This article was first published in Board Agenda in August 2023.
The board has a crucial role in identifying, assessing, and monitoring sustainability strategy, including ESG, technology and diversity.
We live in a time marked by high levels of uncertainty across various domains, including geopolitics, technological advancements, and environmental and social concerns. These factors, in combination with the rapid pace of change, have led to the emergence of new realities for businesses.
One critical response to this evolving landscape is the implementation of a solid sustainability strategy, informed by the principles of ESG (environmental, social and governance). In the present context, we would also urge boards to consider the impacts of technology.
Boards need to be able to identify, assess and monitor all that will impact stakeholders, be they shareholders, clients, employees or others. To add to the complexity, sustainability is not only multidimensional but also transformative. Boards ought to keep a short and long term perspective.
We recommend the following approach to structure an informed and cogent approach to sustainability:
Step 1: Identify
ESG engagement of boards: over the past four years, The Sustainability Board reported a material acceleration in ESG engagement of boards, from 16% in 2019 to 45% in 2022. This means that there is a recognition of boards to seek an ESG/sustainability knowledge base. It is important to understand who the specific knowledge owners are, and the overall ESG competence level of the entire board, including its chair.
AI has been a hot topic on earnings calls lately and we expect this trend to endure.
Technology, a sustainability issue: in addition to climate and social concerns, we have seen concerns emerge about cybersecurity and technology such as artificial intelligence (AI). For instance, AI has a been hot topic on earnings calls lately and we expect this trend to endure and evolve with constantly emerging technology.
Diversity and gender equality: Although women have been found to drive the sustainability agenda, they are still underrepresented on most boards, typically by 50%. Research by The Sustainability Board indicates that female board directors tend to be 60% more likely to be engaged in ESG matters than their male peers. Therefore, by increasing female representation on the board and within leadership teams, organisations can naturally enhance their commitment to sustainability. After identifying key sustainability issues, the board’s next step is to assess the potential impacts of these issues, both from a short- and long-term perspective.
Step 2: Assess
Board directors should acquire a deeper understanding of sustainability related issues and technological innovations. This may require them to upskill and, more importantly, regularly inform themselves about new developments in areas such as AI and cybersecurity, climate change, natural capital, and social values. Scenario planning is a useful exercise to imagine plausible futures within these areas.
If a lack of diversity is identified, boards should implement a strategy to change their culture and add gender and ethnic diversity. It is essential to have a mix of individuals from diverse backgrounds and experiences who have managed to break through traditional barriers in their respective contexts to foster ‘out of the box’ thinking and consider wider perspectives. The most clear-cut case, however, is for empowering women.
Although women have been found to drive the sustainability agenda, they are still underrepresented on most boards.
As a third step, boards might need to put a new governance framework in place that will allow them to monitor closely the implementation of sustainability commitments, as well as the progress of culture changes that inevitably come with it.
Step 3: Monitor
Seek a reality check by identifying the organisation’s position in key areas previously identified and assessed. These might include climate change, technology, social equity, and assurance of the governance structure’s soundness.
It is advisable to mandate an independent third party to provide an assessment of the current oversight processes. This snapshot could be used as starting point to build the implementation plan and its monitoring framework.
KPIs for sustainability commitments: To monitor the implementation or operationalisation of an organisation’s sustainability commitments, boards should employ quantitative and qualitative key performance indicators (KPIs). These can be designed to help identify any gaps or discrepancies in the business’s efforts to implement the board’s strategy. Qualitative KPIs should, further, be designed to capture the necessary evolution of the organisation’s culture, as this will underpin all transformation.
It is advisable to mandate an independent third party to provide an assessment of the current oversight processes.
Frequency of monitoring: boards might want to closely and more frequently monitor the strategy and its implementation. This will detect hurdles and hidden obstacles in the organisation’s actions early on, such as red flags in client engagement, or dubious products.
Most boards still only meet four times a year. Considering the urgency and impact of the sustainability challenge—and, specifically, climate-related issues—meeting frequency might need to be increased.
It might also be necessary to give directors access to ‘aides’ sitting in different divisions of the organisation, and to external educational and other resources.
With governments and regulators worldwide imposing stricter rules for companies to address sustainability risks and demonstrate responsible practices, the onus is on board directors to ensure compliance with these evolving legal and regulatory requirements. Their strategy should include frequent and continuous monitoring, independent assurance, and fostering diverse perspectives.
As such, it is time for boards to stay attuned to external global dynamics and internal realities, make informed decisions, seize opportunities amid uncertainty, and lead the charge towards a more sustainable future for all.
About the Authors
Frederik Otto is the founder and executive director of The Sustainability Board an independent think tank, supporting sustainable leadership and governance.
Frederik is a leader in consulting multinational companies on organisation and human capital strategy with a focus on sustainability and ESG. He is also a member of the Council for Inclusive Capitalism and a fellow of Salzburg Global Seminar.
Fatima Hadj is a senior executive in the banking and asset management industry, with experience in scaling businesses across financial services that have a positive impact for investors.
Fatima is a member at ChapterZero, the Chair of the Principles for Responsible Investments (PRI)’s committee for ESG integration in securitised products, and was named a Goalkeeper of the Bill & Melinda Gates Foundation.