Should Sustainability now be a board level priority for the world’s largest companies?
In short, yes.
Global investors, under increasing pressure from regulators, governments, and clients, are increasingly calling for business leaders to develop long-term strategies to mitigate climate change risk, reduce breaches of their social obligations, and strengthen corporate governance. Yet despite quantitative evidence that sustainable companies financially outperform their competitors, it remains challenging for CEOs and corporate boards to know what they can do to integrate Environmental, Social & Governance [ESG] issues, and Climate Risk management, into their strategy and boardroom activities. There is no longer competitive advantage for a business to simply provide data to the markets via the company’s in-house sustainability team.
A recent report (
IRRC Institute - State of Sustainability and Integrated Reporting 2018) highlighted that while 78% of S&P 500 companies now provide an ESG report to the market, only 3% of reporters stated their reports’ environmental and social performance data were externally verified. Such verification is one of the key challenges currently facing investors who require the highest levels of data integrity.
In addition, the report also highlighted that of the S&P 500:
- 40% of companies now include the concept of sustainability in their annual reports or Forms 10-K
- 38% of companies include discussions of corporate responsibility or sustainability in their proxy statements, beyond the traditional discussion of board governance and executive compensation
- 42% of companies have a formal board committee overseeing sustainability
- 3% of companies provided an integrated report.
It is clear that companies who wish to leverage these developing reporting obligations must also define their own sustainability narrative to existing and potential investors, customers, and broader society. There are already many instances of large pension, sovereign, and investment funds screening out companies from inclusion in next generation investment models without the companies
even being aware of the criteria applied in the selection process. In many instances, an understanding of such criteria could help ensure inclusion/access to a broader pool of capital.
For most companies, having a non-executive director manage the sustainability brief as an adjunct to their other skills is no longer adequate. Indeed, it is the author’s argument that companies should now have a non-executive director who understands the impact of the company’s sustainability activities on investor decision making, and who also has other beneficial skills and experience.
Sustainable Investing is now becoming a mainstream regulatory issue for investors that will only increase in complexity and statutory obligation. The EU Sustainable Finance rules are an example of such upcoming ‘hard’ legislation, and the Bank of England led Taskforce on Climate Related Financial Disclosure [TCFD] an example of international policy guidance on enhanced reporting from financial supervisors and investors.
To be properly equipped for this rapidly developing agenda, boards should have non-executive resources available to help them navigate these challenges, with guidance based on the regulators’, investors’, markets’ and clients’ perspective.
About Kevin Bourne: Kevin is Managing Director & Head of Sustainable Finance at IHS Markit. IHS Markit is a global leader in information, analytics and solutions for the major industries and markets that drive economies worldwide and recently announced its intention to merge with S&P Global. Prior to joining IHS Markit, Kevin was the founder and Managing Director at LCE Risk, a capital markets focused data engineering business established in 2010. In 2012, LCE Risk entered into a multi-year JV with FTSE to build and launch a fully integrated Sustainable Investment data and product platform as well as a series of new Sustainable Investment and ESG data models. As part of the JV, he was also appointed MD & Head of Sustainable Investment at FTSE. His appointment was subsequently extended to simultaneously include the role of MD & Global Head of Database Services for the London Stock Exchange Group. His earlier career was in electronic trading with Salomon Brothers, Citibank, and latterly, HSBC, where he was Global Head of Electronic & Portfolio Trading.
