance Realities” notes:

There is wide recognition that companies that do not have good governance, that lack good management, that fail to consider environmental risks or that disregard community impacts are ignoring risks to their bottom line. In fact, there is a range of ESG-related risks that companies face. Issues such as climate change, health and safety concerns, and issues with transparency, risk management and governance can have a direct financial impact when they affect a company’s operations. The classic case of this is of course the BP oil spill. Poor supply chains and labor policies, and the associated potential PR backlash, can pose a significant reputational risk that translates into lost sales, lower valuations and, in the extreme, consumer boycotts.

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