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EY: Three ways boards can drive the sustainability agenda

Boards must steer organizations to take concerted action to create long-term value for stakeholders, beyond shareholders.

In brief

• Boards have a critical role in driving a stronger sustainability agenda as stakeholders focus more on environmental, social and governance issues.
• The management should review the full value chain to understand material sustainability risks and opportunities.
• Linking executive remuneration with sustainability performance and incorporating sustainability into the long-term strategy can also promote the agenda.

Recent developments in climate change, social unrest, unequal wealth distribution and working conditions are changing stakeholders’ expectations of the role of businesses. The COVID-19 pandemic has further exposed the vulnerabilities of businesses and societies in the face of a global threat and laid bare long-standing sustainability issues relating to health and safety, supply chains, equality, access to economic opportunities and health care.

Governments and consumers are becoming more aware of environmental, social and governance (ESG) issues and are taking the lead in holding businesses accountable for their impact on the environment and society. Likewise, investors are increasingly assessing companies’ performance using ESG factors. In fact, 91% of investors said that nonfinancial performance has played a pivotal role in their investment decision-making over the past 12 months either “frequently” (43%) or “occasionally” (48%), according to the 2020 EY Climate Change and Sustainability Services (CCaSS) fifth global institutional investor survey (pdf).

Amid these changing sentiments, businesses need to shift their focus to stakeholder value, taking into account their employees, communities and the environment. Such a shift toward stakeholder capitalism will not be easy. Boards are in a unique position to lead and influence the sustainability agenda and translate it into incentives and strategies that empower the management’s efforts to act. Boards can direct the management to drive impactful changes in three ways: review value chains for sustainability opportunities and risks, link executive remuneration with sustainability performance, and integrate sustainability into the long-term strategy.

Boards are in a unique position to lead and influence the sustainability agenda and translate it into incentives and strategies that empower the management’s efforts to act.

Review value chains for sustainability opportunities and risks

Companies need to look beyond their internal operations when assessing sustainability risks and opportunities. Boards should call for the management to review value chains — from upstream to downstream — to understand material sustainability risks and opportunities. The management should also consider forming effective partnerships with stakeholders in the value chains to scale up its efforts to address the various sustainability risks or opportunities.

Technological advances, such as artificial intelligence (AI) and blockchain, have made such collaborations easier — companies can now connect more closely with suppliers, collect more granular data, and achieve greater transparency in their supply chains. An example is Unilever’s partnership with Google to use satellite imagery, cloud computing and AI to support sustainable sourcing and create a deforestation-free supply chain by 2023.¹ The technology provides insights on the impact of the company’s sourcing activities on the environment and local communities, which allows Unilever to take timely action, if necessary, to raise sustainable sourcing standards for its suppliers and bring it closer to its goal of ending deforestation and regenerating nature.

Link executive remuneration with sustainability performance

Among leading companies in sustainability, a growing trend is the inclusion of sustainability performance as part of the management’s key performance indicators (KPIs). This measure is effective on two fronts. First, it helps to incentivize the achievement of sustainability goals. Second, it sends an unequivocal message of the organization’s commitment to sustainability, which in turn helps to instill a sense of purpose in employees.

For example, Singaporean real estate company City Developments Limited — whose ESG goals are mapped out in its Future Value 2030 sustainability blueprint — links ESG performance to the appraisal and remuneration of its heads of department and line managers.²

Setting KPIs to drive behavior is a compelling move in an organization’s bid to future-proof its existence. It is worthwhile for boards to explore how linking sustainability performance with the management’s appraisal and remuneration could be a viable option to drive greater accountability for the organization’s sustainable goals and practices.

Integrate sustainability into long-term strategy

Organizations making the shift toward sustainability may gain access to a wealth of opportunities, which could be in the form of new business opportunities, products or services. New Nature Economy Report II: The Future Of Nature And Business by the World Economic Forum published in July 2020 sets out how a blueprint of action for nature-positive transitions could generate up to US$10.1 trillion in annual business value and create 395 million jobs by 2030.³  These opportunities to generate value could be found in building transparent and sustainable supply chains, developing nature-positive built environment designs, and creating circular and resource-efficient models, among others.

Boards should therefore mandate that the management embeds sustainability risks and opportunities into its long-term corporate strategy. This could unlock the potential for the company to increase innovation, anticipate and stay ahead of policy changes, and improve operational efficiency and resources management.

Ultimately, genuine transformation to create stakeholder value through a strengthened sustainability agenda should be entrenched across the organization, from governance, strategy and risk management to targets and incentives. The board’s stewardship in driving this challenging transformation is imperative to making it a success.

The board should consider the following questions:

• How does the company develop a clear understanding of its stakeholders and their key concerns on ESG issues?
• How is the understanding of key stakeholders’ ESG concerns reflected in the company’s purpose and business model?
• Has the company assessed how various ESG trends will impact the business in the form of new opportunities and risks?
• Has the company established robust measurement and reporting systems to track the progress of its ESG performance?
• Do current performance incentives consider the company’s ESG performance?

About this article

Simon Yeo,Partner, Assurance; Climate Change and Sustainability Services Leader, Ernst & Young LLP

Assurance and transaction advisory professional. Provides sustainability advisory services to public and private sectors.