May 25, 2018
May 25, 2018
Board members own the sustainability agenda; it requires taking the long view. Yet, directors continue to struggle with the subject, often referring to sustainability issues under the umbrella of environmental, social, and governance (ESG) matters. This is especially true today.
Consider the auto sector—undergoing more change in the current five-year period than the last 100 years combined. The century-long run of churning out cars and trucks (the linear economy model) is giving way to various forms of sustainable mobility (e.g., electric vehicles, autonomous vehicles, ride sharing, etc.).
It’s not just the auto sector. Every industry is undergoing transformation. Sustainability is not always the main driver, but ESG factors are indeed at play. Sharing economy companies such as Airbnb, Uber Technologies, and Lyft are great circular economy stories—with the increased utilization of assets, lower carbon emissions, and more.
“How do we stack up?” That’s the question I have been asked in over 50 board meetings over the past 25 years. In virtually every case, the directors wanted to know: Where does our company stand today, vis-à-vis sustainability, compared with competitors, peers, and best practices? Are we top quartile?
It’s a good question, and it deserves an answer. That’s why in 1997, after two Fortune 200 company board meetings where we discussed ESG, I began developing the Corporate Sustainability Scorecard—a board and C-suite rating tool applied one company at a time. The scorecard is a web-based tool created by industry for industry that maps a company’s posture and performance along a four-stage maturity path.
Fast forward 20 years: in early 2018, 60 blue chip companies completed the scorecard as a cohort. The results—the first of their kind for board-relevant sustainability data—suggest that many companies may not be “future ready.”
So what are directors to do? I distilled years of boardroom experience into a short book titled Sustainability—A Guide for Boards and C-Suites. The book has three key messages for board members:
1. Think of ESG within the scope of strategy, not just risk. The challenge for directors is to help your CEO think through how to profit from ESG trends, not just how to stay out of trouble. Ask strategic questions, such as:
Scorecard data suggest the boardroom conversation is still mostly about risk. Only 20 percent of companies rate themselves three or higher (on a scale of one to four) for growing revenue from more sustainable products and services. Nearly half of the 60 companies (47%) do not see ESG attributes as a revenue driver.
2. Build robust sustainability governance. Without getting governance right, it is hard to get anything else right. This is true in creating robust brands and delivering consistent and strong financial results. It is also true in showing how your company plans to capture value from leveraging ESG trends for growth.
Scorecard data suggests some big gaps here: only 11 percent of companies say their board is actively engaged on ESG issues between board meetings, and only 10 percent say they have planned ESG learning as part of board meetings.
3. Measure your company against your peers. By encouraging your company’s senior management to fill out a survey like the scorecard mentioned above, you will be doing them and yourselves the favor of getting an overview of your company’s comparative weaknesses and strengths in sustainability.
Knowing how your company stacks up on ESG is more important than ever. This statement was reinforced by BlackRock CEO Larry Fink in his January 16, 2018 letter to CEOs:
“Society is demanding that companies, both public and private, serve a social purpose…To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Without a sense of purpose, no company, either public or private, can achieve its full potential.”
The 2017–2018 NACD Public Company Governance Survey reinforces the need for board action. A strong majority of respondents in every industry sector ascribed importance to improving ESG strategy over the next 12 months, with only a small minority saying that improving ESG was “not at all important.” However, responses varied by industry. Improving board oversight of ESG is viewed as being most important in materials, utilities, energy, and healthcare—and least critical in information technology.
Every industry has its version of what “sustainable mobility” is doing to the auto sector. ESG factors will increasingly impact how companies choose new businesses to buy, old businesses to reshape or shed, new offerings to create, and suppliers with which to partner. Those decisions will be made in the boardroom.
Gib Hedstrom runs his own advisory firm, working with mostly large companies on oversight of ESG issues. He also runs three executive councils for The Conference Board. His latest book is available on Amazon or at www.hedstromassociates.com. Thoughts expressed here are his own.