Inside the boardroom - incorporating sustainability into corporate governance

16 Aug 2017
SOURCE:
Robert Perry, Sustainable Leadership Manager

The environment that New Zealand directors are operating in is changing rapidly.

Global capital markets are transforming as investors and consumers increasingly consider environmental, social and governance (ESG) issues in their investment and purchasing decisions.

When it comes to ESG issues, New Zealand is playing catch up.

Until now, environmental, social and governance (ESG) issues have been an afterthought, sometimes struck off the boardroom agenda as "a casualty of horizon".

But from October, this will change. The New Zealand Stock Exchange's revised Code of Corporate Governance raises the bar. It asks listed companies to report on their non-financial performance, or explain why they haven't.

On top of this, there is also a sharpness of focus internationally around climate risk. This follows the Financial Stability Board's recommendations to the G20 on climate-related financial disclosures, which has put the spotlight firmly on the management of material sustainability risks. The long term value and resilience of a company will soon be a key consideration.

In response, board directors need to formalise their procedures to ensure they are kept informed of the company's ESG risk profile and the potential effects on the business.

While ESG disclosure is nothing new, boards cannot afford to ignore the pace of change or the likely trends signalled. James Bevan from the UK's CCLA Investment Management firm reflected on how the ethics of the past were fast becoming the "responsible norms of today".

I believe ESG performance will have a strong bearing on whether or not a company continues to have a social license to operate. 'Shareholder activism' is still uncommon in Aoteroa, but stakeholders are demanding more information and greater transparency of their decision-making and business performance.

Directors must also adapt to unprecedented complexity, disruption and uncertainty. New technologies, natural capital risks like resource scarcities, and the transition to a low emissions economy present huge challenges to boards. They must plan for an uncertain future.

But I am optimistic. Business has an unparalleled capacity to adapt and innovate at great pace and with huge impact. These attributes puts companies at the vanguard for leading the transformation needed to tackle such risks and opportunities.

Governance is about planning for the future, and managing strategy and risk in the short and long term. Therefore Boards have a critical role to play to bring ESG issues to the forefront of corporate strategy.

As highlighted in SBC's Annual snapshot, the business case for sustainability is clear. Companies that put sustainability at their core of their business strategy perform better through reduced costs, minimised risk, enhanced trust and lasting business growth. Put simply, such companies are more attractive to their stakeholders including investors, communities and staff.

At SBC's annual general meeting Fonterra's CEO Theo Spierings said, "Sustainability is going to mean value over time. Counterfactually, if you don't do it, you're going to lose tremendous value". And he's spot on.

Boards must bring the stability and oversight needed to build their companies resilience and readiness for change and to capitalise on the opportunities for innovation and delivering lasting stakeholder value.

Robert Perry, Sustainable Leadership Manager