Board Oversight, Outperformance, and the Sustainability Disconnect

By Nancy S. Cleveland, CEO & co-founder, Sustrana

Active shareowners, stock exchanges, and rating and reporting system providers¹ all push for company boards to include sustainability as part of their governance duties. Why? Because research has shown that good sustainability management—using sustainability best practices to identify and manage significant environmental, social, and governance (ESG) issues—is a means for outperformance. Managing the right ESG issues well can lead to reduced risk, increased efficiency, and revenue growth.

So how can more companies approach sustainability in a way that guarantees competitive success, and what holds most back from achieving it?

The Big Sustainability Disconnect

There’s little shareholders like better than sustainability-generated outperformance; it benefits the company’s bottom line and everyone involved. But moving from concept to reality is not so easy without the right tools and tactics. A major impediment to sustainability success is that those managing sustainability programs often focus their efforts on completing projects as ultimate end goal, rather than on embedding sustainability management into business operations, which ultimately drives more value. The disconnect here is clear, but the latter technique requires a strategic view and comprehensive management system to be properly executed.

A sustainability management system (SMS) enables management teams to routinely identify and prioritize the ESG issues that have a real impact on the bottom line and help those who spearhead sustainability programs to manage them effectively over the long term. A system like this combines strategy with accountability to make outperformance a real possibility for companies of all sizes.

Board Oversight Requires a Sustainability Management System

The emerging discipline of sustainability management is a powerful tool for smart businesses today. Sustainability management leverages expertise and insights from the field of sustainability to inform business decisions using industry-specific operations experience. This is what fuels the systematic identification and management of ESG risks and opportunities that directly influence the short-, medium-, and long-term financial performance and success of the company. Without applying this nuanced method, companies attempting to address their sustainability situation are often unable to fully understand the issues that exist within their business or those may arise in the future, which makes addressing them a complicated task.

The need for clear, informed connections between sustainability activity and strategy is critical. Together, boards and their management teams have a duty to protect and grow a company’s overall value, but they can’t fulfill this duty or function well without high-quality, concise, reliable sustainability information that comes from the experts and informs a sound strategy. Fully equipped management systems that include audit functions and internal controls provide protocols for developing this type of information. Within management systems, data and information is distilled, analyzed, and organized into reports that reveal which company activities connect to and support an overall sustainability strategy. Boards can easily apply their own business expertise to the developed reports and provide feedback and guidance to management about the direction the company will take.

A comprehensive SMS establishes a dependable process for consistently uncovering and solving ESG issues, thereby managing evolving risks and leveraging new opportunities. Without such a system, many issues and opportunities for business improvement go undetected and risk reducing sustainability efforts into a tangle of disconnected pet projects and misplaced goals.

A company’s Chief Sustainability Officer (CSO) or equivalent program leader should also work directly with each business line to define all sustainability issues and set key focus areas by assessing and prioritizing problems with the help of their SMS. This approach will lead to solutions that align with the company’s internal strategy and processes and ongoing business goals. If a business has a specific revenue growth goal, a sustainability management team made up of the CSO, their support personnel, and the SMS provider can identify both bottom- and top-line sustainability opportunities and demonstrate to leadership exactly how new projects will advance the revenue growth business objective.

Top-Down Support Fuels Outperformance

The hue and cry for board oversight of sustainability is based on the perception that such oversight will force the management team to prioritize sustainability and thereby deliver outperformance. But the real outcome will depend on whether the sustainability work is empowered by full top-down support.

Because sustainability issues cut across all business functions and sustainability work requires effort from many different groups inside a company, effective empowerment starts at the management level with the CSO who reports directly to the CEO or C-level officer. If the management team’s focus on sustainability does not include top-down leadership and strong executive support, they risk causing sustainability efforts to be viewed as interrupting “real” work or treading on others’ turfs. The ability to address relevant issues, prioritize them, and collaborate to find innovative solutions will be undermined or altogether destroyed.

Board oversight of sustainability is worthwhile when management teams take advantage of modern sustainability management systems and integrate into their leadership ranks a sustainability officer who can add business objectives into the mix. Only when strategy is tied to and informs business goals, can companies successfully use sustainability best practices to manage risk, control costs, and grow revenue, fully reaping the outperformance value proposition of sustainability management today.

[1] See, for example: Ceres, Lead from the Top: Building Sustainability Competence on Corporate Boards; Nasdaq, ESG Reporting Guide; and GRI, GRI Standards.

2 According to a 2016 MIT-Sloan and Boston Consulting Group survey of thousands of executives, more than 90% believe in the business value of sustainability, but only 25% have a strategy for how to achieve that value. See MIT SMR, Investing for a Sustainable Future.

Photo: Flickr Creative Commons/ Reyner Media