Many of the biggest companies around the world claim their boards oversee sustainability in some way but a report by Ceres suggests that only a small percentage of those companies have robust practices.
Ceres, an organization that helps coordinate sustainability discussions between major companies and shareholders, examined 475 of the largest companies around the world across multiple sectors. It found that while 62% of the companies say their boards have some level of oversight over sustainability issues, only 13% of the boards receive regular reports from management on the topic and also have a committee with sustainability in its charter — two things that can help drive widespread adoption.
The term "sustainability" broadly refers to the processes companies use to manage their environmental, social and governance, or ESG, risks and opportunities. Investors generally use ESG and sustainability metrics to track which companies in their portfolio are well positioned to remain strong performers. And groups like Ceres believe that true sustainability requires buy-in and frequent attention by both C-suite executives and board members.
"When sustainability is formally placed on the board agenda, directors pay attention," said the report by Ceres. Directors "are more likely to be aware and informed about sustainability and therefore work with management to drive action" and they "may also feel a more urgent need to establish clear metrics, targets and timeframes for measuring progress."
Financial incentives such as linking executive pay to a company's performance on specific sustainability goals can also spur performance, the report said.
The report found that despite recent pressure from investors and asset managers for companies to have strong ESG policies, in many cases, board governance over sustainability issues is "ineffective" and does not drive performance. Instead, most board governance systems are largely piecemeal, it said.
Moreover, most boards do not have directors with demonstrated expertise in sustainability. Some exceptions to that include packaged meat and food producer Danone and insurance company Prudential Financial Inc., the report said. Danone CEO Emmanuel Faber has a background in social responsibility, and company independent director Jean-Michel Sévérino has worked on sustainable development. Prudential uses sustainability criteria when looking for potential directors. In 2017, four of its 12 directors were identified as bringing this experience, the report said.
The report also noted that companies in the energy utility sector have the most board members with a background in sustainability. More than 32% of energy companies have at least one board member with expertise in climate change, environmental regulation and compliance, employee health and safety, or renewable energy, the report said.
Iberdrola SA is also a leader on including sustainability issues at the board level, the report said. Iberdrola has a corporate social responsibility committee, and in 2017, management executives and external exports interacted with the committee on an ongoing basis, the report said.
The report also looked at the extent to which boards tied executive pay to sustainability targets, which is commonly seen as a useful strategy to get executives to care about a topic. While a third of large companies link executive compensation to sustainability, the focus of incentives is unclear, the report said. This is mainly because only 6% of the companies reviewed actually disclose the details of what targets they set.
But the report said two companies stand out as examples of what their peers should do.
Beauty product company L'Oréal SA Chairman and CEO Jean-Paul Agon's annual variable pay is based on hitting the organization's target of decreasing its carbon emissions, water consumption and waste by 60% by 2020. And the company has said it will link the bonuses of brand and country managers to environmental targets.
Bank BNP Paribas SA in 2016 linked its CEO's variable pay to progress against 12 commitments outlined in the company's social responsibility policy. And BNP Paribas uses nine indicators of sustainability performance when weighing the incentive plans for its top 5,000 managers.
— The Ceres report says it examined companies on the Forbes 500 list, which Forbes stopped using in 2003. Ceres through a spokesperson in an email clarified that the review was of the top 500 companies on the Forbes Global 2000 list that replaced the Forbes 500 rankings.