Board Focus: Driving Sustainability
- March 22, 2016
With the expansive reach of social media and the increasing focus on environmental stewardship, scrutiny from shareholders, investors, and consumers is intensifying. More companies are employing a triple bottom line approach to improve their people, profits and the planet—and boards are being tasked with overseeing and executing these sustainability strategies. Subsequently, directors are also trying to mitigate the perceived tension between corporate sustainability goals and the legal interpretation of fiduciary duty.
Sustainability is now more than a buzzword; it is a shift in thinking, and a new way of conducting business that enables companies to operate in a more responsible manner. In fact, companies that execute sustainability initiatives are able to gain significant advantages in today’s market for four primary reasons, which I’ve detailed below.
Through accurate and clear reporting (often achieved by applying Global Reporting Initiative standards), companies can demonstrate actions they have taken, risks or opportunities that have evolved, and costs and savings that are driven by corporate sustainability initiatives. Stakeholders who base their decisions on, or are affected by, the results of corporate social responsibility, are looking for more than just traditional financial metrics. Their decisions have significant implications in the capital markets; funds recognizing the importance of sustainability issues grew from $4 to $49 trillion from 2006 to 2015, according to research by the Principles for Responsible Investment Initiative.
Positive Brand Image
In a December 2014 study, 78% of Americans agreed that purchasing products from environmentally or socially responsible companies was important, and 43% said they had chosen not to purchase a product in the past year based on these concerns. Beyond daily consumer choices, investors may be more likely to purchase “green” stocks. The key is effectively communicating sustainability achievements, which also links back to the importance of effective reporting practices.
Revenue Maximization & Cost Minimization
Sustainability initiatives afford companies an opportunity to spur innovation, while also improving operational efficiency. Such initiatives can also mitigate legal, financial, environmental and social risks. For example, safety improvements can reduce insurance costs; operational efficiencies can effect supply chain optimization; innovations can lead to new or improved products or processes; and risk management can enhance customer and supplier relationships. In October 2015, Nielsen found that 66% of millennial consumers are willing to pay more for products from companies that demonstrate a commitment to positive environment or social impacts—and the percentage has increased steadily over the past two years. To best summarize the points above, Harvard Business School published research findings suggesting that “firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing.”
Attract & Retain Talent
The Deloitte Millennial Survey 2016 found that 87% millennials globally believe that financial performance should not be the sole measure of a company’s success. Perhaps this is unsurprising coming from a generation that is notably concerned with working towards the greater good and contributing to sustainability initiatives. The survey, in fact, noted that 44% of millennials would consider leaving their current position in the next two years, particularly when there is misalignment between their own purpose and values and those of their employer. When examining company purpose versus impact, millennials believe that businesses are underperforming on social and environmental issues, but overemphasizing profit generation. As a growing consumer segment, and as potential employees or investors, companies should consider how their own sustainability initiatives would fare in the eyes of millennials.
The Board’s Role
As the company’s governing body, the board plays an important role in aligning corporate strategy with the long-term preservation of financial, environmental and social capital. Specifically, the board is uniquely positioned to execute a corporate sustainability strategy because of their collective ability to:
- Establish sustainability-driven policies and objectives, many times through the creation of a separate board committee for sustainability;
- Appoint a Chief Sustainability Officer or another sustainability-related position;
- Include sustainability education in New Director Orientation;
- Require sustainability performance reporting;
- Prioritize and approve resources for sustainability-related projects.
Executing these initiatives sends a message that sustainability is a core business function, not a silo of activity. The board’s buy-in will encourage adoption of these initiatives and promote cross-collaborative projects. Perhaps most importantly, sustainability initiatives demonstrate the board’s interest in engaging new customers, investors or talent, encouraging positive social and environmental impacts, and ultimately improving corporate performance.