Why Sustainability Is a Board-level Risk
Wall Street Journal
DECEMBER 22, 2017
Sustainability, which encompasses environmental, social, and governance (ESG) issues, is increasingly positioned at the top of board agendas as expectations of investors around ESG continue to increase. Investors also continue to reinforce their belief that ESG factors provide critical insight into how the company is driving and protecting value, but in the absence of effective disclosure, they cannot price that risk effectively. Against this backdrop, directors have a critical role to play. By fostering more proactive identification, measurement, and disclosure of ESG risks, directors can help provide insight into how the organization is integrating sustainability and changing stakeholder expectations into risk and strategy.
Traditionally, sustainability has focused on topics such as environmental disasters, labor relations, safety incidents, and scandals, but the range of issues under ESG has broadened. Today, sustainability also factors into disruptive market trends and other developments impacting an organization’s ability to compete and build shareholder value.
Understanding how organizations are addressing sustainability issues can be difficult for investors and others. Many investors do not have easy access to comparable and consistent sustainability information, including industry-specific information. Companies are increasingly challenged to understand the universe of sustainability data used to evaluate corporate performance, and this information gap represents a clear call to action for companies to increase the level of sustainability disclosure in a more standardized format.
If a company doesn’t tell its sustainability story, someone else will. In fact, a number of sustainability data providers and raters have stepped in to fill this void. Given that much of this information does not come directly from company disclosures, data providers often rely on proxies or other sources to provide a clearer picture for investors.
This is an opportunity for boards and management to better communicate, through improved disclosure, how sustainability is integrated with strategy, risk management, and operations to drive long-term value. Investors expect the board to be fully engaged in this process and demonstrate a solid understanding of ESG.
Near-term U.S. regulation of sustainability is unlikely, and the Securities and Exchange Commission (SEC) is not expected to take any immediate action promoting enhanced sustainability disclosure. Outside the U.S., the policy landscape is quite different. The European Union Directive on Non-Financial Reporting went into effect in 2017, with the 2018 reporting season representing the first period for disclosures.
Companies that operate in EU member states and meet certain criteria are required to disclose information on the way they manage social and environmental challenges. Regulatory bodies and stock exchanges around the world are also taking measures to respond to growing investor demands for more uniform sustainability information linked to financial performance of global companies. For example, NASDAQ’s Nordic and Baltic exchanges issued ESG guidance in March 2017.
There is no single sustainability standard in the market today, but a number of initiatives are underway to advance greater standardization and transparency of sustainability disclosures. These standard-setting and reporting initiatives are important market mechanisms driving improved sustainability disclosure, and they also can enable increased reliability of sustainability reporting through external assurance of reporting to promote trust and confidence with stakeholders. There, however, remains a certain level of market confusion as to the purpose and use of these standards, including questions on how to determine materiality and how disclosures should be presented (e.g., standalone report, survey response, annual report, or financial filing).
Directors are in a unique position to connect sustainability with corporate purpose and strategy. Once the value of sustainability is established, the business case for the critical importance of its disclosure will naturally follow. Careful consideration of the needs of a broader universe of stakeholders ultimately drives value for shareholders, and directors have an opportunity to use transparency to promote more effective engagement with investors.
Beyond disclosure strategy, many boards do not feel they have access to the sustainability information they need, nor do they necessarily understand how sustainability is tied to business value. This gap is an opportunity for the board to work with management to define the broader universe of risks and the critical stakeholders and determine what warrants measurement and disclosure.
There are a number of steps boards can consider and questions they can ask to gain a better command of emerging sustainability risks and changing stakeholder expectations.
Questions for Directors to Ask
- Do we have regular access to the information needed to evaluate risks emerging from environmental and social trends?
- How frequently do we discuss sustainability risks?
- Do we have a board committee focused on sustainability risk?
- Who on the board has sustainability competence?
- Do we have an understanding and list of critical stakeholders, and how we are meeting their needs as a means of driving shareholder value?
- Do we have a clear message on how our long-term strategy considers sustainability risks and opportunities?
- What external sustainability disclosures do we provide, and how confident are we that they are complete, accurate, and reliable?
- Are sustainability risks specifically included in the company’s enterprise risk management program and processes?
Steps to Take
- Establish, or increase the frequency of, management reporting of sustainability risks to the board.
- Establish a standing board agenda item on sustainability.
- Establish, or clarify the responsibility of, a board committee with a sustainability mandate.
- Consider giving the nominating committee responsibility for evaluating sustainability competence on the board.
- Ensure management has established clear sustainability responsibilities for functions, such as finance, investor relations, legal, risk, strategy, talent, and operations.
- Establish a disclosure strategy that prioritizes the needs of stakeholders, aligns sustainability to business value, and uses leading sustainability standards to guide meaningful disclosure.
In a world where stakeholder expectations and reporting standards continue to evolve, some argue for a “wait and see” approach to sustainability reporting. However, sitting on the sidelines is itself risky. The board can, and should, play a crucial role in moving the company’s ESG practices forward.
See the original article: http://deloitte.wsj.com/riskandcompliance/2018/05/16/why-sustainability-is-a-board-level-risk/
— Produced by Dan Konigsburg, senior managing director, Global Center for Corporate Governance, Deloitte Global; Michael Rossen, managing director, Global Center for Corporate Governance, Deloitte Global; Kristen Sullivan, partner, Americas Region Leader, Sustainability Services, Deloitte & Touche LLP (US); and Christine Robinson, senior manager, Sustainability Services at Deloitte & Touche LLP (US).