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How can better sustainability reporting mobilize companies and capital?

Big 4 CornerHow can better sustainability reporting mobilize companies and capital?

Investors recognize that robust corporate governance – including a central and clearly defined role for boards – is critical if companies are to move from purpose statements to truly embed sustainability into their strategies and decision-making. There are three priorities when it comes to embedding sustainability into governance systems: effective board oversight, sustainability metrics and executive compensation, and strategic alignment.

Effective board oversight:

While governance models and the role and responsibilities of boards of directors will vary by global region, boards should play a critical role in sustainability:

Challenging management on its sustainability plans
Overseeing execution and progress against pledges
Engaging with investors about sustainability plans and progress

But for this to happen, companies will likely require that their board members have sufficient  sustainability knowledge to fulfil that role. While there are senior leaders who combine both deep sustainability knowledge and the ability to operate at a board level, supply does not match demand. Until supply increases, board members – as a starting point – will need the knowledge required to analyze how the planet and society are changing, and what that means for the business. When the research asked investors to nominate the one area that would have the greatest positive impact on oversight, over one in five respondents (21%) selected “improving board knowledge and skills in ESG issues through exposure to external expertise and training.”

Strengthening accountability by introducing nonfinancial, sustainability metrics into the compensation of senior executives:

When the research asked investors to specify the two main advantages of basing a significant element of executive pay against the achievement of sustainability goals, over a third of investors surveyed (37%) said that it is “ensuring that ESG issues are embedded into strategic decision-making”. This reinforces how important it is for investors that sustainability be considered not only as a peripheral issue, but also essentially be given the same importance that leaders usually place on traditional financial and capital allocation decisions.

It is, of course, challenging to design a scheme that will deliver accountability. It can be challenging, for example, to align short-term annual pay and bonus with sustainability goals that often have five- to 10-year targets. It is also no easy task to identify quantifiable metrics and then measure achievement against them. However, as this survey shows, a strong understanding of investors’ expectations when it comes to sustainability in compensation is a good start.

Clarifying the involvement and role of a chief sustainability officer (CSO) to elevate the strategic importance of sustainability:

How companies organize themselves for sustainability will vary depending on a range of factors, from how complex their organization is to its level of sustainability ambition. However, the research shows that investors see CSOs as a crucial element of governance frameworks, perhaps reflecting some concern in the industry that current structures are not delivering.

Story from www.ey.com

Disclaimer: The views expressed in this article are independent views solely of the author(s) expressed in their private capacity.

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