Boards & Sustainability: Aspiration to Action

Q & A with Professor Chiara Mio, IFAC Board Member

Sustainability, which encompasses environmental, social, and governance (ESG) matters and the UN’s Sustainable Development Goals (SDGs) is increasingly being positioned at the top of board agendas. Although it might not be the first boardroom topic directors traditionally think of, sustainability is now central to corporate competitiveness and an organization’s continued ability to operate successfully into the future.

Each company needs to translate sustainability in its own purpose and language, in its values and specific goals. The most sustainable organizations do not simply talk about sustainability; they aim to achieve a long-term goal of empowering people and preserving the environment; they aim for a net-zero carbon business model while they use technology to scale up innovations. Traditionally encompassing topics as varied as environmental impacts and performance, health and safety, and diversity and inclusion, sustainability affects all industry sectors and challenges even the most progressive businesses and the most thoughtful directors.

Professional Accountancy Organizations (PAOs) that empower accountants who sit on the Boards of organizations with the right knowledge will help to drive and shape focus on sustainability in companies.

Q: How have you seen the visibility and importance of sustainability evolve in recent years?

The COVID-19 pandemic is a wake-up call to accelerate the transition to a more sustainable and inclusive global economy that can achieve the SDGs. The SDGs provide a common framework of goals, targets, and indicators for governments, business, and others to address systemic, interconnected development challenges. These include many definitive issues of our time, including poverty, inequality, climate change, and peace and justice.

Greater trust in business will flow from business being seen as a force for good. Some organizations are clearly aligning their purpose to serving the long-term goals of society and investors. This allows them to connect their strategies and activities to sustainable development and value creation, and developing business-led solutions through their products and services. One example is OMRON whose mission, vision and management philosophy are based on the company creating value for society and its key stakeholders, Their sustainability initiatives are driven through a long-term management plan to create value for all stakeholders.

Other examples exist particularly in Europe, for instance Renault with its Mobilize portal, stating that Mobilize means shared mobility and carbon free energy in a secure environment. Selling cars is no more the objective, the change of paradigm is evident. Widening the concept of corporate purpose so that the focus is on profitably solving the problems of people and planet by integrating relevant sustainability issues into governance and decision-making starts with the board.

Q: Why is sustainability a board-level issue?

Establishing corporate purpose and strategy is a board accountability. Purpose is then connected to strategy and how capital is allocated and what initiatives and projects are prioritized, and how performance is measured. Boards need to understand the sustainability opportunities and risks related to the business model, and direct companies toward making a net positive contribution to people and planet and to safeguard its license to operate.

On a global scale, boards of directors are being challenged by investors and other stakeholders to be proactive in addressing the material impacts that their operating model causes on society.

A board can ensure that the organization’s strategy embeds relevant sustainability issues. These issues will vary according to industry. For retailers, much of their sustainability impact will be tied to their supply chain and how consumers use their products and services. For energy companies, the transition to net carbon zero business models is hugely challenging but those with a long-term perspective see decarbonization as a new growth opportunity for business (for example, see Reliance Industries).

Ultimately, board oversight is central to investor trust and confidence in an organization’s future performance. Directors have an important role to play in defining the organization’s critical stakeholders and overseeing the identification, measurement, management, and disclosure of sustainability performance. The board also has a role to play in challenging an appropriate level of rigor and attention to the needs of a broader universe of stakeholders, critical to driving shareholder value, that enable prioritization of and allocation of resources to sustainability matters that are material to the business.

In the case of climate change risk, the expectation of investors is that companies have a defined climate change governance framework, identify and quantify climate risks and opportunities, and integrate these into strategy, operations and public disclosure and reporting. Where expectations are not met, investors may conclude the board is failing its responsibility and withhold support of director appointments in proxy voting.

Q: What do you see as the biggest challenge to boards embracing sustainability?

Sustainability opportunities and challenges can be highly uncertain, unpredictable, and outside the entity’s control. They are future oriented and are close to a revolutionary perspective of the community. Therefore, collaboration and cooperation are necessary to get there: directors need to engage with key stakeholders and management to translate the risks, trends, and stakeholder expectations into the business context, define material sustainability topics, and establish measurement and reporting practices to inform business decisions and disclosure.

Ultimately, directors need to ensure they are taking all relevant steps in the boardroom so the business not only properly assesses and mitigates sustainability risks but also understands the opportunities that sustainability considerations can bring.

Q: What is something you would tell other directors about the importance of sustainability in driving value for an organization?

There are some aspects of sustainability that may be more evolutionary rather than revolutionary. However, climate change is now becoming an urgent issue. The recent Intergovernmental Panel on Climate Change (IPCC) report highlighted the need for action by multiple stakeholders to combat rising temperatures and reduce greenhouse gas emissions. Investors’ expectations have changed, and boards need to ensure there are strategies and plans in place to meet climate commitments. Water scarcity and human rights deserve the proper level of attention as well. Sustainability risks are usually interconnected and boards need to make the connections, for example between climate change, biodiversity and societal impacts.

Organizations that take a leadership role in sustainability typically realize tangible benefits such as competitive advantage in a variety of ways – capital markets – by generating better returns for shareholders; stakeholders – through improving reputation and credibility; and talent – attracting and retaining individuals who want to contribute to sustainability through their work. But to do so, boards and management need clarity on how the organization can contribute to sustainability and seize opportunities to deliver value to its key stakeholders. Long term business resilience and financial performance will depend on balancing financial, social and environmental considerations in strategy, risk management, and capital allocation.

Q: What can boards do to stay ahead?

Boards need to create the conditions that allow a sustainability to be at the heart of decision making and communication throughout the organization. Directors are in a unique position to connect sustainability with corporate purpose. Once the value of prioritizing sustainability matters is recognized at the board level, the business case for its integration into the core strategy and overall operating model will naturally follow.

Investors are also increasingly looking for enhanced ESG disclosures. The establishment of the International Sustainability Standards Board (ISSB) will enable global standards —compatible with any multistakeholder-focused disclosures that some jurisdictions may require—to result in consistent, comparable, and assurable sustainability-related information that enhances corporate reporting.

Board directors now, more than ever, need to build knowledge and awareness of sustainability issues in order to fulfill their role. This is particularly important for professional accountants who are board directors and have a professional obligation to keep up to date through continuing development/ education. Many of the skills and competencies required to effectively use sustainability standards and frameworks are already in today’s professional accountant’s toolkit.

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 and other stakeholders. If a business doesn’t tell its sustainability story, someone else will. And don’t hide beyond “too small to be involved” —It’s not a matter of size, it’s a matter of being a key player/innovator or a follower.