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Manager at Global Compact LEAD within the UN Global Compact on integrating environmental, social, governance factors into business models

Traditionally the issues of corporate sustainability and of governance have been treated as unrelated subjects and kept siloed from one another, but these days it is simply impossible to not talk about them together. Boards of directors are responsible for the long-term interest of the corporation and in doing so, need to take account of all stakeholder groups.

It is firmly acknowledged among executives, investors and researchers that sustainability is key to support the growth and long-term profitability of a company. What started off as reputation management and as a reaction to external pressure has now evolved into companies trying to integrate Environmental, Social and Governance (ESG) factors into their business models and operations, because it makes business sense and presents opportunities no one can afford to miss.

It is increasingly clear that the fiduciary duty of the board includes a responsibility to effectively manage risks as well as innovation and growth opportunities related to ESG. With legal obligations developing across jurisdictions, substantial risks and the potential for liability related to sustainability action or inaction is emerging—both for the board as a whole and for individual directors. To successfully future proof business it is vital that boards understand the shifting structural dynamic of not only their industry, but of all global markets. Board ownership of sustainability is becoming a proxy for good governance.

To fulfil the potential for ESG to drive revenue, productivity and risk mitigation, the board must treat it as a strategic priority. It is not philanthropy; it is a set of highly material business issues that has to be clearly reflected in the company’s mission, strategy and approach to its stakeholders and competitors. The board has the authority to hire, direct and terminate its chief executive officer (CEO). Incorporating ESG criteria into CEO succession planning, executive recruitment and executive compensation is, no doubt, a powerful approach to advance leadership and sustainable performance. In its risk management, audit and monitoring role, the board has the mandate to ensure that ESG metrics and policies are linked to business performance. Leading boards are calling for ambitious policies across issues such as human rights, health and safety, corruption, and environment. Further, to hold leaders accountable, they are making sure that internal audit procedures are in place to assess cross-company compliance with sustainability commitments, policies and management systems. On disclosure and stakeholder engagement, common practice today is for boards to sign off on the company’s sustainability report, but more than that, it has a key role to play in determining its focus on longterm viability, level of corporate disclosure, and the prioritization of its shareholders and other stakeholders.

Corporations are at a crossroads, and boards of directors need to guide the direction. How the board sets the tone from the top and the way they establish and promote a culture of diversity, integrity and sustainability both inside and outside the boardroom will be critical in the transformation towards the corporation of the future. True leadership and real potential will only come when directors move from a reactive compliance role to visionary long-term leadership.

Ingvild Sørensen was a participant at the Salzburg Global program Corporate Governance in the Global Economy: The Changing Role of Directors. The session was hosted in partnership with BNY Mellon, Goldman Sachs, and Shearman & Sterling LLP and was sponsored by Barclays, LIXIL, Mars, Potter Anderson & Corroon LLP, the state of Delaware, and Warburg Pincus. More information on the session can be found here: http://www.salzburgglobal.org/go/550