How can boards convert sustainability from a wish to a winning reality?

Boards have an essential role to play. When companies face increasing uncertainty, they need to lean in and embolden management to do what is right for the long-term health of the business, not just deliver short-term results. Nowhere is this more pertinent than when it comes to the topic of sustainability.

In this podcast, Dr Sabine Dembkowski, Founder and Managing Partner of Better Boards, discusses how board members can help make a difference with Andrew Hobbs from EY’s Center for Board Matters across Europe, the Middle East, India, and Africa (EMEIA). Alongside this, he continues to serve in his role as EMEIA Public Policy leader. Through these roles he meets boards and audit committees of companies of all sizes, discussing regulatory change and corporate governance. Andrew is co-author of the annual EY Europe Long-Term Value and Corporate Governance Survey. He is also Chair of the Corporate Governance Working Group of the European Contact Group and Vice-Chair of the Corporate Governance Policy Group of Accountancy Europe.

“There’s a significant strategic data and information gap at the board level”

One of the big discoveries from the recent EY survey of 200 C-suite or Non-Executive Directors across a variety of companies in Europe was the data gap. Andrew notes there is a small group, less than 25% of the total, who have been identified as leaders on the sustainability and governance front. These leaders, compared to the rest, were much better informed and working from a much stronger set of metrics that helped them build and showcase the links between ESG decisions and other value-creating objectives. Too often it seems, according to our discussion with Andrew, those who aren’t at the leading edge are operating with little clarity on their metrics. This makes it harder for them to provide effective oversight, challenge management on key sustainability issues, or engage in a meaningful way with shareholders and stakeholders about sustainability goals.

“Metrics are key for good decision-making.”

Effective decision-making on capital allocations for ESG and quantifying returns on investments is impossible without good metrics. Andrew notes that both leaders and those he called “followers” reported challenges around getting good metrics that allowed them to capture the financial implications of their decisions. It’s an area of opportunity – after all, to make informed decisions and have useful conversations, Andrew says boards have to be able to get the right kinds of data.

“It isn’t about creating a board full of sustainability experts. It’s about encouraging boards, or giving boards enough training to ask the right questions.”

Andrew says many boards are seeking members with sustainability skills, but that may not be the right solution to the problem. Instead, boards need training to ask better questions of themselves and of management – questions that challenge short term thinking, that probe for a deeper analysis of financial impacts, and that encompass more of a holistic, long-term view of what sustainability choices are going to do for the business and to the business. After all, some sustainability decisions that need to be made now will not deliver immediate returns. Boards need to be able to tell a compelling story about the business case over a longer-term timeframe and really sharpen their investor narrative.

Boards may also choose to supplement their expertise with outside experts who come in as a part of a committee or for specialised reporting responsibilities. Andrew notes this may be a very effective path, especially in areas where the technology or regulations are changing rapidly, and it is essential to keep current. Additionally, he feels board Chairs have a significant role to play here because Chairs can set and rearrange the board agenda to ensure sustainability issues stay top of mind and as a continual priority. Of course, sustainability is everyone’s responsibility, and if every member of the board reinforces its importance, then that makes life easier for the Chair.

“We’re not saying that boards need to do the job of management.”

Andrew feels that while boards shouldn’t take on management’s responsibilities, boards need to be ready to challenge and question decisions to find meaningful solutions. If a target has been set, due to regulations or internal goals, but things are behind, how can boards create accountability and pave the way for a real change in business practices? How can boards create deeper conversations about costs, benefits, and resource allocations? It’s not easy, but it is work that makes a difference.

“All that gathering of data and setting up the systems and controls to report is giving boards and companies insights they didn’t previously have.”

There is a huge slew of regulations out there, which some companies view as a distraction on their path to developing a more sustainable business model. However, Andrew points out that looking at this regulation as a compliance exercise is the wrong mindset and approach. Instead, boards need to look at the regulation and say, “How can we turn this to our advantage?”

Looking at regulations as an opportunity shifts everything. The additional data reporting can be viewed as a burden, or it can be looked at as getting insights that weren’t available before. Having those insights presents a chance to get beyond regulations and a chance to gain focus on strategies because there’s better integrity around the data and higher quality inputs available for decision-making. This can allow businesses to make decisions that make them more competitive and put them ahead of their peers, delivering more sustainable growth over the long-term.

“Businesses need to walk the tightrope between growth and governance.”

Andrew feels businesses need a balanced approach to governance and growth. One example is the use of artificial intelligence (AI) to advance or monitor sustainability efforts. Boards need to look at the business opportunities it presents and the environmental impacts surrounding the use of AI, including the long-term impact on the workforce and the environment. At the moment, he’s not seeing a consistent approach or application of AI in governance or sustainability. Still, responsible use of AI systems is certainly a topic of conversation as the technology expands.

The three top takeaways for effective boards from our conversation are:

• Boards are the long-term stewards of an organization. While, of course, boards need to be mindful of what’s happening now and deal with that, they also need to encourage a focus on the future and ensure that long-term value and priorities are not neglected in the face of more immediate concerns.
• Boards need to ask better questions to get better answers and not shy away from the challenges presented.
• Boards play a key role in linking reporting to a stronger long-term value narrative for investors. If boards advocate for reporting that facilitates better business decision-making for the longer term, they will help ensure sustainability is seen as mission-critical. Sustainable business models aren’t just a nice to have; they are essential to ensuring that businesses will not face existential threats. And that is good business.

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