The Business Case for Board Sustainability Competence
Sustainability risks—including climate change, water crises, human rights and inequality—are creating new challenges for board members to meet their fiduciary responsibilities and ensure long-term shareholder success and overall value creation.
Sustainability disruptors could materially affect corporate financial performance. Environmental and social issues have the potential to impede corporate plans, performance and even business models. The experiences of major global insurers, mining companies and food companies demonstrate the financial impacts of climate change, water scarcity, and stakeholder expectations on supply chains, business expansion and capital investments.
Where sustainability is material to a company, boards have a fiduciary responsibility to act. A key part of the fiduciary responsibility of boards is the duty of care, or the duty to adequately inform themselves of material issues prior to making business decisions. To discharge this responsibility, directors need to be able to understand and evaluate material risks facing the business. When a social or environmental force poses material risks, directors now need to consider those risks in decision-making in order to adequately discharge their fiduciary responsibility.
Investors are increasingly focusing on board sustainability competence. Investors are making connections between sustainability and materiality on one hand, and financial performance on the other. As a result, they are focusing on the critical role the board plays in ensuring the resilience of a company’s assets and its long-term business strategy. Consequently, investors are putting pressure on boards to show themselves as “competent” in environmental and social issues.
This report builds upon Ceres’ 2015 report, “View from the Top: How Corporate Boards Engage on Sustainability Performance,” which recommended two linked approaches for incorporating material sustainability considerations into core board functions: integrating sustainability into board governance systems and into board actions.
This follow on report, “Lead from the top: Building Sustainability Competence on Corporate Boards” provides greater detail on how boards can successfully integrate sustainability into their governance systems by raising their own competence on material sustainability issues to enable effective oversight. This report focuses on the skills and experience needed for board members to provide thoughtful oversight of sustainability risks and opportunities, in addition to the tools and processes that can help foster deeper engagement at the board level around these issues.
What Makes a Board Sustainability Competent?
An ideal sustainability-competent board has the requisite knowledge about material environmental and social issues that affect the business. It is able to ask the right questions, support or challenge management as needed, and ultimately make informed and thoughtful decisions affecting strategy and risk.
A Sustainability-Competent Board:
» Integrates knowledge of material sustainability issues into the board nominating process to recruit directors that ask the right questions;
» Educates all directors on material sustainability issues to allow for thoughtful deliberation and strategic decision-making at the board level; and
» Engages regularly with external stakeholders and experts on relevant sustainability issues.
It is important to make the distinction between a sustainability-competent director and a sustainability-competent board: A sustainability-competent director has relevant expertise in or exposure to the material environmental, social, and governance issues that affect the company. The distinguishing feature of a sustainability-competent board, on the other hand is its ability to engage thoughtfully on material social, environmental and governance issues as one cohesive deliberative body. A sustainability-competent board integrates sustainability into broader board conversations and functions. Rather than being isolated or marginalized, sustainability becomes part of the fabric of board oversight and is integrated into decision making on strategy, risk and compensation.
How to Build a Sustainability-competent Board: Leading Practices
Integrate sustainability into the nominating process by:
Creating regular opportunities to bring new directors with relevant expertise onto corporate boards. To remain relevant, especially with a view to including sustainability priorities, boards must be periodically “refreshed.” The board nominating or governance committee could affirm the importance of board refreshment in their charters by developing mechanisms that ensure consideration of refreshment, for example, through a regular board evaluation process.
Incorporating material sustainability issues into qualifications for potential board candidates. By thinking about recruiting for sustainability in a systematic way, boards can look beyond their short-term needs. Nominating committees can make sustainability issues important qualifications they consider when recruiting new directors and track the qualifications via a board skills matrix.
Finding directors that can make the connections between environmental and social issues and the business context. 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. Directors who cannot make the connections between the appropriate social and environmental issues and the relevant business context risk being marginalized.
Identifying directors who represent key stakeholder groups relevant to a company’s sustainability impacts. Nominating committees should recruit directors who have experience with interacting or representing stakeholder groups that offer insights into a company’s material sustainability impacts. This provides the advantage of bringing both relevant expertise and background diversity to the boardroom.
Recruiting candidates representing a diversity of backgrounds and skills to improve decision-making. Nominating committees should seek out candidates who bring a range of attributes, expertise and desired skills to the table, and represent a mix of gender, ethnicity, nationalities, and backgrounds. This will help the board avoid “group think” and foster robust, thoughtful deliberations when making a decision. Research also shows that diverse boards are better boards.
Educate directors on material sustainability issues by:
Integrating new directors with sustainability competence into current board deliberations, especially on strategy and risk. For sustainability-competent directors to be effective and for sustainability to be integrated into board decision making, they must participate in board functions, structures and processes. Mentoring by existing directors is another effective method of helping new directors succeed in their roles.
Requiring regular education on material sustainability issues for the whole board. Boards and company leadership could mandate that all directors need to be up-to-date on material sustainability issues. Education, training programs, and site visits should build knowledge over time and make connections to operational or management realities.
Providing boards with information on the materiality of sustainability to their business. Boards need information to help them understand the materiality of specific sustainability issues to their business, so they can make the connection between sustainability and corporate strategy and risk. Materiality analyses could prove useful in helping directors understand how certain environmental and social issues relate to business strategy and how they may materially affect operations.
Driving board discussion on how sustainability impacts corporate risk, strategy and business models. Identifying risks and opportunities created by environmental and social issues helps companies adapt their models. By becoming more resilient, integrated and circular, businesses can tap into more sustainability-related business opportunities.
Deepen engagement with stakeholders and experts on relevant sustainability issues by:
Finding regular opportunities for boards to engage stakeholders on environmental and social issues. Regular participation in stakeholder engagements with internal and external stakeholders—including investors and advocacy groups—can help boards gain a holistic understanding of the key issues that affect a company. This can help the company not only mitigate adverse impacts on external shareholders, but also pinpoint opportunities for creating long-term value.
Leveraging sustainability advisory councils as a critical board resource. To deepen communication between a sustainability advisory council and a company’s board, board members could be involved in the deliberations of these councils more systematically. Such councils could also provide recruitment opportunities for new board members.
Incorporating material sustainability issues into board-investor dialogues. Investors increasingly expect boards to engage directly and systematically with them on critical issues. Given the growing focus of the investor community on sustainability writ large and the role of boards for sustainability in particular, material environmental and social factors should be made a part of any board-investor dialogue.
Sustainability has never been more important. Business leaders have never been so engaged. As fiduciaries to the corporation and stewards for its long-term performance, boards have a fundamental responsibility to be able to engage on relevant sustainability issues in a thoughtful manner. Competence in sustainability is the bedrock to all of this.
This report points to concrete, actionable recommendations on how boards can raise their overall sustainability competence in both the short term and the long term. Now is the time for boards to rise to the challenge and use their positions as opportunities to be leaders.