Media: Lufthansa Inflight Magazine
Publication Date: October 2019
Prof Dr Rodney Irwin, Managing Director and Member of the Senior Management Team at the World Business Council for Sustainable Development (WBCSD).
Bringing Sustainability into the Boardroom
Sustainability or environmental, social and governance (ESG), is increasingly on the minds of investors and other key stakeholders - which means corporate boards must be ready to respond when asked about their sustainability performance, says Prof Dr Rodney Irwin, Managing Director and Member of the Senior Management Team at the World Business Council for Sustainable Development (WBCSD).
Redefining value – that’s the title the WBCSD program you’re responsible for. Can you tell us a bit about the program and explain what you aim to achieve?
The term “Value” has multiple meanings and it is something very specific to individuals. If you asked the CEO of an oil company and the CEO of a family-run business what value means to them, you would probably get two different answers.
Today, businesses operate in a volatile and changing environment with technological advances, climate change and demographic shifts. As a result, looking only at a company’s financials is not enough to understand its whole value creation journey and its resilience to change. Businesses need to look at and understand their impacts and dependencies on other stocks and flows of capitals, such as natural, social, intellectual and human capital.
To stay competitive, companies need to ask themselves questions such as: where are they getting their raw materials from and are there sufficient supplies, will their products still be relevant tomorrow and how can they react to changing circumstances?
Sustainability professionals like to say that companies can’t survive in societies that fail. Taking other capitals into account requires a change in a CEO`s and the board’s mindset.
At WBCSD, we’re showing companies that there are real value creation opportunities made possible by thinking differently about the way a company operates without the need to become eco-warriors.
WBCSD helps companies to strengthen existing company processes such as accounting and management practices to factor relevant impacts and dependencies on other capitals into their every-day operations. This helps build more robust decisions-making and identify relevant risks and opportunities.
Where are we on this journey at the moment? Are CFOs and accountants starting to factor sustainability into their decision-making?
There are different levels of maturity for integrating sustainability in companies, depending on the sector and geography. There is still a lot of ground to cover. Europe is usually noted as a leading example and other countries are also making progress - for example, in South Africa where transparency and sustainability is driven by governance codes and reporting requirements and in Costa Rica where most energy sources are from renewables.
Industries with challenged sustainability associations - like the oil, gas, transport, food and chemicals sectors – are actually ahead of the game in factoring in sustainability information. There are certain companies who stand out today, many of whom had to learn the hard way.
We‘ve anecdotally noticed the sectors who don’t have a clear impact on the environment have fallen behind. For example, the service sector is only now realizing that it must change its practices and business models because millennials want to work for companies with a purpose. In many ways, the competition for talent is being fought through the sustainability agenda.
In short, where we are on the sustainability journey depends on the company and the individual leadership of the company’s senior management - but we can already see that businesses who have integrated sustainability are reaping the benefits like access to lower cost of capital, license to operate and customer and talent retention.
Is sustainability still hidden in the depths of corporate social responsibility (CSR) departments or is it moving into the boardroom?
Sustainability is increasingly becoming a corporate governance issue, meaning that there is more awareness at board level.
There is a growing list of corporate issues (profit warnings), scandals and regulatory changes to confirm that sustainability is a fiduciary duty – something the board needs to address. The UN-backed organization, Principles for Responsible Investment (PRI), has also concluded that being mindful of sustainability issues falls under fiduciary duty obligations for board members. However, this interpretation of the law has yet to be applied widely.
We have become very accustomed to the view that the board’s only duty is to generate returns for shareholders, but, in reality, a board’s duty is to perform in the best interest of the company, not just the shareholders.
We are starting to see investors become more discerning about the companies they invest in. Because of this, these investors are starting to prefer that companies understand their sustainability risks and opportunities.
As a result, sustainable investment is gaining momentum. This certainly helps change the perception that sustainability is only a report or department or a job title – rather, it’s something that should be fully integrated to understand a company’s impacts and dependencies on a wider range of issues – including on society and the environment.
What global regulatory and legislative initiatives are driving this change?
In January 2018, EU law began requiring large public-interest companies (those with more than 500 employees) to disclose information about how they manage social and environmental challenges.
This covers approximately 6,000 large companies and groups across the EU. Because we are at the very beginning of this journey, we still need to see what the outcomes will be, but the progress seems positive. By 2020, we will certainly be able to identify the most progressive companies and those who may be lagging behind.
However, South Africa, for instance, has had disclosure requirements for decades: The King Report on Corporate Governance was first issued in 1994. Back then, Nelson Mandela had asked a retired Supreme Court judge, Mervyn E. King, to chair a committee on corporate governance. The King Code is now in its fourth edition, and King can truly be regarded as the grandfather of integrated reporting which focuses on value creation over time and helps integrate other forms of capitals.
Since then, we’ve seen corporate governance codes changing around the world. However, the pace of change could always be faster!
In addition, stock exchanges around the globe are playing an important role as their listing rules are becoming ever more sophisticated and asking for information on social and environmental impacts, as well as information on corporate governance (ESG).
For example, the Singapore stock exchange, SGX, has mandated that from 2018 all listed companies must report their ESG practices. Both mandatory and voluntary initiatives are pushing companies to report on relevant ESG information across the globe.
These are all very much “stick approaches”– is there any carrot at the end?
Absolutely. If you want to reduce the cost of your sustainability function, then you need to professionalize it with tools, controls and processes. We already have some of our WBCSD members following a very sophisticated approach resulting in significant cost savings in data management and assurance.
The real advantages are being able to attract lower cost of capital and being rewarded in the capital markets as a better corporate citizen because you understand your impacts and dependencies. We are also seeing banks offering more sophisticated products for sustainable companies.
However, unless a company has accurate and reliable data, there is no point in pursuing these avenues because the business needs the information to be robust and reliable enough to be useful for company and investor decision-making.
A lot of our work at WBCSD during the past four years has been centered around building foundations so that companies know their impacts and dependencies and produce decision-useful information. If you want all of this to come together, then you need to have better data, better processes, better controls and better decision-making.
What about the international standard-setting organizations? Could they play a role in ensuring that not only multinationals, but also smaller companies sign up to sustainable practices?
The International Organisation for Standardisation (ISO), The Global Reporting Initiative (GRI), The International Integrated Reporting Council (IIRC), The Sustainability Accounting Standards Board, etc. are important organizations that created a lot of standardization around sustainability in particular on reporting. While these standards will definitely help, they are not going to take a firm’s practices to the next level. Companies need to ask themselves the bigger questions such as “do we need to change our business model” and “do we need to come up with new products because we are running out of raw materials for our current product or because they are contributing to the climate crisis?”
We recently developed application guidance on how companies can capture ESG criteria in their risk management framework. We have worked together with the Committee of Sponsoring Organisations of the Treadway Commission (COSO), which in 2017 updated its Enterprise Risk Management Framework that is used by many of the largest companies. Now, the guidance helps companies include ESG-related risks which all companies should understand since three of the top five risks in terms of impact and likelihood are environmental according to the annual risk report published by the World Economic Forum.
How are universities and business schools responding to sustainability challenges?
We are starting to see some change in education but not at the pace needed. Universities, and particularly MBA programs, are strongly encouraged to include more sustainability-related topics in their curriculums and strengthen their education around sustainability leadership. This should be holistic across the entire degree and not a standalone module. We need sustainable finance, sustainable strategies, sustainable procurement and more. This makes sense as historically, most people who completed these programs wanted to work on Wall Street, corporate banking or global consulting firms. However, as I already mentioned, we are seeing a trend where a large portion of students and young professionals want to work for socially conscious enterprises – both schools and companies will need to meet the expectations.
Are you witnessing increased demand for talent with sustainability knowledge?
Demand is growing - but, for the time being - the number of students and graduates who want to work in this area exceeds demand. Many companies are still hiring based on traditional MBA skills. But we are now at a turning point where there are more student profiles matching new roles, and companies are realizing the need to change their recruitment processes. Online career fairs to link recruiters with sustainability-savvy MBA graduates have been quite successful. However, all MBA graduates should be armed with sufficient sustainability knowledge. To not have this makes me question if indeed they are a Master of business administration.
What have you set as your big priorities for the coming months and what are your expectations for the next three to five years?
We are at a stage where we can show that there is a correlation between good sustainability performance and the ability to attract lower cost of capital. However, we can’t conclude causation yet. Therefore, we want to continue to engage with companies’ finance departments to measure impact and, quite literally, redefine value.
I am pretty sure that in the next three or five years we will start to see widespread adoption of new technologies, which, ultimately, will improve information collection, reporting and help to bring sustainability into every-day corporate governance. Our mantra is that companies will need to be commercially viable organizations, and they need to continue doing business but they need to find a smarter and more sustainable way of doing it.
We believe that now, and in the future, the most sustainable companies will become the most successful.