Board sustainability governance: a watershed year?

We’ve made leaps in progress in sustainability governance; I predict this will be a watershed year. 

Throughout 2018, environmental and social concerns have dominated shareholder proposal submissions, with shareholders asking boards to urge their companies to establish Environmental, Social and Governance (ESG) committees, build ESG board expertise, compensate executives on ESG performance and report on their ESG results. The Canadian Coalition for Good Governance — whose members manage almost $4 trillion in assets on behalf of institutional investors — released their ground-breaking call to action (PDF) to directors. The report recommended that board oversight and disclosure of ESG issues be enhanced, signaling the coalition’s intent to increase engagement of companies they invest in for those who fall short. One expectation, for example, is that boards should ensure their organizations have an enterprise risk management (ERM) system that enables the firm to identify and assess ESG risks as a fully integrated aspect of the management of material risks.

The Conference Board of Canada also has issued a new report, Embedding Sustainability into Corporate Governance (PDF), that updated its 10-year-old guidance to boards on ESG oversight has been updated with new insights. One main new insight is the significance of identifying material ESG risks that will influence the future prospects of the firm. It is a must-read for board members and those who advise or support boards. As shown in the table below, it points out that boards have a central responsibility for ensuring the company’s strategy addresses ESG risks and opportunities and that sustainability is integrated in the corporate culture.

Progress is in other sustainability governance areas as well. Governance Professionals of Canada (GPC) — which represents Canadian governance professionals and corporate secretaries — launched its new GPC.D designation education program, with sustainability governance a central theme. As a faculty member for its sustainability governance module, I am seeing significant receptivity to these ideas on the part of governance professionals and an uptick of interest in this emerging role of the board. Indeed, at GPC’s annual conference in August, Peter Dey — Canada’s preeminent governance guru speaking at the event — signaled ESG governance as a leading worldwide issue, one that should be watched and observed by governance professionals and corporate directors alike.

Global management consulting firm Korn Ferry published its annual benchmarking report on governance trends (PDF) in Canada, which reveals some encouraging turning points in board sustainability governance. The 2018 report — which analyzed practices of about 90 boards — found that about one-third have a sustainability committee, and close to 50 percent have an ESG policy adopted by the board; of those, half are reviewed annually and audited periodically.

The 2018 report — which analyzed practices of about 90 boards — found that about one-third have a sustainability committee, and close to 50 percent have an ESG policy adopted by the board.

However, despite the promising efforts by boards to identify their ESG risks (and presumably address them in their business plans), according to Korn Ferry’s research, in 2018 two-thirds didn’t incentivize management for achievement of sustainability targets in their business plan. Further, ESG ranks No. 7 on the list of significant governance issues, with only 15 percent of boards finding these topics compelling enough for inclusion on their regular agenda. 

A telling sign of future progress (aka "leading indicator") is that 20 percent of boards significantly consider sustainability skills, knowledge and competencies when recruiting new board directors. Half are providing board education on ESG trends affecting their firms and as these trends play out, even more boards are expected to include ESG within their corporate strategy and incentive packages.

For those keen to explore these and other pressing challenges and emerging opportunities in sustainability, I encourage you to consider attending GreenBiz 19, Feb. 26-28 in Phoenix, Arizona. It’s an outstanding annual event for sustainability leaders. I’ll be there to present on board sustainability oversight: trends; practices; drivers; and standards.