Learning how to implement sustainable business practices can be challenging for companies in any industry, and boards may wonder how to integrate sustainability issues into discussions with management. NACD has compiled a set of resources offering practical information to help boards discuss climate-related risks, as well as opportunities associated with environmentally- and socially-sustainable business practices.
The first step is to assess why sustainability and social responsibility are such hot topics for the boardroom. Two important factors to consider are the political environment and shareholder expectations.
Signals From the Current Administration
President Donald J. Trump in June announced that the United States would be withdrawing from the Paris climate agreement, an international deal in which 191 countries have pledged to work toward goals to restrict the increase in temperatures globally to less than 2.0°C and reduce the amount of greenhouse gases being created.
The president in April also signed an executive order aimed at “promoting energy independence and economic growth,” curtailing federal environmental regulations. The order instructs the Department of the Interior to lift former President Obama’s ban on coal leasing activities on federal land.
Watchdog group Environmental Integrity Project recently reported that this year, the Trump administration, when compared to the prior three presidential administrations in the same period, has collected approximately 60 percent less in fines from companies’ violations of pollution-control regulations.
Opposing Pressure From Shareholders
Despite strong signals from the current administration that enforcement of environmental-related regulations will decrease over time, shareholders are applying an opposing pressure on corporations.
More than half (56%) of shareholder proposals introduced this year on proxy ballots related to social, environmental, or policy issues, and Proxy Monitor reports that this proportion is the highest it has seen since it began tracking such data in 2006.
Shareholder proposals relating to environmental and social issues 10 years ago sought fairly basic changes such as increased clarity into companies’ environmental policies. The proposals now seek, for example, enhanced disclosures around what the company is doing to manage climate risks and how executive pay links to sustainability initiatives, the Wall Street Journal reports.
Proposals about environmental issues received a record breaking average of 27 percent support this year, according to Proxy Monitor. That percentage was 21 percent last year and fell in the teens before that.
Meanwhile, State Street Corp., a global financial services and investment management firm with $2.47 trillion in assets under management, published a report earlier this year in which they found that traditional obstacles (like the lack of quality data about ESG) to investing more heavily in companies that prioritize ESG initiative are diminishing.
“Over the long-term, environmental, social and corporate governance issues can have a material impact on a company’s ability to generate returns,” Ron O’Hanley, president and CEO of State Street Global Advisors, said in a press release.
Resource centers are repositories for NACD content, services, and events related to top-of-mind issues for directors. In these resource centers, individuals can find practical guidance, tools, and analyses on subjects varying from board diversity to cyber-risk oversight. Below we have highlighted a sample of helpful materials from our new resource center on sustainability and social responsibility.
The handbook, produced in conjunction with EY, centers around four key recommendations:
Directors should understand the company’s definition of sustainability in the context of the company’s strategy and specific circumstances.
The board and management should align on the sustainability message and information the company chooses to report publicly.
Boards should clarify roles for oversight responsibility for sustainability activities, including external reporting.
Directors need to establish parameters for sustainability reporting to the board regarding the information required to support robust discussions with management.
A number of items included in the resource center provide expert commentary on myriad issues related to sustainability and social responsibility. A favorite of mine is “Living in a Material World,” an article written by Veena Ramani, program director of the Capital Markets Systems, at sustainability-focused nonprofit Ceres.
Ramani discusses the corporate director’s critical role in engaging with management over which sustainability issues are material for the enterprise. She offers four suggestions for board members who want to address the materiality of certain sustainability risks.
Boardroom Tools & Templates
The resource center houses several tools and templates to assist directors as they oversee sustainability-related risks and opportunities. One such tool is the “Self-Assessment: Is Your Board Sustainability-Ready?” evaluation. Directors can answer a set of questions to gauge their board’s level of engagement—or lack thereof—in sustainability oversight.
Videos and Webinars
The NACD BoardVision—Sustainability Oversight video in the resource center features a candid discussion by EY subject matter experts Brendan LeBlanc and Kellie Huennekens on how investors are engaging with boards around sustainability and social responsibility issues. (A transcript of the video is also available here.)
Our hope is that you find this resource center useful and visit it often. We will continue to update it regularly with new and interesting content. If you would like help finding resources on a specific subject matter, please let us know. We welcome the opportunity to engage with directors on pressing needs and concerns.
Few institutions represent American ingenuity and innovation more clearly than its space program. With rapt attention, the world watched July 20, 1969, as Mission Commander Neil Armstrong of NASA’s Apollo 11 spacecraft became the first person to walk on the moon.
Ron Garan—retired astronaut and chief pilot for commercial space launch provider World View Enterprises Inc.—was one of those who watched. “My most vivid childhood memory was July 20, 1969,” Garan said. “On some level, I realized that we had just become a different species. A species no longer limited to our planet.”
Garan delivered the opening keynote address to an audience of more than 1,300 on Sunday evening in Washington, D.C., at NACD’s Global Board Leaders’ Summit, the world’s largest gathering for corporate directors.
Four decades later, Garan’s childhood dream became reality. He had trained with NASA to become an astronaut himself. “That first day in space when I got to take a look at our planet, [I] was absolutely breathless.…What I felt was an incredible sense of gratitude. Being physically detached from the world made me feel closer to the people on it—more interconnected.”
Reflecting on his second space mission, Garan remembers similar feelings of gratitude, but that gratitude was coupled this time with internal struggle. The technological advances that make space flight not just possible but routine offer the potential to solve some of the world’s biggest problems. Yet, Garan pointed out, some people on this planet still do not have access to basic resources like clean water.
“These days we’re more connected than ever, and the Internet is the backbone,” said Garan. “The Internet can be our nerve center, enabling us to solve problems in an entirely different way.”
Garan further explored that challenge in his third mission, when the seeds to a solution began to root. The answer? Collaboration. On this space mission, Garan was weightlessly floating about 100 feet over the International Space Station, attached to the craft’s large robotic arm. That station represents the collaborative innovation of 15 nations—including the United States, Canada, Japan, the Russian Federation, and 11 European nations—that have, at times, been at odds with each other politically and ideologically.
“What would it look like for us to have that kind of collaboration here on the [Earth’s] surface?” Garan asked. “Collaboration doesn’t mean we agree on everything. What it does mean is that we find the things we do agree on so we have a platform to work [from in order] to address the things we don’t agree on.”
Risk: Necessary for Innovation
But innovation and collaboration don’t come without risk. As a highly decorated fighter pilot, Garan had run several missions and trainings in which he’d successfully flown and had no mechanical problems in flight. Then one day, while piloting a jet during a routine takeoff, he heard a loud pop that jolted him. He very quickly realized his engines no longer had any usable thrust. Garan tried to land in a wooded area and quickly realized that he had no need to be in the jet at that point. Seconds before impact, he ejected and his life was spared.
That incident, though life-threatening, did not change Garan’s outlook on life or risk. But the very next day, he was in flight and, because of a mechanical malfunction, had to conduct an emergency landing. After having completed thousands of flights, he’d had emergencies two days in a row. The second day is when the idea of what it means to take risks sunk in.
Before ever entering a plane or spacecraft, one must decide if doing so is worth the risk. The same is true for business leaders who want to innovate and collaborate. When NASA is planning a mission, they consider every possible issue that could go wrong and develop a response plan that’s ready and waiting to be activated. Boards should do the same. Similarly, a great idea on the shelf can only provide value if it’s activated. “Ideas are overrated. There’s got to be a streamlined path to action,” Garan shared.
“Any change involves some level of risk,” Garan said. “Any innovative business strategy must involve risk. Collaboration can help mitigate risk and also provide an engine for growth.”
Implications for Businesses
It’s important for businesses to understand that we don’t live on a globe; globes are just abstract lines on a map, Garan shared. We too often think of the world in terms of it being about business and economy supporting a society that sustains a planet, he said. “Instead, we live on a planet that sustains a society that has built an economy.” Understanding that concept is adopting what Garan calls an “orbital” view.
It’s time that enterprises realized that it’s good business to care about issues like sustainability and corporate social responsibility (CSR)—beyond just doing it to boost a brand or reputation, Garan shared. Issues like CSR should be part of a company’s DNA now, not just for future generations, he added.
The retired astronaut described how, on his last space mission, his spacecraft entered back into the Earth’s atmosphere and landed on its side. “Now out of my window, I saw a rock, a flower, and a blade of grass. I was home. In Kazakhstan, nonetheless,” he said. “I wasn’t in Houston, where my family was. But I was home and had a different idea of home.”
Thinking of the planet as “home” may be what’s required to actually make one small step for directors and one giant leap for corporate governance.
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.
Brendan LeBlanc, partner at EY’s Americas Climate Change and Sustainability Services (left), and Kellie Huennekens, from EY’s Center for Board Matters.
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.