Investors are becoming increasingly focused on sustainability and there is a genuine recognition that sustainability risks affect long term profit. The research backs this up and shows that corporate strategy should be viewed through the lens of environmental, social and governance (ESG) issues.
The people responsible for securing the long term future of any company are its board of directors. Their role in creating a sustainable future is, however, often falling short.
It's time to remove short-termism
According to a 2019 PwC survey, 56% of public-company directors thought that boards were spending too much time on sustainability.
Directors have been typically slower to embrace ESG factors than investors or consumers. HBR put this partly down to a focus on short-termism. “It is an unfortunate truth that directors tasked with securing their company’s future are often holding the enterprise back with an outdated emphasis on short-term value maximization.”
Holding a duty to protect the long term profitability of the company, directors are in a unique position to ensure that sustainability is built into business strategy. However, the overriding perception remains that businesses must choose between improving their sustainable credentials or increasing revenue.
There’s no business conflict between doing well and doing good.
ESG is becoming a bigger factor when investors screen businesses. In the long term, and increasingly in the short term too, it is clear that sustainability factors affect the financial outcome. From an investor's perspective, stocks from companies that factor in ESG issues are more likely to outperform the broad market.
As an example, Barron’s highlighted Equifax, Bausch Health (formerly Valeant Pharmaceuticals International) and Volkswagen as three companies red-flagged by ESG analysts. They warned investors “before those stocks blew up because they fell short on multiple sustainability criteria.” ‘Sustainability risks’ are becoming increasingly seen as just ‘business risks’
Or as BlackRock CEO Larry Fink wrote: “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
How boards can start building a sustainability mindset
1. Connect corporate purpose to strategy
To truly make an impact, corporate strategy and sustainability strategy must be one and the same. Sustainability needs to be front of mind in decision making. This includes both the potential opportunities and from a risk management perspective.
Articulate a clear and compelling corporate purpose and tie it to the business strategy. This should provide the necessary groundwork to align directors behind the company’s initiatives to improve environmental and societal impact. Conversely, plot the potential risk and cost of not conforming to sustainability standards.
2. Change the structure of the board
A common method to give attention to sustainability is to set up a stand-alone committee. This focuses attention on the matter at hand but it’s not a one-size-fits-all solution. The most important task is to structure the board in a way that connects sustainability to all other board agenda items and conversations.
For example, the global brand Nike combined its Corporate Responsibility Committee with its Nominating and Governance Committee. This single entity oversees ESG issues and purpose within the organisation. As Nike Chief Sustainability Officer Noel Kinder endorses: “establishing a structure that allows the board to effectively oversee and have visibility into sustainability is important.”
3. Hire directors with sustainability in mind
“A CEO cannot do their sustainability work without support from the board.” Filling board positions with high performing directors that have a sustainability mindset will inherently increase the focus on ESG issues. This doesn’t mean that new directors need to be sustainability experts. Instead, they should hold “a belief that business is not a commercial activity divorced from wider society, and the ability to align all aspects of running their organization with related core values and beliefs.”
At the same time, boards can also work to educate their directors on sustainability. Understanding the perspectives of investors, consumers and everyone in-between can be invaluable to grasp the opportunities and risks of improving ESG factors. Working to foster the right culture and mindset is ultimately the only way to truly prevent sustainability risks from affecting long term profits.