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Sustainability is becoming a key board priority: But what does good governance really look like?

“You need people on the board that have a much more sensitive antenna on how the world is changing.”
Melodie Michel
Sustainability is becoming a key board priority: But what does good governance really look like?
Photo by Paul Skorupskas on Unsplash

In 2023, almost 90% of the world’s largest companies  added sustainability to their board’s responsibilities – up from just over half in 2019. The figure, in a new report from The Sustainability Board, confirms what CSO Futures’ Chief Sustainability Officer interviews emphasise: sustainability is firmly becoming a business priority.

“More boards have adopted sustainability oversight as part of their current committees or dedicated a specialist committee to it,” said Frederik Otto, Executive Director of The Sustainability Board, publishing the report.

Adding one more box to a list of board responsibilities doesn’t magically improve sustainability governance of course and among the other relevant indicators is the presence and level of influence of the Chief Sustainability Officer or equivalent.

A strategy-oriented Chief Sustainability Officer

Indeed, appointing a CSO is one of the more impactful actions companies can take to strengthen sustainability governance and the data supports this claim.

A September 2023 study by Climate Impact Partners found that just  43% of Fortune Global 500 companies have a Chief Sustainability Officer or equivalent.

Those that do are already delivering better outcomes: companies without a CSO saw emissions increase by 3% in the last year, while those with a CSO or equivalent role reduced their operational emissions by 0.2% over the same period. 

The level of CSO influence also needs to be appropriate for the task. 

A report from Imperial and education provider Emeritus in October suggested that half of all CSOs now report directly to their CEO or executive board – and companies with a more mature and innovation-focused sustainability strategy (usually with a CSO integrated in the C-suite) significantly outperformed the S&P 500 in 2022. Its authors warned that a CSO three steps removed from the CEO was a sign that “these companies’ sustainability strategies were not very advanced”.

Source: Imperial-Emeritus

Ron Soonieus, a senior advisor at BCG and Director in Residence at business school INSEAD, says CSOs’ influence can be assessed not just based on who they report to, but also on what their main responsibilities are. 

“When sustainability becomes core to the business strategy the type of questions – and the people who ask them – change. They are much more about the future value of the business in the face of a changing world, where non-traditional externalities create new risks and opportunities. These are the type of questions the board is concerned with. They are quite different from sustainability compliance and reporting and can be new for some CSOs. Forward-looking CSOs ensure they are prepared to initiate and drive the business value discussion,” he tells CSO Futures

Shifting from reporter to facilitator

As sustainability matures within organisations, the role of the CSO shifts from a focus on reporting to “a facilitator” to make the strategy happen at all operational levels, he adds – a view shared by other leaders like experienced NED Harry Broadman and FuturePlus founder Mike Penrose, who last month warned in CSO Futures about the “trap” of looking at disclosures as “a mechanical process”.

Hear it from the CSO: Coordinating with internal and external stakeholders – and juggling their diverse priorities – is exactly what Whirlpool’s sustainability director Beat Stocker says is his main challenge.

Sustainability skills and vision within the board

As well as CSO influence, BOD capacity to influence sustainability decisions can vary significantly – and a strong board cannot be overestimated in driving change. 

“Boards have a key role in… establishing the right organisational incentives for delivering the enterprise sustainability strategy…transition plans, targets and necessary communication protocols so that plans can be implemented successfully,” says PwC in a report on the CFO’s role in the climate transition.

But NEDs often lack sustainability skills – the World Business Council for Sustainable Development says that only 16% of members’ sustainability reports “have a clear narrative on both current board experience in sustainability and on sustainability skills being sought as part of the board selection process”. 

In the 2023 study The role of the board in the sustainability era, BCG, INSEAD and Heidrick & Struggles surveyed 879 NEDS globally, and found that sustainability is only slightly or not at all integrated into board selection criteria in 54% of cases.

Source: BCG - INSEAD - Heidrick & Struggles

While a majority (79%) of board members may have “a clear understanding of the strategic opportunities and risks sustainability presents”, only 29% feel knowledgeable enough to effectively challenge management on sustainability plans and ambitions and exercise oversight on their execution, the report shows.

For Soonieus, boards’ sustainability capabilities have less to do with ESG skills, and more with non-executive directors’ ability to have long-term vision. 

“In my mind, you need people on the board that have, I would not even call it sustainability, but a much more sensitive antenna on how the world is changing. You need to have a sensitivity about the fact that different, non-traditional externalities can actually affect your ability as an organisation to create value. And in the end, that's the responsibility of the board to make sure that you maintain and increase the value of the business,” as he puts it to CSO Futures.

This long-term vision is then translated into much longer-term decision making. “The average time horizon for corporate strategy is three to five years, but most of these things play out in a much longer time. Boards and companies that are really on the forefront are looking at radically longer time horizons and using radically different discount factors when making capital allocation decisions," he adds.

Hear it from the CSO: Lisa Conway, VP of Global Market Sustainability at Interface, shares the importance of setting “impossible sounding ambitions” in long-term strategy planning.

The sustainability committees: no one size fits all

To PwC, a sustainability committee is critical to progress. In its survey of 1,000 finance professionals globally, two-thirds of firms had a sustainability committee, and these organisations appeared more proactive in implementing their emissions plan: 57% were reviewing their emissions plans quarterly, compared to 22% without, and 63% had grown their finance function to support the setting, achievement and reporting of their emissions plans, compared with 11% without.

Dedicated sustainability committees are one of several options to structure sustainability governance. Other possibilities include adding sustainability to an existing committee, making it the responsibility of multiple committees, or naming one sustainability champion within the board. To Soonieus, there is no-one-size-fits-all structure, and taking superficial action, for example by setting up a sustainability committee without substance, is the riskiest move of all. 

“I remember a few years ago there was a company that decided to set up a sustainability committee. Before that, they had placed sustainability in a board committee. But as a company, they weren't really interested in sustainability: they were pushed, both internally and externally, by investors to show more commitment, and they felt that this was a way to do it. But then they were not effective in doing it, so it backfired completely,” Soonieus recalls.

Whichever structure a company chooses to handle sustainability matters, they can leverage a series of what he calls “plug-ins” to boost board capabilities, he suggests: regular updates from ESG management (including CSOs), occasional updates from external experts, permanent or semi-permanent internal or external advisors, a sustainability task force, or an independent external council. 

Ultimately, he emphasises, board mindset as much as structure are key. 

Hear it from the CSO: When it comes to tracking progress, in terms of internal reporting, SAP’s Chief Sustainability Officer Daniel Schmid reports quarterly to executive board members – a practical example of the most popular sustainability governance plug-in.

Pay incentives: an effective but controversial measure

When it comes to driving execution, pay incentives are an increasingly popular mechanism chosen by boards. Among members of the WBCSD, 66% of companies tie the annual compensation of senior executives to the company’s sustainability performance. To Soonieus, this is a sign that these companies are becoming more mature in their approach to sustainability: “We find that [for] those companies that are in the implementation stage, the G [governance] of ESG becomes important, because that is part of how you get it done. Does that mean the governance of the organisation needs to change, or how sustainability function is anchored in? Are we integrating sustainability into our incentives? If it's difficult to get it done, that is a way of making it more effective, potentially," he explains.

Incentives are a somewhat controversial measure, not least because it exacerbates governance questions around executive pay. They have also been associated with ‘restatements’ in sustainability reports, with an Australian study suggesting that executives may be tempted to change previous years’ metrics to inflate the progress achieved in a year and meet their targets. One way to mitigate any potential controversy can be to extend pay incentives beyond senior executives, as Estée Lauder is doing with its new sustainability governance shakeup. 

Hear it from the CSO: For Smiths Group’s Chief Sustainability Officer John Ostergren, the implications of having tied sustainability goals to compensation (not just for executives) are “difficult to overstate”.