Corporate boards know why sustainability is important, they just don’t know what to do about it

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By Bronagh Ward

 

If companies are taking sustainability seriously, it will be integrated at the top - at the board level. Remarkably, most of the world’s largest corporations are now overseeing sustainability at the board level (62% according to our latest research on Forbes 500 companies). This is a clear signal that corporate boards understand why sustainability matters (see for example - the business case).

But there is a catch. The fact that corporate boards are overseeing sustainability does not mean that they are doing it well. Digging a little deeper, we found that the rest of the corporate governance picture tells another story. One example is that the majority of those same corporations do not appear to have any directors with sustainability expertise, meaning that there is a skills gap.

Overall, it seems that corporate boards are trying to integrate sustainability, but they need more guidance on how to improve based on a knowledge of what is truly effective. Below are two key findings from our latest report that will help to fill the gap:   

1.       What we found: Sustainability governance drives sustainability performance

Boards might struggle to keep sustainability on the agenda if they are unsure of what outcomes to expect from their efforts. That is why we compared the existence of several board governance practices to whether companies had made strong sustainability commitments and if they performed well on sustainability metrics. Overwhelmingly, the data showed that sustainability governance is linked both to stronger corporate commitments and also better sustainability performance.

Data insight: Companies with top scores on sustainability performance are 4 times more likely to have a board member with demonstrated sustainability expertise

2.       What to do: Focus on expertise, oversight, and incentives  

We found that sustainability performance leaders tended to have boards with all the governance practices we were looking for in place – (1) formal mandates for sustainability oversight, (2) directors with demonstrated sustainability expertise, and (3) incentives built into executive compensation packages. Companies that had a more piecemeal approach did not have such good sustainability performance. Corporate boards should therefore aim to make improvements across these three areas if they want to see results. When doing so, they may also realize that expertise, oversight and incentives all reinforce one another. Effective board oversight of sustainability is possible when directors have the right skills to make informed decisions and the right incentives to make sustainability a priority.

Data insight: A company whose board includes directors with expertise in sustainability is 2.5 times more likely to have a more formal mandate for sustainability at the board level

The message is clear - integrating sustainability at the board level is key to unlocking better sustainability performance. With investors becoming increasingly vocal about their expectations for corporate boards to strengthen board governance in relation to sustainability, the timing has never been better for directors to take action.