Today’s business environment is increasingly characterized by volatility and disruption. Climate change, worker rights and welfare, geopolitical risk, cyber security, and corruption are just a few of the material sustainability issues that corporate leaders need to manage in order to reduce risk and drive positive financial returns. Engaging corporate boards in that journey will be critical to success.
In the past, corporate boards were not much involved in these issues. In 2018, for example, when NYU Stern Center for Sustainable Business (CSB) first assessed sustainability on Fortune 100 boards, just 22 had sustainability committees. We also found that board members had limited sustainability credentials which often were not matched to the material ESG issues confronting the company. In 2018, for example, only eight board members of the 1,188 total had cyber security credentials, only three had climate credentials, and only 12 had credentials in labor relations—all existential issues for most industries.
CSB just published a 2023 update which indicates some improvement: 89 of Fortune 100 companies now have sustainability committees, a jump from the previously mentioned 22. 43% of all board members now have some form of sustainability credentials, up from 29% in 2018. We have seen slight improvements in two of the three topics listed previously—in cyber security (50 out of 1,161 board members) and climate (22)—but a downturn in employee relations (7). We also find continued mismatches in some industries especially exposed to certain ESG issues such as energy, which has only one board member with climate credentials, and utilities which has zero board members with environmental expertise.
However, in many industries, we see a far better match with material sustainability issues and board expertise. For example, in 2018, while the category of health care, pharmaceuticals, biotechnology, and life sciences had 41 members with social credentials, only five had health-related credentials. In 2023, that number had increased to 16 (14 in health challenges/advocacy and two in health care). And despite the significant environmental footprint of some industries (e.g. energy, water, and waste), in 2018, this sector had zero board members with environmental expertise—they now have 13! On governance issues such as opioids, biotech, and drug access, there was even more dramatic improvement—30 members, up from two in 2018, had governance credentials.
It is the job of the CEO and their team to work closely with board leadership to ensure that boards can excel in today’s environment where regulators, investors, customers, and employees are asking for information on the company’s positive and negative sustainability impacts. They should help their board members understand the material sustainability issues confronted by the company, work with them on incorporating sustainability strategies such as decarbonization into the business strategy, and support the development of sustainability expertise on the board through training or recruiting board members with requisite credentials.
Best practices in board engagement related to material sustainability topics include the following:
- Inventory board ESG credentials and publish them on the corporate website and 10K.
- Identify weak areas and either support with training or help identify board members who can bring the appropriate expertise such as sustainable investors, chief sustainability officers, CEOs of major NGOs with aligned missions, renewable energy leaders, concurrent board members in DEI or sustainability organizations, and so on.
- Help the board establish a strong governance approach by including sustainability topics in the audit, nominating, and compensation committee charters, setting up a sustainability committee that focuses on embedding sustainability into business strategy with appropriate KPIs and financial return metrics, and ensuring transparent and regular internal and external communication on sustainability performance.
- The entire executive team should be well versed in the material sustainability topics and be structured to deliver on sustainability strategy implementation. This will require executive champions from each division (e.g. finance, human resources, product research and development, supply chain), a cross-functional organizing committee, and sustainability KPIs determined across the organization with compensation tied to those KPIs. The sustainability lead should be part of the C-Suite and work closely with the sustainability committee of the board as well as manage the agenda for the executive management team committee on sustainability. For more information on embedding sustainability core to business strategy and related governance, see this guide.
Boards and executive management must be fully versed in the material sustainability topics for their company, work together to ensure sustainability risks and opportunities are embedded in business strategy, and make sure the company is in full compliance with the growing body of sustainability regulatory regimes. This is about improving corporate management and financial performance. As such, it is the obligation of management and the board leadership to educate the full board and bring on members who can help the organization successfully navigate sustainability cross-currents.
Tensie Whelan is Distinguished Professor of Practice and Founding Director at NYU Stern Center for Sustainable Business.
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