Sustainability: No Longer a ‘Soft Issue’ for Boards
As shareholders and stakeholders focus more on sustainability, board members increasingly are taking responsibility for the long-term sustainability of their companies. In this BoardVision interview, NACD’s publisher and director of partner relations, Christopher Y. Clark, moderates a discussion between Kellie Huennekens, from EY’s Center for Board Matters, and Brendan LeBlanc, partner at EY’s Americas Climate Change and Sustainability Services, on why directors should prioritize sustainability in the boardroom:
- Sustainability is no longer being viewed as a “soft issue” for board members. Rather, it’s an issue that is tied to oversight of corporate strategy.
- Shareholders are becoming more concerned about how environmental and social issues are affecting companies.
- There are so-called quick wins for management and boards who realize their companies should address sustainability issues.
Here are some highlights from the discussions.
Christopher Y. Clark: [Has] there been increased activity and interest by directors in the governance and oversight of sustainability?
Brendan LeBlanc: I would suggest that governance and oversight of sustainability is simply governance and oversight of the corporate strategy. Companies execute their business models in the context of planetary limits and societal expectations. Sustainability is a word that goes by a lot of other synonyms: citizenship, stewardship, responsible growth, resiliency, profitability, [and] in perpetuity. All of these concepts get at the essence of sustainability, and the idea of how a company’s strategy is executed has always been a board issue.
Kellie Huennekens: It’s all about shareholders, at least from my perspective. The EY Center for Board Matters has ongoing engagement with a full range of institutional investors. We track proxy voting of the 3,000 largest companies in the U.S., and what we’re seeing and hearing from them is that sustainability topics, [like] environmental and social issues, are key concerns…gaining traction among a broader range of investors. Basically, what investors are searching for is a better understanding of how nontraditional, nonfinancial developments are impacting the companies in their portfolio, and accordingly, they want to know more about board oversight of these issues.
Clark: The perception is that this was a soft issue, and I want to hear more about EY’s work with boards on not forcing it but enhancing it so it’s no longer viewed as a soft issue.
Huennekens: There are a number of companies that appear to be redefining how boards should be looking at sustainability topics. These companies are the leaders in the space, and they’re constantly communicating with one another [and] with investors to explore how to approach sustainability topics. It’s a very difficult area, partly because it’s new and partly because the topics covered are very broad and very challenging.
LeBlanc: Boards are meant to safeguard the assets of the companies they serve. And one of the trickier but more important assets is your social license to operate, [with] an engaged workforce that comes to work…[not only for a paycheck but also] because they’re doing something that they believe in. And how companies actually understand, report, and capture this information [is] a business issue. Today, that whole process is maturing, and as boards get more engaged on what we think our social license-to-operate issues are, [we’re asking], “What are the things that really matter to our business? What do we depend on for natural resources? What are society’s expectations of us? And how are we meeting that responsibility?”
Clark: I read the appendices of NACD’s handbook, Oversight of Corporate Sustainability, and one tip that stood out to me…was: get quick wins. I was hoping that you could flesh that out for me.
LeBlanc: Quick wins for the management of the company [have] historically [included being] good at cost savings. If you do well by managing energy, [and] reduce costs, that’s fine. If you do well by managing a safe workplace, and you reduce cost and increase morale, that’s fine. The company manages risks very well if they are [also] engaging stakeholders, those who might be impacted by getting them in the tent with them early and understanding what their expectations are of the business. Those are all good, quick wins in producing a report from the company that explains the progress that they’re making….On quick wins for the board, I would strongly suggest taking a look at the [handbook’s] appendix, where we’ve put a model charter [that helps with] understanding the board. Who’s responsible for what? What’s the governance around the nonfinancial commitments that you’ve either explicitly made or are expected of you from your stakeholders?
Huennekens: As an indication of investors’ interest on sustainability topics, more specifically environmental and social issues, we’ve been seeing in recent years that shareholder-sponsored proposals to management on environmental and social topics now make up one of the largest shareholder proposal categories. It’s now about half of all the shareholder proposal topics submitted. While some boards may ask [whether or not this is] really a big deal [considering the amount of stock the shareholder who filed the proposal holds], what we’re seeing is that the broader base of investors is supporting a number of these key topics. [These topics include] greenhouse gas emissions reduction, whether to produce a sustainability report on an annual basis…, a human rights assessment, [and] supply chain management issues. [These issues] are increasingly becoming more prominent in terms of the broad range of topics boards cover, and we’re seeing average support for these proposals increase as well.
William Young is the editorial and research assistant for the National Association of Corporate Directors.