Executive Summary
The global pandemic has made the interconnected of the world and made the need more visible for all actors to cooperate for a more sustainable future. The global nature of problems we face requires a more holistic, stakeholder-centric, and long-term impact-oriented view of the role of the corporation in today’s society. The corporations’ response to emerging sustainability challenges will determine not only their long-term viability and competitiveness, but also the viability of the planet and its inhabitants.
Sustainability is no longer a “nice to have” issue for companies, but a crucial element for preparing for the future. To move toward a more sustainable future, we need to have organizations that assume their sustainability responsibilities and act on them. Corporations—with their resources, efficiency, innovation capabilities, and access to talent—have the opportunity to be at the forefront of this change. To achieve this, companies need to embark on a broad transformational change journey and lead the way in re- evaluating their traditional performance models to encompass ESG issues and ecosystem-level thinking for a more sustainable future.
Integrating sustainability into performance management to move towards a more sustainable future requires a continuous improvement mindset and cooperation between boards, management, investors, regulators, and civil society. To aid them with this effort, we analyzed 212 Global Sustainability Leaders (GSLs) that are part of Sustainability Stock Exchanges Initiatives from 7 countries and 10 sectors (See: Scorecards). We analyzed the publicly available data through a ‘governance lens’ to identify and share insights from the GSLs on how they provide governance to their sustainability efforts and to share best-practice examples to accelerate learning from peers.
SGS 2020 results show that GSLs have improved on several fronts compared to the previous year. However, there is still significant room for improvement in the effectiveness of execution and accountability of their sustainability programs and significant opportunity to learn from peers to accelerate progress.
Key Conclusions
- 1Enhance board leadership for sustainability: Boards set the tone at the top and board leadership and good governance are essential for sustainable value creation in the long run. This is possible through setting the right governance mechanisms, ensuring the board has the composition and skills to lead sustainability and tying executive compensation to sustainability metrics to incentivize management towards sustainable value creation in the long run.
- 2Move from storytelling to rigorous numbers: What gets measured gets improved. There is need to move beyond checking boxes and marketing material to embedding ESG considerations into strategy and operations. Reporting should cover material ESG areas and provide evidence on targets, results, and evaluation of results to signify a learning loop (including trends, benchmarks). There should be a mindset shift towards looking at the whole (short-term, long-term, all relevant ESG issues, supply chain and ecosystem, individual and global goals) rather than just reporting on parts. The scope of reporting should be comprehensive and include all employees, geographies, supply chain and ecosystem. This requires more rigorous target-setting and measurement of material issues by companies, regular feedback from investors on what matters for decision-making and unification of reporting frameworks, at least at the sector-level.
- 3Adopt a stakeholder-centric view and assume responsibility for your ecosystem: License to operate in today’s world requires responsible leadership – companies who actively manage sustainability benefit both the company and the society. Reaching sustainable development goals requires setting-up a multi-layer multi-year process and requires cooperation from stakeholders. When crafting their sustainability approach, companies must move to a more stakeholder-centric model and widen their view to encompass their ecosystem and long-term impact.
In this Report, we present a how-to guide on governance of sustainability and provide peer-to-peer learning opportunities based on good practices shared by the Global Sustainability Leaders on how they approach their sustainability efforts. These examples are presented in the relevant chapters throughout the Report.
Responsible Boards
Skill Matrix
Board members need to have the right skills to provide guidance and oversight to the sustainability plans of the corporation. The Board needs to have sufficient expertise to understand the decision-making processes of key stakeholders, have members who are familiar with evolving sustainability standards and practices, and sufficient diversity to adequately evaluate different dimensions, perspectives, and risks of sustainability issues. A skills matrix identifies the skills, knowledge, experience, and capabilities desired of a board to enable it to meet both its current and future challenges and realize its opportunities. Compared to last year’s report, sustainability skill in at least one board member increased from 31% to 40% and sharing skills matrix has increased from 21% to 36%.
Executive Compensation
In order to focus management behavior on capturing opportunities from sustainability and ensure that sustainability practices are adopted as everyday practice in decision-making, Boards need to make management explicitly accountable for the company’s sustainability impact. Best-in-class companies align executive compensation with strategic sustainability targets to sharpen management’s focus and incentivize management to prioritize sustainability. Even the GSLs have significant room for improvement in this area. All companies in our research sample share executive compensation, 90% share link of executive compensation to financial targets, but only 28% share link to sustainability targets.
Guidance
Board Leadership is key for setting the company’s direction and ensure long-term value creation for the company and its ecosystem. Responsible Boards ensure that sustainability issues are integrated into the company’s strategy and reflected in its policies and practices. The Board must ensure that policy covers all relevant ESG dimensions and all relevant stakeholder groups including employees, supply chain and communities. Having the right policy is not enough, it should be regularly reviewed to be improved, and the right people and processes should be in place for implementing policy commitments. All GSLs have adopted ESG policies in E (climate change, energy, waste & packaging), S (health & safety) and G (executive compensation). There is room for improvement in E (responsible sourcing, hazardous materials, biodiversity), S (inclusiveness, data security, customer privacy, stakeholder engagement) and G (board diversity, succession planning).
Oversight
The board’s oversight role requires setting up an effective internal control mechanism, ensuring independence of audit and strict compliance, monitoring ethics and business conduct within the company and its value chain, and transparency in external reporting and disclosure. Effective tracking of sustainability performance and communication to the board is essential for improving oversight of sustainability. Board structures for sustainability governance should be defined at the Board level and can include direct Board Oversight or Sustainability Committee. All GSLs defined oversight structures & board committees to address sustainability risks and opportunities. Compared to last year, independent audit coverage of ESG issues for GSL increased from 72% to 84% and independent audit coverage for supply chain increased from 23% to 54%.
Sustainability Performance
KPIs, Targets, Results, Results Evaluation
What gets measured gets improved. To improve performance management in sustainability, companies, investors, and regulators/standard-setters must cooperate to improve the reliability, consistency, and comparability of reporting metrics across material ESG issues. Companies must identify KPIs for material ESG issues, set targets, report on progress, and evaluate results to consistently get better at managing sustainability. Sectoral collaboration is required to define what matters for each sector. Consistent feedback from investors on the value and usefulness of metrics for decision- making would improve the effectiveness of this process.
As part of our research, we evaluated whether a company sets policy, KPIs and targets and shares results and evaluation of results across specific ESG categories. We find that 85% of GSLs consistently report on environmental topics, 82% on social topics and 74% on governance topics. Climate Change and Energy are the most consistently reported environmental topics, there is significant room for improvement in consistent reporting in Responsible Sourcing, Hazardous Materials and Biodiversity.
There is a gap between policy and target-setting for Diversity & Inclusion and Human Rights issues. Target-setting and results-assessment must be improved for governance areas. We find that 65% report consistently on Executive Compensation, 21% on Board Diversity and only 10% on Compliance (Ethics, Anti-corruption).
Results Coverage
Best-in class companies ensure comprehensiveness of measurement and implementation throughout the value chain including the supply chain, the product lifecycle, all stakeholder groups, all levels of the organization and all geographies. All stakeholders must be empowered and moving towards the same direction in order to achieve sustainability goals. Transparency on targets and results provides the basis of communication and cooperation between relevant stakeholder groups. Among the GSLs, 89%, 85%, and 84% share targets across ESG issues respectively, but only half of these companies set targets and share results for their supply chain.
Increasingly, companies must assume responsibility not just for the impact of their own operations but also manage their ecosystem if they are to thrive in the long run. To do this effectively, companies must set targets and share results covering the environmental ecosystem, the communities in which they operate and partnerships through which they address global goals.
Link to SDGs
The Sustainable Development Goals (SDGs) define global sustainability priorities and aspirations for 2030 and seek to mobilize global efforts around a common set of goals and targets. SDGs have a significant impact on the environment, social, and governance structure in which business will operate in the future. There is an increasing number of companies, both public and private, committing to the Sustainable Development Goals (SDGs). However, business reporting on credible contributions to SDGs is falling short and there is still an intention-action gap. Compared to last year, the share of GSLs that link their strategy with SDGs increased from 62% to 73% and results disclosure increased from 48% to 59%.
Aligning incentives with the world we want in the future requires changes in the system. For this systems change, Global Sustainability Leaders (GSLs) need to take leadership to act fast and scale-up progress. If we are to reach the global goals in 2030, companies should step-up to set targets, measure outcomes and partner for scale-up.
The global nature of problems requires non-traditional partnerships across corporate, social, and public spheres as well as among competitors within the same industry. There is also needed to increase action and partnership around creating the right climate for sustainability through institution- building. We find that engagement of GSLs with SDG16: Peace, Justice, and Strong Institutions increased from 20% to 27%.
Promoting the rule of law; fighting corruption, bribery, and organized crime; protecting fundamental freedoms and non-discriminatory laws and policies; and in short ensuring responsive, inclusive, participatory, and representative decision-making at all levels (good governance) should be a priority of not only all citizens, but particularly the business leaders as well.
Sustainability Journey
Purpose and Value Creation Model
A value creation model defines the companies’ purpose and forms the basis of a companies’ vision for long-term value creation. Best-in-class companies identify a corporate purpose that encompasses sustainability goals and build a culture around it. A clear statement of purpose united executives, directors and investors on the company’s priorities and creates the link between strategy and capital allocation decisions. Integrated reporting is a holistic tool to help companies tell the story of how they create value now and, in the future, and provides a solid framework for communicating the company’s sustainability approach to different stakeholders.
Companies can use Integrated Reporting as a transformative tool for continuously getting better at managing sustainability. We find that 92% of companies that have Integrated Reporting share their value creation model, whereas less than 75% of companies from all other standards share their value creation model.
Stakeholder Engagement and Materiality
Engaging stakeholders is key to obtaining the social license to operate in the 21st century. Best-in class companies adopt a long-term comprehensive view of their stakeholders to encompass external stakeholders (environment, supply chain, communities), and engage their stakeholders to identify material ESG issues. Materiality assessment allows companies to focus on issues which are most relevant to the firm’s core value proposition, in order to mobilize resources for a step-change in selected areas. Publishing a materiality matrix including assessment of materiality for the company as well as its stakeholders, is a good communication tool to align management, investors, and other stakeholders on what matters in the short-term and the long-term. We find that 80% of GSL shared a list of material sustainability issues, 69% shared prioritization based on materiality for company, 54% shared assessment of material issues for stakeholders, and 52% shared a materiality matrix.
Supply Chain Sustainability
Many companies’ greatest sustainability risks and opportunities are in their supply chain. As a result, companies must set standards, manage risk, and invest in the development of their supply chains for a step-change in sustainability impact. This may involve utilizing their purchasing power to encourage, audit, collaborate with and provide benchmarking, and learning opportunities with its suppliers on key sustainability issues. We find that 77% of GSLs share their assurance process for supply chain covers ESG issues (69%, 75%, and 70%), but less than half of those that do, share their supply chain results across ESG issues (29%, 31%, 19%). There is clearly room for more rigorous audit and more transparency.
Continuous Learning and Development
Sustainability is a continuous journey. To improve the quality of the journey, a learning mindset and environment are essential. To ensure progress is sustained over the long-run, companies must establish a learning loop for continuous improvement and create a climate of learning with measurable indicators (trends, benchmarking). Lessons learned should be utilized to improve decision-making processes, skill gaps and required mindset changes need to be addressed through trainings and sustainability practices need to be integrated into the company’s processes. Furthermore, development trainings and development opportunities should cover employees in all geographies, supply chain and communities. 93% of GSLs report social sustainability trainings, while 75% report governance (compliance) and only 60% report environmental trainings. Companies must invest in training their management, workforce and supply chain on climate change, energy efficiency, waste & packaging, and water stewardship as well as compliance on ethics, anti-corruption and supply chain standards.
