Today, many of the world’s largest companies are starting to integrate sustainability into their board governance systems, but too often board systems are still rudimentary and do not focus on material issues. In many cases, board governance for sustainability does not drive performance. In other words, it is ineffective.
However, companies with the right board governance systems, including formal board mandates for sustainability, board expertise on sustainability, and executive compensation linked to sustainability, are more likely to have established strong sustainability commitments and are better positioned to deliver sustainability performance.
We found that while most boards have taken steps to oversee sustainability, their approaches are still largely piecemeal.
While most large companies state that they oversee sustainability at the board level, only a minority have formal mandates and demonstrate board-management engagement on sustainability.
Most boards do not have directors with demonstrable sustainability expertise.
A third of the companies analyzed state that they link executive compensation to sustainability, but most do not give details on which specific goals are incentivized.
At the same time, our analysis showed positive relationships between companies whose boards incorporated the right systems and sustainability outcomes.
Companies that were able to demonstrate stronger board governance systems were more likely to have established sustainability commitments.
Companies that showed the best performance on sustainability were more likely to have established all three board governance systems that our report examined.
Board governance systems reinforce each other, which could help trigger virtuous cycles of improvement.
The message is clear. Integrating sustainability across board governance systems is key to unlocking better sustainability performance. Integrating formal mandates, strengthening board expertise and incentivizing top executives to deliver on sustainability goals will make a difference.
Our goal is to provide key insights into the elements that lead to effective board governance for sustainability to help investors, companies and advocates decide how to focus their efforts.
Recommendations:
Make board governance systems holistic. The companies that perform best on sustainability issues are those that have incorporated mandates, expertise and incentives for sustainability that reinforce one another.
Exercise sustainability oversight with an eye towards performance improvements. The board can play an important role in asking management the right questions and encouraging executives to identify the right material issues for corporate performance, as well as setting goals for these priorities. Financial incentives can also be used to spur performance.
Orient board governance systems towards performance on material issues. The strongest performing companies don’t just have the right board governance systems in place, they also link them to specific sustainability issues that are material to corporate performance.
Provide more detailed disclosure about board governance systems. More detailed disclosure, including details on the material issues that the board prioritizes and how it addresses those priorities, can spur further sustainability commitments and improvements.