The seven pillars of sustainability leadership

The Seven Pillars of Sustainability Leadership

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The Seven Pillars of Sustainability LeadershipRESEARCH REPORT R-1604-16

by Thomas Singer

4 Introduction and Methodology

6 Executive Summary

SEVEN PILLARS

11 I. The board of directors is actively engaged on sustainability issues

23 II. The CEO and C-suite champion sustainability

36 III. Sustainability is embedded in strategic planning

47 IV. Sustainability goals are strategic, ambitious, and long term

58 V. Executive compensation is tied to sustainability performance

64 VI. Sustainability is part of the innovation process

72 VII. Sustainability is woven into company reporting and engagement

80 About the Author

The Seven PillarS of SuSTainabiliTy leaderShiP www.conferenceboard.org4

Introduction and MethodologyEach year since 1999, The Conference Board CEO Challenge® survey has asked CEOs around the world to identify their top business challenges. In the 2015 edition of the survey, respondents included “sustainability” among the top five global challenges for the first time since the survey’s launch. Surveys from other organizations, including McKinsey, BCG, and the World Economic Forum, point to a similar rise in profile of corporate sustainability issues. These issues—once predominantly associated with compliance or philanthropy—are now ever more embedded in discussions of company strategy. Sustainability is now a top agenda item for CEOs of many of the world’s leading companies.

Despite the increased focus on corporate sustainability, business leaders continue to struggle with integrating sustainability practices into their businesses. When asked to identify the specific strategies to meet the sustainability challenge, respondents to both the 2015 and 2016 editions of the CEO Challenge survey pointed to “ensuring sustainability is part of the corporate brand identity and culture of the organization.” While business leaders are beginning to understand the sustainability imperative, many are unclear on how to address this imperative. What are the key practices that define leadership in corporate sustainability? What are the steps companies can take to become leaders in corporate sustainability?

This research report attempts to address these questions by examining a distilled set of practices most often associated with leadership in corporate sustainability. The report provides background and context for each of these top practices and offers practical examples from companies that apply them. Because it focuses on a prioritized list of practices, the report can serve as a guide to help company leaders direct their sustainability efforts where they are most impactful and ultimately enable leaders to embed a culture of sustainability leadership within their organizations.

Research methodologyBetween October 2015 and January 2016, the research team surveyed 84 senior executives who are members of The Conference Board Sustainability Councils and Chief EH&S Officers Council. These council members represent companies with average revenues exceeding $50 billion from a diverse set of industries. Council members were asked to identify the practices they considered to be most indicative of leadership in corporate sustainability (from a list of 15 curated practices based on a literature review and discussions with subject experts). The practices examined in this report were selected based on results from this survey. The order in which these selected practices appear in this report does not reflect a further ranking or prioritization.

Council members also provided input on a separate survey of 10 questions specific to the practices that were ultimately selected. Results of this survey are discussed throughout the report.

www.conferenceboard.org The Seven PillarS of SuSTainabiliTy leaderShiP 5

Each of the practices identified in this report is examined based on a literature review of current collective knowledge on governance and organizational sustainability practices. A number of studies are referenced in this report as they provide valuable context and detail on many of the practices identified by council members. These resources represent knowledge from a diverse set of organizations, including Ceres, Harvard Business School, KPMG, McKinsey & Company, MIT Sloan School of Management, PwC, The Boston Consulting Group, and the United Nations.

Peer networks for sustainability officers

The Conference Board Councils are peer learning networks in which executives share best practices and problem-solve in a highly confidential and collaborative environment. Our councils of sustainability officers include:

• Sustainability Council I – Strategy and Implementation

• Sustainability Council II – Innovation and Growth

• Chief EH&S Officers Council

• European Council on Corporate Responsibility and Sustainability

To learn more about our councils, visit www.conferenceboard.org/sustainability or contact [email protected]

Defining sustainability

The Conference Board defines corporate sustainability as the pursuit of a business growth strategy that creates long-term shareholder value by seizing opportunities and managing risks related to the company’s environmental and social impacts. These impacts include elements of corporate citizenship, corporate governance, environmental stewardship, labor and workplace conditions, supply chain and procurement, community involvement, and philanthropy.

The Conference Board has been conducting research in the area of corporate sustain-ability for more than a decade, in response to the increasing interest by corporate executives in stakeholder engagement and social responsibility. Since 2012, through collaborations with NASDAQ, NYSE, Bloomberg, and the Global Reporting Initiative (GRI), The Conference Board has introduced and expanded a set of benchmarking reports to assist companies in the peer comparison of their disclosure and performance across a wide variety of environmental, social, and governance (ESG) practices.

For additional information on these benchmarking reports and other research in the area of corporate sustainability, please visit: www.conferenceboard.org/sustainability.


Executive SummaryBusiness leaders increasingly recognize the sustainability imperative. They understand that the companies they lead cannot expect to be successful in the long term without considering the communities they work in and with and the natural environment they operate in and depend on. They understand global trends will ultimately reward companies that successfully balance their natural, social, and financial capitals, and that companies that fail to adapt to these global trends risk becoming irrelevant. The challenge is converting this recognition into action. How can business leaders prepare and steer their organizations for leadership in sustainability?

Input from senior executives at more than 80 member companies of The Conference Board sheds light on this question. Their collective input reveals leadership in corporate sustainability boils down to the following seven most impactful practices:

1 The board of directors is actively engaged on sustainability issues

Sustainability oversight is now a board-level issue, driven increasingly by the scale of business risks and opportunities posed by sustainability issues and a sense of urgency given these impacts. Global megatrends such as resource scarcity and climate change are becoming ever more relevant to board discussions about strategy, risk, and performance. Boards that are engaged on sustainability issues are more likely to take a longer-term view and thus are able to better foresee and prepare companies for potential risks and opportunities.

Board engagement on sustainability is a function of oversight, time, and expertise. There is no one perfect board structure for sustainability oversight. Some boards choose to assign responsibility for sustainability to one of the “typical” board committees (e.g., governance and nominating; audit and finance), while others dedicate a committee largely or entirely to sustainability or assign responsibility to the board at large. While the structure chosen can vary, what ultimately matters is that directors allocate sufficient time to discussions of sustainability. There is significant room for improvement here, as surveys indicate the amount of time directors spend on sustainability issues is relatively low. One reason for this is that many companies do not have adequate sustainability expertise on their boards. Companies should consider appointing board members with relevant expertise or enabling regular access to sustainability experts, both within and outside the company.

Notably, while input from more than 80 senior sustainability executives points to board engagement on sustainability issues as the business practice most indicative of leadership in sustainability, CEOs appear to be missing the mark: When asked about their top strategies for meeting the sustainability challenge, CEOs ranked “strengthen board oversight of sustainability issues” last.1

1 The Conference Board CEO Challenge© 2016, The Conference Board, Research Report 1599, January 2016, p. 67.


2 The CEO and C-suite champion sustainabilityThe companies most often recognized as sustainability leaders are typically led by a CEO who actively champions sustainability. It may seem obvious, but companies where CEOs and senior management take an active role in sustainability are more likely to experience success with their sustainability strategies. While not all CEOs can be expected to lead sustainability strategy, companies should strongly consider ensuring their head of sustain-ability (a chief sustainability officer, for example) has a direct reporting link to the CEO and regular access to the board of directors. Sustainability steering committees also offer a useful mechanism for developing and implementing a company’s sustainability strategy. To ensure sustainability is elevated to a strategic level, these committees are most effective when chaired by the CEO or a member of the C-suite. For instance, Siemens’ sustainability steering committee is not only chaired by the chief sustainability officer, it also includes four out of the seven members of the company’s managing board. It is perhaps no coincidence that Siemens’ Environmental Portfolio accounted for almost half (43 percent) of the company’s overall revenue in 2015.

Some companies also choose to form sustainability committees composed exclusively of external advisors, who can provide additional subject matter expertise and an objective perspective.

3 Sustainability is embedded in strategic planningSustainability-related issues can no longer be ignored by companies wishing to remain competitive in the long term. Environmental risks, such as climate change and water scarcity, have been climbing up global rankings of business risks. In fact, an environmental risk has topped the World Economic Forum Global Risks Report for the first time since the report’s inception in 2006. The “failure of climate change mitigation and adaption” was ranked the number one global risk in terms of impact.2 Companies are beginning to act: More than one-fourth of S&P 500 companies now include discussion of the risks associated with climate change in their annual SEC filings, up from just 5 percent in 2013 (see page 46).

Companies need to be prepared to manage environmental and social risks that can have significant business implications. To do so, it is important for companies to consider and integrate sustainability issues in their strategic planning process. Companies can begin by developing a priority list of sustainability risks and opportunities most material to their business, with input from internal and external stakeholders.

4 Sustainability goals are strategic, ambitious, and long termA fundamental change in the way companies think about value creation is evident in the types of sustainability goals leading companies are setting. Many of these goals are not just about operational efficiencies—doing “less bad”; they are increasingly about adding value.

2 “The Global Risks Report 2016, 11th Edition,” World Economic Forum, Switzerland, 2016 (http://www3.weforum.org/docs/GRR/WEF_GRR16.pdf).


For example, as part of DuPont’s 2020 sustainability goals, the company will measure and report on the quantifiable safety, health, and sustainability benefits from DuPont’s major growth innovations.3

Setting corporate sustainability goals helps companies create accountability for improving sustainability performance and helps focus attention on the issues that matter most to the company and its stakeholders. The right sustainability goals can also help employees rally behind their company’s sustainability strategy and can reinvigorate a culture of innovation. To be most effective, sustainability goals should be strategic, ambitious, and focused on the long term.

Strategic goals ensure targets are in line with a company’s most important sustainability issues, typically identified using a materiality analysis process. Ambitious goals can help kick-start innovation and create a sense of urgency. Companies that set bold stretch goals—goals that are seemingly unattainable—often achieve significant improvements in performance, even if those goals are not ultimately met. The time frame is also important, as goals with target dates of 2020 and beyond help ensure companies adequately prepare for future risks and opportunities. LEGO, for example, in 2012 announced a commitment to make all of its products from sustainable materials by 2030, thus replacing oil-based plastic.

5 Executive compensation is tied to sustainability performanceIt is no secret that incentive compensation of the C-suite drives focus, attention, resource allocation, and performance. Companies that are serious about sustainability are placing sustainability performance metrics squarely in their incentive compensation schemes. This is crucial as business leaders point to a lack of incentives as a significant obstacle to achieving their companies’ sustainability potential. Linking incentive compensation to a set of sustainability targets helps make sustainability a priority for the organization and can steer company leadership to consider initiatives with long-term benefits that may otherwise have been ignored.

While the number of companies that have introduced pay for sustainability performance is growing, the sample remains fairly low. For companies that introduce this practice, the sustainability benefits can be significant: Incorporating pay for sustainability performance can reward long-term thinking, elevate sustainability issues to the CEO’s agenda, and drive performance against sustainability targets. DSM’s short-term incentive scheme, for example, takes into consideration the percentage of successful product launches that meet the company’s ECO+ criteria (products that offer a superior performance and lower environmental footprint than competing mainstream products over their entire life cycle). The impact on performance has been significant: By 2015 DSM’s ECO+ solutions accounted for 91 percent of the company’s innovation pipeline (see page 67).

3 NB: A merger between DuPont and Dow Chemical is expected to be completed by the second half of 2016. The combined company, DowDuPont, is expected to be separated into three independent, publicly traded companies.


6 Sustainability is part of the innovation processThe motivation for launching corporate sustainability strategies is shifting significantly from achieving compliance, risk, and operational efficiencies to spurring innovation and market growth opportunities. Companies are increasingly pointing to revenue growth and business opportunities as a primary reason to get started on sustainability.

In many ways, this is a result of growing demand from customers for solutions that help address sustainability challenges. Companies seeking to improve their sustain-ability profiles are generating demand for products and solutions to meet these needs. Suppliers are responding with innovative solutions that in some cases redefine an entire product category or open a new market, in the way that Lighting as a Service solutions have done for companies such as Philips.

Products and services with improved environmental and/or social profiles can represent significant revenue growth opportunities. For this reason, several leading companies are investing heavily in sustainability innovation to meet growing customer demand for sustainability solutions. Industry leaders such as GE and DuPont, for example, invest about half of their R&D budgets in environmental innovations (see page 67).

The capacity to recognize and act upon the revenue potential that sustainability offers is ultimately an outcome of many of the practices mentioned above. To companies that dedicate sufficient board time to sustainability, have champions within the C-suite who ensure sustainability is part of strategic planning, and adequately incentivize sustain-ability performance, sustainability represents an obvious opportunity and source of competitive advantage.

7 Sustainability is woven into company reporting and engagement

Companies at the forefront of sustainability excel at transparency; they are comfortable with openly reporting sustainability challenges and not just opportunities, and they see value in discussing company financial and nonfinancial performance side by side. For these companies, sustainability is woven into communications with stakeholders and is an integrated and core component of the company’s reporting process.

While the reporting of sustainability information has become common practice among large companies, there is still wide variation in the quality and scope of this reporting. Following standard guidelines helps ensure comparability, consistency, and materiality of reported information. And closer integration of a company’s sustainability and financial reporting—still an emerging practice—also offers an opportunity to further embed sustainability into company strategy. Transparent communication can also improve sustainability engagement with company investors, a much-needed benefit as engagement levels remain low for many companies.

CEOs also play an important role, as their rhetoric can be influential in strengthening the sustainability profile of the organizations they lead.


The past couple of years have seen a rapid acceleration in the pace of corporate sustain-ability initiatives (or core strategic initiatives, as the most forward-thinking companies view them). Some of the world’s biggest companies are embarking on bold strategic initiatives that are having a significant impact on their investments, sales, growth, business models, and environmental footprint. These initiatives rarely emerge by chance; they are a result of specific actions that pave the way for sustainability leadership.

Corporate sustainability leaders recognize that the more time company directors, CEOs, and C-suite executives spend in serious deliberation and debate about sustainability issues:

• The more engaged they become;

• The more they begin to grasp the magnitude of the transformation that a low-carbon, resource-constrained world will offer;

• The more bold they become about the goals and investments they commit to; and

• The more excited they become about the upside opportunities for sustainability-led innovation and growth.

Defining sustainability

The Conference Board defines corporate sustainability as the pursuit of a business growth strategy that creates long-term shareholder value by seizing opportunities and managing risks related to the company’s environmental and social impacts. These impacts include elements of corporate citizenship, corporate governance, environmental stewardship, labor and workplace conditions, supply chain and procurement, community involvement, and philanthropy.


I. The board of directors is actively engaged on sustainability issues

Input from members of The Conference Board clearly points to active sustainability engagement from the board of directors as the governance practice most often associated with leadership in corporate sustainability; specifically, the existence of a company board that explicitly recognizes responsibility for sustainability oversight and acts upon this responsibility. This section offers an overview of why board engagement on sustainability matters, as well as examples of various ways in which companies are approaching this practice.

At a tactical level, companies with boards that engage on sustainability issues may be more successful in reaching their corporate sustainability goals. Research conducted by MIT Sloan Management Review and The Boston Consulting Group (BCG) shows companies with boards that are actively engaged on sustainability are twice as likely to successfully accomplish their sustainability initiatives.4 However, while 86 percent of survey respondents believed boards should play a strong role in driving a company’s sustainability efforts, only 42 percent perceived boards to be even moderately engaged with a company’s sustainability strategy.5

4 David Kiron, Nina Kruschwitz, Knut Haanaes, Martin Reeves, Sonja-Katrin Fuisz-Kehrbach, and Georg Kell, “Joining Forces: Collaboration and Leadership for Sustainability,” MIT Sloan Management Review, January 12, 2015, p. 6.

5 Kiron et al., “Joining Forces,” MIT Sloan Management Review, p. 6.

To what extent is the board of directors engaged in your organization’ssustainability efforts?

Chart 1

Source: MIT Sloan Management Review

Don’t knowNot at allTo someextent

To smallextent

To moderateextent

To greatextent

15%13%14%15%20%22%

42% report that theirboards are substantially

engaged in sustainability.

n=2,587


Besides improving the odds for success of a company’s sustainability initiatives, boards that are engaged on sustainability are also more likely to take a longer-term view and thus are able to better foresee and prepare companies for potential risks and opportunities. A report from the Finance Initiative of the United Nations Environment Programme (UNEP) makes the point that boards that are engaged in sustainability strategy are more likely to focus more on long-term success than on short-term financial results.6 Preparing for long-term success requires an understanding of the potential economic, social, and environmental challenges facing companies—challenges that can result in significant risks or missed opportunities if ignored. The National Association of Corporate Directors points out that sustainability oversight is increasingly becoming a board-level issue, not least because of the global megatrends that are affecting companies, many of which fall in the realm of sustainability issues (such as resource scarcity and climate change) and are central to board discussions about strategy, risk, and performance.7 In other words, sustainability issues can significantly affect a business, and company boards are right to start paying more attention to these issues.

Is short-term behavior jeopardizing the future prosperity of business?

A recent report from The Conference Board examines short-term corporate behavior by boards and management and offers insights on how public company CEOs and boards can effectively balance short- and long-term performance in the face of constant pressure to meet quarterly guidance and maximize profits, often at the expense of future profitability. Along with board members and investors, business leaders should review their companies’ governance structures and consider whether any changes could better serve their long-term prospects. In particular, the report

offers some of the following suggestions for governance changes companies can make, with support of their investors:

• Abandon quarterly bottom-line earnings guidance and replace it with longer-term guidance and information that is material to the company’s longer-term prospects.

• Revamp executive compensation to reward longer-term thinking.

• Consider the benefits of offering extra dividends or enhanced voting rights to reward longer-term investors.

• Adopt capital allocation policies to ensure the long-term interests of the company are not sacrificed to the pressures of daily business activity.

For more details see Is Short-Term Behavior Jeopardizing the Future Prosperity of Business? The Conference Board, October 2015.

6 Integrated Governance: A New Model of Governance for Sustainability, United Nations Environment Programme Finance Initiative, June 2014, p. 32.

7 Director’s Handbook on Oversight of Corporate Sustainability Activities – Executive Summary, National Association of Corporate Directors and Ernst & Young LLP, 2014, p. 3.

https://www.conference-board.org/publications/publicationdetail.cfm?publicationid=5041

https://www.conference-board.org/publications/publicationdetail.cfm?publicationid=5041


Is sustainability oversight a fiduciary duty?If sustainability issues represent real risks and opportunities for companies, should boards be expected—rather than simply encouraged—to have oversight of sustainability? There is plenty of literature arguing that sustainability may be a concern of directors in the pursuit of their fiduciary duty to maximize shareholder value and not contrary to the responsibilities of the board. In the report Sustainability Matters: How and Why Corporate Boards Should Become Involved, The Conference Board provides an overview of the doctrinal arguments most often used to support this case, including directors’ duty of care, the business judgment rule, and state constituency statutes.8 The report also cites evolving court standards that assert that corporate fiduciaries, while pursuing value maximization for the owners, may also consider the interests of key stakeholder groups.

That boards should have oversight is an increasingly accepted view as corporate sustain-ability practices shift from being largely voluntary to being expected or even required. As an example, legal scholars point to the evolution of the European Commission’s definition of corporate social responsibility (CSR) to de-emphasize the voluntary nature of CSR. In 2001, the commission defined CSR as “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.” This definition was updated in 2011 as “the responsibility of enterprises for their impacts on society.”9 The trend away from voluntary measures is not limited to rhetoric and definitions—legislation has already been introduced in several countries and regions requiring companies to report on their sustainability activities and meet certain sustainability-related requirements, such as emissions reductions or diversity targets.

Despite increasing recognition of sustainability issues as material business issues, many directors continue to give discussions of sustainability short shrift (see “Are boards allocating sufficient time to discussions on sustainability?” page 19). One of the biggest barriers to greater board engagement on sustainability is the belief many directors hold that maximizing shareholder value (essentially short-term value, given that the average holding period for stocks is less than one year) is a company’s legal obligation and a director’s fiduciary responsibility, the report by MIT Sloan Management Review and BCG found. The report swiftly labels this as a mistaken belief and highlights literature to back this up, including a 2010 Harvard Business Review article, “The Myth of Shareholder Capitalism,” and a 2012 book by law professor Lynn Stout, “The Shareholder Value Myth.”10 Both publications come to the conclusion, based on legal research, that maximizing shareholder value is neither a company’s legal obligation nor a director’s fiduciary responsibility.

8 Sustainability Matters: How and Why Corporate Boards Should Become Involved, The Conference Board, October 2011, p. 29.

9 Beate Sjåfjell & Linn Anker Sørensen, “Directors’ Duties and Corporate Social Responsibility (CSR),” University of Oslo Faculty of Law Legal Studies Research Paper Series No. 2013-26, pp. 16-17.



Given that board oversight of sustainability is within the purview of directors, and board engagement on ESG issues can help companies not only meet their sustainability goals but also manage broader long-term risks and opportunities, it makes sense for investors and shareholders to be keen on companies ensuring their boards are actively engaged on this topic. Current levels of engagement are relatively modest: 36 percent of respon-dents in a 2014 survey by The Conference Board assign responsibility for sustainability oversight to the board,11 with larger companies by revenue almost twice as likely as smaller companies by revenue to do so (see Chart 3 on page 16). Investors aware of the benefits of board engagement on sustainability would like to see these figures grow.

A recent Ceres report, for example, points out that investors are increasingly focusing on the role that boards play in overseeing material sustainability issues as part of their fiduciary responsibility. The report references figures from the Sustainable Investment Institute that show over 250 shareholder resolutions were filed between 2010 and 2014 asking for board oversight of sustainability issues.12 The specific requests made in these resolutions vary. One type of request, for example, calls for boards to establish separate committees on sustainability. A review by The Conference Board of data from FactSet shows that in 2015 there were two shareholder resolutions making this specific request, filed at Starbucks and PepsiCo. That both resolutions received low levels of support (just over 3 percent of shares outstanding each) does not necessarily indicate a lack of board willingness to engage on sustainability. For example, the Starbucks board recommended voting against the proposal in part because sustainability considerations are included in the charter of the board nominating/governance committee.13 Similarly, the board of directors of PepsiCo also recommended voting against the proposal based on the recog-nition that “the full board considers sustainability issues an integral part of its business oversight” and that the nominating and corporate governance committee is charged under its charter with reviewing sustainability initiatives.14

Determining a board structure for sustainabilityWhile investors’ calling for boards to demonstrate sustainability engagement by establishing separate sustainability committees can indeed be effective for some companies, it is not always the best approach. There are multiple ways in which boards can be structured to ensure engagement on sustainability, some of which may be more effective than establishing a separate committee on sustainability.

11 Results from a 2014 survey of 307 SEC-registered business corporations administered by The Conference Board in collaboration with NASDAQ OMX and NYSE Euronext.

12 Veena Ramani, View from the Top: How Corporate Boards Can Engage on Sustainability Performance, Ceres, October 2015, p. 6.

13 Starbucks 2015 Proxy Statement, p. 50.

14 PepsiCo 2015 Proxy Statement, p. 76.


The basic models for sustainability board oversight most commonly used are:

• Tasking one of the common board committees (e.g., governance and nominating committee; audit committee) with oversight of sustainability;

• Tasking a (new or existing) committee that is dedicated largely (or entirely) to corporate responsibility, sustainability, environment, health and safety, and related topics;

• Deciding that the full board will handle oversight of these issues rather than delegating to a committee.

The 2014 survey of SEC-registered companies found that, overall, the majority of companies with board oversight of sustainability choose to assign this responsibility to the full board, though there are significant differences by company size.15 An analysis by revenue group reveals larger companies are more likely than smaller ones to assign oversight responsibility to a dedicated sustainability committee or to an existing committee rather than to the full board.

15 Results from a 2014 survey of 307 SEC-registered business corporations administered by The Conference Board in collaboration with NASDAQ OMX and NYSE Euronext.

Responsibility for sustainability oversight, by industryChart 2

Source: The Conference Board/NASDAQ OMX/NYSE, 2015.

Full board of directors

Board chairman/lead director,acting as liaison with seniormanagement on these issues

Chief Executive Officer

Dedicated standing committeeof the boardNominating/governance committee

Senior executive (other than the CEO) reporting directly to the CEOSenior executive (other than the CEO)reporting directly to the board

Other

31.9

19.3%

10.9

11.8

10.1

11.82.5

1.7

Manufacturingn=119

32.7

15.4%

21.2

7.7

5.8

13.5

1.9

1.9

Financial servicesn=52

41.0

12.0%

15.4

10.3

8.5

11.1

1.7

Nonfinancial servicesn=117

Percentages may not add up to 100 due to rounding.


Each structure has its own set of advantages and disadvantages. A dedicated sustainability committee, for example, can send a strong signal to the company and its stake holders about the seriousness with which the board treats sustainability, but it also risks creating a silo that hinders efforts to fully integrate sustainability into the organization. Meanwhile, tasking the full board with sustainability oversight can be an effective way of ensuring integration of sustainability issues, but it can also discourage these issues from being discussed if board members are not sufficiently proactive or knowledgeable about sustainability issues.

Responsibility for sustainability oversight, by company revenueChart 3

Source: The Conference Board/NASDAQ OMX/NYSE, 2015.

$20 billion and overn=28

Percentages may not add up to 100 due to rounding.

$10-19.9 billionn=29

$5-9.9 billionn=32

$1-4.9 billionn=70

$100-999 millionn=53

Under $100 millionn=24

0 100%

28.6

37.9

40.6

45.7

34.0

16.7

10.7%

3.4%

12.5%

11.4%

26.4%

29.2%

3.6

3.4

6.3

11.4

20.8

33.3

35.7

24.1

12.5

4.3

1.9

4.2

21.4

17.2

15.6

8.6

5.7

4.2

3.1

2.9

11.3

12.5

13.8

9.4

15.7

Full board of directors

Board chairman/lead director,acting as liaison with seniormanagement on these issues

Chief Executive Officer

Dedicated standing committeeof the boardNominating/governance committee

Senior executive (other than the CEO) reporting directly to the CEOSenior executive (other than the CEO)reporting directly to the board

Other


Assigning sustainability oversight to an existing committee, such as a governance committee, can strengthen the link between strategy and implementation but can also risk burying sustainability under existing agenda items.16 Ultimately what is most important is that sustainability issues get addressed by the board of directors, regardless of the structure chosen or the specific name used to describe a committee that oversees these issues.

Examples of companies’ varying structures for board oversight of sustainability

• Unilever’s full board has oversight of sustainability, and specific agenda items, including sustainability reporting, are delegated to the Corporate Responsibility Committee of the board. The committee meets quarterly and comprises a minimum of three nonexecutive directors. A member of the Unilever Leadership Executive attends the meetings of the committee and also chairs the company’s Sustainable Living Plan Steering Team (which is accountable for the company’s sustainability goals) and external sustainability advisory board (the USLP Council).

• Nike Board oversight of sustainability falls to Nike’s Corporate Responsibility and Sustainability Committee, established in 2001 at the suggestion of a board member who accepted the role of chair with the proviso that the CEO attend every meeting of the committee. The committee reviews significant policies and activities and makes recommendations regarding labor and environmental practices and community impact and charitable activities. In 2013, the committee’s charter was updated to review strategy and performance and to formally include sustainability and innovation. The committee receives regular briefings from Nike’s chief sustainability officer and VP, Innovation Accelerator, who also attends all of the committee’s meetings.

• At Intel, board oversight of sustainability falls under the responsibilities of the Corporate Governance and Nominating Committee. While the committee assumed this responsibility in 2003, in 2010, Intel amended the charter of the committee to add clarity that the committee “… review(s) and report(s) to the Board on a periodic basis with regard to matters of corporate responsibility and sustainability performance, including potential long and short term trends and impacts to our business of environmental, social and governance issues, including the company’s public reporting on these topics.”

16 David Grayson and Andrew Kakabadse, Towards a Sustainability Mindset: How Boards Organise Oversight and Governance of Corporate Responsibility, Business in the Community, p. 9.


While there are numerous reasons behind a company’s choice of board structure, research from Harvard Business School professors indicates that board oversight of sustainability tends to depend on the stage of a company’s sustainability “maturity.” The research classified a sample of 180 companies into two groups, High Sustainability companies and Low Sustainability companies, primarily based on whether companies had adopted a comprehensive set of corporate sustainability policies, including those related to the environment, employees, community, products, and customers. Fifty-three percent of the companies in the High Sustainability group assigned formal responsibility for sustainability to the board of directors, whereas only 22 percent of the Low Sustainability companies did so. Further, 41 percent of the High Sustainability companies opted for a separate board-level sustainability committee, compared to 15 percent of companies in the Low Sustainability grouping.17

The specific board structure a company chooses can evolve over time to meet the needs of the organization. For companies that are just beginning to formulate a sustain-ability strategy, creating a separate board sustainability committee—or requiring the full board to tackle sustainability issues—is likely too big of an ask. For these companies, a more realistic approach would be tasking an existing committee with overseeing sustainability strategy and perhaps considering establishing a separate sustainability committee at a later time.

A report by the UN Global Compact argues that companies would benefit from the establishment of a separate sustainability committee because, among other reasons, a separate committee significantly increases the amount of time that board members can dedicate to sustainability issues and can also be symbolic as it increases the visibility of the board’s commitment to both internal and external stakeholders.18 For organizations that are further along in their integration of sustainability into the business, a separate sustainability committee could actually be an impediment to further integration as it can isolate sustainability discussions to one committee rather than elevate them to the entire board. For these organizations, the ideal oversight structure might resemble one where sustainability issues are fully integrated into the board and material sustainability issues are actively discussed in the relevant board committees. Ultimately an organi-zation should choose a structure that encourages the board to allocate sufficient time to addressing sustainability as part of company strategy.

17 Robert G. Eccles, Ioannis Ioannou, and George Serafeim, “The Impact of Corporate Sustainability on Organizational Processes and Performance,” Management Science 60, no. 11, November 2014, p. 7.

18 A New Agenda for the Board of Directors: Adoption and Oversight of Corporate Responsibility, United Nations Global Compact, Global Compact LEAD, 2012, p. 14.


Are boards allocating sufficient time to discussions on sustainability?

Results from a survey by The Conference Board of sustainability and environmental health & safety (EH&S) executives reveal sustainability issues may not be getting sufficient airtime at board meetings. For instance, one-third of respondents indicate their companies’ sustainability and/or EH&S functions meet with the board of directors only one time per year, and almost 1 in 4 respondents indicate these functions never meet with the board. When asked about the amount of time their companies’ board members spend on sustainability and/or EH&S issues, 69 percent of respondents indicated two to four hours per year, the lowest option presented.

How many times each year do the sustainability / EHS functions meet with/presentto the board of directors (committee or full board)?

Chart 4

How much board meeting time does the board committee (or full board) typicallyspend annually on sustainability / EHS (all of those combined) issues?

Chart 5

Source: Results from a 2016 survey of members of The Conference Board Sustainability Councilsand Chief EH&S Officers Council.

More than16 hoursper year

8 to16 hoursper year

4 to8 hoursper year

2 to4 hoursper year

0 100%

13.7% 7.8 9.8 68.6

Percentages do not add up to 100 due to rounding.

More thanthree times

per year

Threetimes

per yearTwice

per yearOnce

per year Never

12.5% 12.5 20.3 32.8 21.9

N=64

N=51


Ensuring boards have sustainability expertise and access to expertsBeyond board structure, companies should also consider the level of their board’s expertise on sustainability topics, as well as the board’s access to internal and external sustainability experts. Research suggests that board expertise on sustainability issues is quite low. For example, Ceres found that among a sample of 774 directors who sit on sustainability committees, only 19 percent had discernible expertise in ESG issues.19 Appointing board members with sustainability experience is one way to ensure a board is sufficiently versed in these topics. Prudential Financial, for example, made corporate responsibility skills a requirement for board member selection.20 Similarly, UBS has a board-level Corporate Culture and Responsibility Committee composed of members who are expected to “have good knowledge of corporate responsibility and relevant societal issues.”21 In addition, over the last two decades a number of companies have appointed prominent sustainability figures to their boards, including DuPont (William K. Reilly, who served as administrator of the US Environmental Protection Agency under President George H.W. Bush), Ashland (John F. Turner, who was US assistant secretary of state for the Bureau of Oceans and International Environmental and Scientific Affairs from 2001 to 2005), and International Paper (Patrick F. Noonan, who was president of The Nature Conservancy from 1973 to 1980 and founded The Conservation Fund in 1985).22 There are other ways companies can ensure the board has sufficient sustainability expertise. Some companies, for instance, opt to establish external sustainability advisory boards to help support senior management and the board with ESG-related issues (see page 33 for specific examples). Direct and frequent access to sustainability experts can provide board members an important resource to help inform strategy decisions.

In 2015, the board of directors of Sims Metal Management decided to codify in writing its personal commitment to sustainability excellence and to share this commitment with company employees, contractors, and external stakeholders (see Exhibit 1 on page 21).

19 Ramani, View from the Top, Ceres, p. 16.

20 Integrated Governance, UNEP Finance Initiative, p. 40.

21 The Organization Regulations of UBS Group AG and UBS AG, January 1, 2016, p. 52 (http://tinyurl.com/jrolb8f).

22 Gilbert S. Hedstrom, Navigating the Sustainability Transformation, The Conference Board, January 2015, p. 8.

http://tinyurl.com/jrolb8f


Exhibit 1

An example of board action on sustainability from Sims Metal Management

In 2015, the board of directors of Sims Metal Management decided to codify in writing its personal commitment to sustainability excellence and to share this commitment with company employees, contractors, and external stakeholders. The result was the Board of Directors’ Commitment to Safety, Health, Environment, Community and Sustainability (SHECS).

Source: Sims Metal Management Sustainability Report 2015, p. 8.


IN SUMMARY

• Active sustainability engagement from the board of directors is the governance practice most often associated with leadership in corporate sustainability.

• Board engagement on sustainability is a function of structure, time, and expertise. An engaged board can better prepare a company for long-term risks and opportunities and can improve a company’s chances of successfully achieving its sustainability goals.

— There is no one best board structure for sustainability oversight—what is ultimately important is that sustainability issues are sufficiently addressed by the board. Some boards choose to assign responsibility for sustainability to one of the “typical” board committees (e.g., gover-nance and nominating; audit and finance), while others dedicate a committee largely or entirely to sustainability or assign responsibility to the board at large. The chosen structure may also change over time depending on circumstances.

— Boards should ensure they have adequate sustainability expertise by appointing board members with relevant expertise, enabling regular access to company experts, or establishing external advisory boards.


II. The CEO and C-suite champion sustainability

A board of directors that embraces sustainability as a company priority sets a positive tone for embedding sustainability throughout the business. However, board leadership alone is not sufficient, as companies need champions within senior management to translate vision into action and implementation. The role that strong sustainability leadership by a company’s CEO and senior management plays cannot be overemphasized.

Over the last few years sustainability issues have been gradually moving from niche agenda items to front and center of CEO priorities. Surveys indicate CEOs now care more than ever about sustainability topics, and these issues are gaining significant CEO airtime. Results from The Conference Board CEO Challenge® 2015 survey, for example, reveal that, for the first time since the survey’s launch, sustainability made it into the list of top five global CEO challenges. Results from other surveys point to a similar trend. For example, MIT and BCG found that the number of companies that have sustainability as a top management agenda item rose from 46 percent in 2010 to 65 percent in 2014, based on a survey of 2,587 respondents.23 Findings from McKinsey’s Global Survey also point to a significant increase in CEO’s focus on sustainability issues: 36 percent of 281 CEOs surveyed in 2014 indicated sustainability was among the top three priorities in their agendas, up from 31 percent in 2010. In 2014, 13 percent of CEOs revealed sustainability was the top priority in their agendas, up from only 3 percent in 2010.24


24 Sustainability’s Strategic Worth: McKinsey Global Survey Results, McKinsey & Company, 2014, p. 3.

Sustainability’s strategic position on the CEO agendaChart 6

Source: “Sustainability’s Strategic Worth: McKinsey Global Survey Results,” McKinsey & Company, July 2014(www.mckinsey.com). Copyright © 2014 McKinsey & Company. All rights reserved. Reprinted by permission.

Percent of respondents

2010(n=175)

2011(n=265)

2012(n=364)

2014(n=281)

3 5 513

31%31

37

36

Top 3 priority

Most important priority

Note: The survey was not run in 2013.


A number of factors have led to the increase in prominence of sustainability issues in CEO agendas, including more frequent board discussions of sustainability-related risks and opportunities; greater demand from customers; pressure from investors; and growing interest from current and prospective employees. CEOs are beginning to recognize the business case for and value of a sound sustainability strategy. For instance, in a 2015 survey by Ethical Corporation, 69 percent of corporate respondents said their CEO was convinced of the value of sustainability.25 This finding is significant as CEO buy-in is crucial to the success of a company’s sustainability strategy. A CEO who understands the value that sustainability brings to the organization can pave a smoother path for initiatives that may otherwise struggle to be implemented. In fact, many of the companies that consistently top lists and rankings of leadership in corporate sustainability are led by CEOs who visibly champion sustainability.

What sustainability leadership from the CEO looks likeOver the past decade and beyond, many CEOs globally have demonstrated leadership—in some cases bold leadership—on sustainability. The actions CEOs have taken to demonstrate leadership can be characterized by some of the following traits:

Prioritizing long-term growth over short-term profits The chasm between upholding the principles of sustainability and reporting positive financial results quarterly is one not easily bridged by publicly listed companies, and few CEOs of large companies are able to avoid the short-termism of quarterly reporting. There are signs, however, that companies may begin to steer away from this approach. For example, in a recent letter to more than 500 companies, the CEO of BlackRock Inc. urged CEOs of leading companies to stop offering quarterly earnings guidance and increase their focus on long-term goals.26 The suggestion is not unrealistic: when Paul Polman became CEO of Unilever in 2009, he immediately announced that he would stop issuing earnings guidance and end full quarterly reporting. In a recent interview, he explains that:

The issues we are trying to attack with our business model and that need to be solved in the world today—food security, sanitation, employment, climate change—cannot be solved just by quarterly reporting. They require longer-term solutions and not 90-day pressures.27

In Europe, regulatory developments are making it easier for companies to steer away from quarterly reporting. The United Kingdom ended quarterly reporting requirements in November 2014, with the rest of the European Union following suit a year later (though some local stock exchanges require it for some segments).

25 The State of Sustainability 2015, Ethical Corporation, April 2015, p. 9.

26 “BlackRock Chief Urges Companies to End Quarterly Profit Guidance,” Bloomberg, February 2, 2016 (www.bloomberg.com/news/articles/2016-02-02/blackrock-chief-urges-companies-to-end-quarterly-profit-guidance).

27 “The Tao of Paul Polman,” Washington Post, May 21, 2015 (www.washingtonpost.com/news/on-leadership/wp/2015/05/21/the-tao-of-paul-polman/).


Setting ambitious sustainability goals that “stretch” the organization For CEOs of leading companies, incremental improvements in sustainability reporting or in footprint reduction are not sufficient. They want to drive bold action—and normally do it by setting what Jim Collins, co-author of Built to Last: Successful Habits of Visionary Companies, coined as Big Hairy Audacious Goals. These goals—often with uncertain probabilities of accomplishment and with target dates typically at least 10 years into the future—purposefully stretch an organization and create a sense of urgency. Few CEOs are comfortable setting these types of goals, but these are generally the goals that best motivate an organization to accomplish step-change levels of innovation. For example, in 2011 Phil Martens (then CEO of Novelis) introduced a number of corporate-wide sustainability targets, including an ambitious goal of attaining 80 percent of the company’s production output from recycled aluminum by 2020 (in 2011 recycled aluminum accounted for 33 percent, and 49 percent in 2015). An excerpt from an interview with Martens reveals this goal was meant to stretch the company’s thinking and innovation:

Martens is aware that his 80% recyclable content goal is ambitious and wants to make it clear that it’s an aspirational target. He knew when he announced last summer that 70% was possible—“if we really do things right”—but when he went for 80% the objective was to push the envelope. “I wanted to look beyond what we could do in theory,” Martens says, explaining how companies that stretch themselves and “realign their perspectives” will drive better sustainable business models—even if they don’t know how to get there. “In fact, it’s probably better that you don’t know how to get there because it stretches your thinking,” he ventures.28

Other CEOs have made similar bold commitments—commitments that are less about actually achieving the goal and more about the innovations that result from pursuing the goal. In 2005, for example, Lee Scott, then CEO of Walmart, announced in a speech broadcast to all company associates:

Our environmental goals at Walmart are simple and straightforward: 1) to be supplied 100 percent by renewable energy; 2) to create zero waste; and 3) to sell products that sustain our resources and environment. These goals are both ambitious and aspirational, and I’m not sure how to achieve them—at least not yet. This obviously will take some time.29

28 Matthew Moggridge, “Canned Heat,” Aluminium International Today, September/October 2012, p. 25.

29 “Twenty First Century Leadership,” speech by Lee Scott, October 23, 2005 (http://news.walmart.com/executive-viewpoints/twenty-first-century-leadership).


Realizing sustainability as a driver of innovation and business opportunities CEOs at the forefront of sustainability recognize that many of the challenges posed by environ-mental and social pressures actually represent significant business opportunities. These CEOs see sustainability strategies as an opportunity to refocus a company’s business to meet emerging societal needs. For example, resource scarcity creates demand for more efficient products, and companies that can develop these products are able to position themselves at an advantage. Research from The Conference Board reveals several large companies are generating substantial revenues from portfolios of sustainable products and services—and these revenues have been growing at, on average, six times the rate of overall revenues among the sample of companies studied.30 GE, for example, set a goal in 2005 to grow EcomaginationSM-related revenues to $US20 billion, and at twice the rate of GE’s overall industrial revenue. Since the initiative’s launch, EcomaginationSM revenues have grown at four times the rate of GE’s overall industrial business.31 In some cases, entire new business models have emerged from demand for more sustainable products, as in the case of the Lighting as a Service business at Philips (see page 70 for more examples).

Promoting radical transparency Consumers are becoming increasingly interested in knowing more about the companies they buy from and what goes into the products they consume. Stakeholders are also exerting greater pressure on companies to disclose information about their operating practices and supply chains, especially given that the vast majority of companies’ environmental and social impacts occur in their supply chains. Rather than fighting this trend, some CEOs are leveraging transparency as a powerful competitive advantage. Patagonia’s “Footprint Chronicles,” for example, is an inter-active online tool designed to give consumers deep insight into the company’s supply chain, including worker headcount, gender mix, and addresses of its global factories, textile mills, and farms. In 2014, Clorox expanded its “Ingredients Inside” program, becoming one of the first large consumer product companies to disclose the full list of fragrance allergens used in each of its products, a fairly bold move considering its industry has historically been very protective of trade secrets. Transparency, however, is not limited to products and supply chains, as it can also extend to lobbying and other political activities. IKEA, for example, made the company’s position on climate and energy policy clear through the release of an infographic detailing the impacts of climate change on the company.32

30 Thomas Singer, Driving Revenue Growth through Sustainable Products and Services, The Conference Board, June 2015, p. 27.

31 Singer, Driving Revenue Growth through Sustainable Products and Services, p. 28.

32 A copy of IKEA’s infographic is available at: (www.ikea.com/ms/en_US/pdf/reports-downloads/IKEA_Group_position_on_climate_and_energy.pdf).


Embracing business model transformation A handful of CEOs on the leading edge of sustainability actually embark on a personal mission to transform their companies—and in some cases their entire industries—to align with sustainability principles. These CEOs recognize that the business models of the companies they lead are at risk of becoming irrelevant in a low-carbon and resource-constrained future.33 Since for many companies this threat is not necessarily imminent (though still significant), it takes a visionary CEO to challenge a status quo that may be difficult to deviate from. David Steiner, CEO of Waste Management, realized about 10 years ago that a business model dependent on hauling customers’ trash was not sustainable, given that more and more of the company’s customers were pursuing “zero waste” goals. This led to a refocus of Waste Management’s business to emphasize environmental solutions and extract value from waste. Waste Management’s revenues from “Green Services” now account for well over half of the company’s total revenues.

Another example of business model transformation is evident in the shift of Novelis’ core business from a traditional linear model to a closed-loop model. In the following public statement, Martens explains the role sustainability plays in driving business model transformation:

Our intent when we established our sustainability targets two years ago was to transcend the incremental approach by radically transforming our company—and, in the process, lead the way in our industry. This approach is driving changes in the way we source inputs, structure our supply chain, make capital investments, develop our products and engage with our customers. We are still in the early stages of our sustainability journey, with many hurdles yet to overcome, but our efforts are already beginning to bear fruit. I am more firmly convinced than ever that our commitment to sustainability will be the key value driver for our company going forward.34

Visionary CEOs aim to transform not only the businesses they lead, but also entire industries. For example, during his tenure as CEO of NRG, David Crane not only pushed the largest independent power producer in the United States to become a leader in clean energy, but was also very vocal in his belief that the entire energy industry needed to do more to combat climate change. However, in the attempt to balance long-term value creation with short-term pressures, transformational leadership can be a risky proposition. Crane’s vision for the future of NRG made short-term investors nervous and was likely not shared by the company’s board; he was let go at the end of 2015.

33 For more details on this topic see Gilbert S. Hedstrom, Navigating the Sustainability Transformation, The Conference Board, January 2015.

34 “Novelis Building Sustainable Enterprise through Disruptive Innovation,” PR Newswire, October 22, 2013 (http://www.prnewswire.com/news-releases/novelis-building-sustainable-enterprise-through-disruptive-innovation-228790911.html).


The following is an excerpt from former NRG CEO David Crane’s March 2014 letter to shareholders, which offers an example of Crane’s leadership rhetoric, including his embrace of business transformation and his vision of sustainability as a driver of business opportunity:

As we forge ahead, I am mindful of the fact that the next generation of Americans—the generation of my soon-to-be-adult children—is different from you and I. Somehow, some way, the next generation of Americans became “all in” in their commitment to sustainability, in every sense of the word, including clean energy. With them, it is built into their DNA, not just “learned behavior,” as it is for many of us.

And make no mistake about our children. They will hold all of us accountable—true believers and climate deniers alike. The day is coming when our children sit us down in our dotage, look us straight in the eye, with an acute sense of betrayal and disappointment in theirs, and whisper to us, “You knew…and you didn’t do anything about it. Why?” And for a long time, our string of excuses has run something like this: “We didn’t have the technology…it would have been ruinously expensive…the government didn’t make us do it…”

But now we have the technology—actually, the suite of technologies—and they are safe, reliable and affordable as well as sustainable. They do not represent a compromise to our ability to enjoy a modern lifestyle. They represent an opportunity for us to do the right thing while multiplying shareholder value through greater value-added services. And these technological solutions are focused on the individual consumer—both businesses and individuals—so the shameful passivity and failure to act of government is irrelevant.

The time for action is now; we have run out of time for more excuses.

You should know that I get up each day animated and motivated to lead NRG into a transformational role in the clean energy economy by my intense desire to have a better answer to that question when it comes from our children, whether it comes from your children or mine: “At NRG, we did all that we could, as fast as we could do it, and what we accomplished with our partners and customers turned out to be quite a lot. Enough, in fact, for you and your generation to finish the job.”

That would be a much better answer.

So let’s make it happen.

Source: Originally posted on NRG’s website. A copy of the March 27, 2014, letter is now available at: (www.greentechmedia.com/articles/read/nrgs-david-crane-where-is-the-amazon-apple-and-google-of-the-utility-sector).


Reporting structure mattersThere is wide variation in who ultimately is assigned responsibility for implementation of a company’s sustainability strategy. It can be the CEO who shoulders this responsibility, or the chief sustainability officer (CSO), or in some cases other members of senior management. In fact, while it is growing, the number of companies with CSOs is relatively low. A report found that among US publicly traded companies, in 2014 there were 36 professionals with “chief sustainability officer” in their official title, up from 29 in 2011.35 Especially at companies that are at a relatively early stage in their sustainability strategy, it is instead common for the role of a CSO to be undertaken by individuals with other functional responsibilities, including but not limited to EH&S, public affairs, and marketing. To wit, researchers from Harvard Business School asked a sample of 66 respondents to identify their companies’ approach to sustainability as one of three options: “Compliance” with regulations and securing license to operate, “Efficiency” and focus on the bottom line, and “Innovation” and exploitation of opportunities for growth.

Only 14 percent of companies in the “Compliance” stage had a person with responsibility for sustainability with the title of “chief sustainability officer.” By contrast, 36 percent of companies in the “Innovation” stage had a person responsible for sustainability with the CSO title.36 While the wording of a title may seem trivial, it can be an important signifier of an organization’s commitment to sustainability. In 2016, for example, 3M changed the title of the company’s head of sustainability from vice president of EHS and sustainability operations to chief sustainability officer, primarily as a way to further signal 3M’s commitment to sustainability.

35 CSO Back Story II: Evolution of the Chief Sustainability Officer, Weinreb Group, 2014, p. 6.

36 Kathleen Miller and George Serafeim, Chief Sustainability Officers: Who Are They and What Do They Do?, Harvard Business School working paper, August 20, 2014, p. 13.


Regardless of title, what is ultimately important is that this individual—if he or she is not the CEO—have direct and frequent access to the CEO and/or the board. This reinforces sustainability as a strategic priority and allows for discussions on the topic to be elevated beyond the tactical. It also serves as a mechanism to provide CEOs and the board with much-needed access to internal expertise on the subject. The reality, however, is that most heads of sustainability do not have direct access to the CEO. In a 2016 survey by The Conference Board of sustainability and EH&S executives, only 16 percent of respon-dents indicated these functions report directly to the CEO, with most (63 percent) indicating these functions report one level down from the CEO (usually the COO/Operations).37 These figures suggest companies should take a close look at their existing reporting relationships and evaluate whether there is a close enough link between their head of sustainability and their CEO. This link will become increasingly important as sustainability issues become more embedded in CEO agendas.

37 Results from a 2016 survey by The Conference Board of sustainability and EH&S executives at 43 member companies.

If EH&S and sustainability are combined,where do they report?

Chart 7

Source: Results from a 2016 survey of members of The Conference Board Sustainability Councils and Chief EH&S Officers Council.

Sustainability reporting structure — CEO

Directto CEO

16.3

62.8%

One leveldown from

CEO

18.6

Two levelsdown from

CEO

2.3

Other

What function does sustainability report into(if not direct report to CEO)?

Chart 8

Sustainability reporting structure — other functions

COO orOperations

34.5%

16.4

GeneralCounsel

Administration,Finance,

or HR

25.5Other

16.4

Marketing,R&D, or Technology

7.3

N=43 N=42


Chief sustainability officers who report to CEOs: Examples from Nike and IKEA

Nike Nike created the position of VP of corporate responsibility (CR) in 1998, led by Maria Eitel, who worked to consolidate the company’s various corporate responsibility functions and begin drafting a strategic framework to address the corporate responsibility issues facing the company. In 2004 Hannah Jones, the director of CR for Europe, became Nike’s next VP of CR. Jones reported to Mark Parker, then co-president of the Nike brand, and was also responsible for briefing the board of directors’ Corporate Responsibility and Sustainability Committee.

In 2009 Nike’s CR team was reorganized as the Sustainable Business & Innovation (SB&I) team, led by Jones as VP. In 2013, the SB&I team was moved into Nike’s Innovation organization, with Jones named as chief sustainability officer and VP, Innovation Accelerator in 2014, reporting directly to CEO Mark Parker and the president of Innovation.

Jones co-manages a number of dedicated teams with business and functional executives to rethink materials, methods of make, products, and business models to solve complex sustainability challenges, to develop and review policies for board approval, and to manage the company’s sustainability approach and direction. Jones is actively involved in the board of directors’ Corporate Responsibility and Sustainability Committee and attends all of its meetings.

IKEA While IKEA’S sustainability strategy has evolved over the last two decades, the head of the company’s sustainability initiatives has always reported directly to the CEO. From the mid-1990s through 2010, IKEA’s sustainability initiatives were led by a sustainability manager with direct reporting to the CEO. During this period, the company viewed sustainability as primarily a compliance and development issue.

By 2011, however, sustainability had evolved to become a much more strategic focus for the company. That year, IKEA launched “People & Planet Positive,” the company’s 2020 sustainability strategy, which focuses largely on sustainability as an opportunity to drive innovation and transform the business. This more strategic focus on sustainability led to the 2011 hiring of IKEA’s first chief sustainability officer, Steve Howard, founder and CEO of The Climate Group. Howard took on overall responsibility for performance against IKEA’s sustainability commitments. He reports directly to IKEA’s president and CEO, and he is the company’s first head of sustainability to be appointed to IKEA’s nine-person executive management group, which includes the CEO, CFO, and the heads of IKEA’s operating divisions.


Steering sustainability: The importance of committees and external advisorsForming steering committees can be tremendously beneficial to integrating sustainability into an organization’s strategy.

Internal committees Sustainability committees that are chaired by the CEO or another member of the C-suite are particularly effective. A 2014 report by Ceres and Sustainalytics notes that about 25 percent of companies have an executive-level committee overseeing sustainability strategy and performance.38 Below are some examples:

• Campbell Soup’s Sustainability Leadership Team was first established in 2009. The team met every other month for seven years and focused on driving sustainability within the business divisions and regionally. In 2015 the committee was restructured to focus on enterprise vectors (e.g., energy/GHG, water, waste, packaging, logistics, procurement, agriculture, and co-manufacturing), and its composition was elevated to officer level. The committee is now run by Campbell’s chief sustainability officer and is composed of senior executives of the company’s largest business divisions and corporate functions, including procurement, supply chain, research and development, engineering, and public affairs. The committee reports an annual deep dive on sustainability operations to the audit committee of the board of directors and briefs the CEO and other leadership quarterly.

• BASF’s Corporate Sustainability Board (CSB) is the company’s central steering committee for sustainable development. It is chaired by a member of BASF’s Board of Executive Directors and comprises the heads of the company’s business, corporate, and functional units as well as heads of the regions. The CSB monitors the implementation of BASF’s sustainability strategy and cross-divisional initiatives, defines sustainability goals, and approves corporate position papers on sustainability topics.

• The Siemens Sustainability Board, formed in 2009, is the central steering committee for sustainability at the company. The committee is chaired by the chief sustainability officer and includes four out of the seven members of Siemens’ managing board, as well as top executives from the company’s divisions, countries, and corporate functions. The significant representation of managing board members means that only in exceptional situations do the committee’s initiatives require approval from the company’s managing board. The committee meets quarterly.

• IKEA’s Sustainability Management Group helps coordinate the company’s efforts to make key decisions on sustainability. The group is chaired by IKEA’s chief sustainability officer and brings together sustainability managers from the main business areas—Retail and Expansion, Range and Supply, and IKEA Industry—as well as the heads of Policy and Compliance, Sustainability Communication, and Sustainability Innovation. Progress against IKEA’s sustainability objectives is reported to group management and the board of directors on a regular basis.

38 Gaining Ground: Corporate Progress on the Ceres Roadmap for Sustainability, Ceres and Sustainalytics, 2014, p. 17.


• Marks & Spencer (M&S) launched the company’s broad sustainability strategy—“Plan A”—in 2007. The company’s Executive Plan A 2020 Committee oversees the development and implementation of Plan A. The committee is chaired by the CEO and includes all of the company’s executive directors as well as senior directors with relevant specialist knowledge and responsibilities. The committee meets every two months, and the CEO delivers an update on activities to the board of directors at least once a year. In addition, M&S has an Operational Plan A 2020 Committee that is chaired by the director of Plan A.

External advisors Independent sustainability experts who interact with senior leadership and the board can offer a valuable perspective on a company’s sustainability strategy and priorities. Recognizing the value this outside view can bring, a few leading companies have established sustainability steering committees composed of external advisors. These external committees can provide an objective perspective and subject matter expertise, and they can help challenge and verify a company’s sustainability strategy. Following are some examples of companies’ external sustainability committees:

• Walmart’s Sustainable Value Networks bring together supplier companies, academia, government, and nongovernmental organizations to explore sustain-ability challenges and develop solutions.

• M&S Sustainable Retail Advisory Board meets every six months to provide guidance and insights and to challenge the company to further improve its sustainability performance. The advisory board includes renowned and respected external sustainability experts and is jointly chaired by the company’s CEO and the founding director of Forum for the Future.

• In 2007 Kimberly-Clark formed an independent Sustainability Advisory Board (SAB) to provide the company’s Global Sustainability Team and Global Strategic Leadership Team with guidance on sustainability issues. The SAB is composed of six external thought leaders who are selected based on their sustainability competencies and experience.

• The Unilever Sustainable Living Plan Council is a group of six external specialists in corporate responsibility and sustainability who meet twice a year to help guide the development of the company’s sustainability strategy.

• Dow Chemical’s Sustainability External Advisory Council (SEAC) was formed in 1992 to introduce a diverse outside-in perspective on environment, health and safety, and sustainability issues for the company. The council is composed of thought leaders from around the world and is chaired by the corporate vice president and chief sustainability officer. SEAC meetings usually take place over two and a half days, addressing agenda items that have been suggested by Dow and the council.39



Senior leadership engages with employees on sustainabilityIdeally, companies that have a sustainability champion among senior management also have strong systems in place to engage the company’s employees on sustainability. A CEO’s vision for sustainability is worth little without support and enthusiasm from employees, which makes having the proper communication and engagement channels an important element of sustainability leadership. The good news is the number of companies actively engaging employees on sustainability issues appears to be increasing. In a sample of large US companies studied by Ceres and Sustainalytics, 40 percent had programs in place to engage employees on sustainability, up from 30 percent in 2012.40 The extent of engagement, however, appears to vary significantly, with only a few companies offering company-wide engagement. The following company examples offer some best practices, including the value of having senior leadership drive engagement efforts and the importance of giving employees a forum to discuss and learn about their company’s sustainability strategy:

• The CEO of Baxter International discusses the company’s sustainability strategy during quarterly all-employee webcasts. The company also has a sustainability intranet site to communicate with and engage employees on Baxter’s sustain-ability initiatives.41

• In 2013 Staples created the position of chief culture officer, which includes responsibility for driving employee engagement and championing the company’s sustainability commitments. Quarterly management forums also provide an opportunity for employees to discuss sustainability issues with management and engage on the company’s sustainability initiatives.42

• Johnson & Johnson places a strong focus on engaging employees on the company’s sustainability initiatives and rewarding them for their contributions to sustainability innovation. For example, teams who receive Earthwards® recognition (recognition for the company’s most broadly sustainable products) are publicly congratulated and rewarded for their innovations by Johnson & Johnson leadership through established employee recognition programs. As a result, the company increased internal awareness of the Earthwards® process from 7 percent in 2012 to 24 percent in 2014 and increased the percentage of employees that agree that Earthwards® offers value to Johnson & Johnson’s customers from 45 percent to 74 percent.43

40 Gaining Ground, Ceres and Sustainalytics, p. 7.

41 Gaining Ground, p. 69.

42 Gaining Ground, p. 69.



Ultimately companies need to tailor their engagement strategies to their own corporate cultures. Regardless of the specific engagement mechanisms they use, companies need to begin by ensuring employees view senior leadership as advocates for sustainability. The reality is that typically employees do not consider senior management to be the primary advocate for sustainability.44 While grassroots sustainability initiatives are important and powerful, they can often be met by management with resistance, reluctance, and skepticism. When sustainability leadership and enthusiasm comes from the top, a signal is sent to employees that these initiatives are important—opening the door for employees to rally behind and embrace a company’s sustainability strategy.

44 The State of Employee Engagement in Sustainability and CSR, WeSpire, June 2014, p. 6.

IN SUMMARY

• Sustainability issues are making their way into CEO agendas, and CEOs are increasingly identifying sustainability as a top business challenge.

• Support and engagement from the CEO and senior management are crucial to the success of a company’s sustainability strategy.

— Companies should consider establishing a direct reporting link between their head of sustainability and the CEO and/or ensure the head of sustainability has regular access to the board.

— Companies should establish a sustainability steering committee, chaired by the CEO or a member of the C-suite, to help implement sustainability strategy. In addition, an external sustainability committee composed of advisors can provide additional subject matter expertise and an objective perspective.

• Senior leadership should actively engage employees on the company’s sustainability strategy and provide a forum for employees to discuss the company’s sustainability initiatives.


III. Sustainability is embedded in strategic planning

Companies that have not integrated sustainability into strategic planning may be putting their businesses at risk. Changing consumer demands and emerging global trends (including many sustainability-related risks, such as natural resource scarcities and climate risks) are placing increasing pressure on businesses to prepare for uncertainties. In its latest review of global risks, the World Economic Forum identifies water crises, extreme weather events, and climate change among the top five risks in terms of impact and likelihood. In fact, “failure of climate change mitigation and adaptation” was ranked the top global risk in terms of impact (see Exhibit 2 on page 37).45 A survey of 365 expert economists indicated that more than three-quarters of respondents believe climate change will have a long-term, negative effect on the growth rate of the global economy.46 Further, they predict a global GDP loss of about 10 percent by 2090 under a “business as usual” scenario where global carbon emissions remain unchecked.47 Companies that swiftly acknowledge and proactively manage these risks will be better prepared for this future scenario. But preparing becomes a difficult task when sustainability issues are absent from discussions of business strategy. To remain competitive, companies need to fully integrate sustainability into their strategic planning process.

The good news is many companies have developed a business case for sustainability and are actively working on integrating it into their strategy. The number of companies without a sustainability business case is shrinking, according to results from a global survey by MIT Sloan Management Review. The survey found that between 2009 and 2014, the percentage of companies that had not created a sustainability business case dropped from 42 percent to 23 percent.48

45 The Global Risks Report 2016, World Economic Forum, Switzerland, p. 10.

46 Expert Consensus on the Economics of Climate Change, Institute for Policy Integrity at New York University School of Law, December 2015, p. 15.

47 Expert Consensus on the Economics of Climate Change, p. 21.


3.5 4.0 4.5 5.0 5.5

4.0

4.5

5.0

4.87average

4.76average

Data fraudor theft

Asset bubble

Deflation

Failure of financial mechanism or institution

Failure of criticalinfrastructure

Fiscal crises

Unemployment orunderemployment

Illicit trade

Unmanageable inflation

Extreme weather events

Natural catastrophes

Man-made environmentalcatastrophes

Failure of national governance

Interstate conflict

Terrorist attacks

State collapse or crisis

Failure of urban planning

Food crises

Profound social instability

Water crises

Adverse consequences oftechnological advances

Cyberattacks

Large-scale involuntary migration

Extreme weather events

Failure of climate-change mitigation and adaptation

Interstate conflict

Natural catastrophes

Failure of national governance

Unemployment or underemployment

Data fraud or theft

Water crises

Illicit trade

Failure of climate-change mitigation and adaptation

Weapons of mass destruction

Water crises

Large-scale involuntary migration

Energy price shock

Biodiversity loss and ecosystem collapse

Fiscal crises

Spread of infectious diseases

Asset bubble

Profound social instability

Economic

Environmental

Geopolitical

Societal

Technological

Top 10 risks in terms of

LikelihoodTop 10 risks in terms of

Impact

Categories

Likelihood

Imp

act

Weapons of mass destruction

Spread of infectious disease

Critical informationinfrastructure breakdown

Energy price shock

Biodiversity loss andecosystem collapse

Large-scale involuntarymigration

Failure of climate-changemitigation and adaption

Respondents were asked to rate the impactand likelihood of each risk on a scale of 1 to 7

and in the context of a 10-year timeframe.World Economic Forum Global Risks LandscapeExhibit 2

Source: The Global Risks Report 2016, World Economic Forum, Switzerland, p. 3.


Not only have more companies established a business case, but executives are also finding that sustainability is becoming a more strategic and integral part of their businesses. In McKinsey’s 2014 Global Survey, 43 percent of respondents indicated their companies seek to align sustainability with their overall business goals, mission, or values, an increase from 30 percent in 2012 and 21 percent in 2010. In previous years, executives most often pointed to cost cutting as a primary driver of their companies’ sustainability initiatives.49

49 Sustainability’s Strategic Worth, McKinsey & Company, p. 2.

Top 3 reasons that respondents’ organizations address sustainability*Chart 9

Source: “Sustainability’s Strategic Worth: McKinsey Global Survey Results,” McKinsey & Company, July 2014(www.mckinsey.com). Copyright © 2014 McKinsey & Company. All rights reserved. Reprinted by permission.

Percent of respondents**

2010 2011 2012 2014

** In 2010, n=1,749; in 2011, n=2,956; in 2012, n=3,847; in 2014, n=2,904. The survey was not run in 2013.

21

31 30

43

2010 2011 2012 2014 2010 2011 2012 2014

3632

35 36

19

3336

26

Alignment

Align with company’sbusiness goals, mission,or values***

Reputation

Build, maintain, or improvecorporate reputation

Cost cutting

Improve operationalefficiency and lower costs

* Out of 12 reasons that were presented as answer choices in the question.

*** From 2010 to 2012, the answer choice was “Align with company’s business goals.”


This shift is significant as it points to a transition in how companies view sustainability—increasingly less as operational and more as strategic. Whereas once the primary drivers for sustainability for many companies were related to cost reductions and efficiencies, this is decidedly less so the case now. For example, respondents to a survey by BSR/GlobeScan cited the effect on the company’s reputation as the most important driver of sustainability efforts, followed by market growth opportunities. Budget and cost reductions, notably, were at the bottom of the list.50

50 The State of Sustainable Business 2015 Annual Results, BSR/GlobeScan, September 2015, p. 36.

Drivers of sustainability effortsChart 10

Source: The State of Sustainable Business 2015 Annual Results, BSR/GlobeScan, September 2015, p. 36

Percentage of company-level respondents identifying issue as a top-three driver, combined (N=196).

Budget/cost reduction

CEO interest

Investor interest

Consumer demand

Product and process innovation

Talent recruitment and employeeengagement and retention

Regulatory requirements

Market growth opportunities

Operational risks/benefits

Reputational risks/benefits

1st Driver 2nd Driver 3rd Driver

27% 21 19

13 18 12

16 11 11

8 14 14

2 7 14

6 6 10

10 7 4

4 9 5

10 2 5

3 6 8


Integrating sustainability into the business is easier when sustainability is seen as strategic. In the same BSR/GlobeScan survey, the majority of respondents (54 percent) indicated sustainability is at least fairly well integrated into their core business. While these results are promising, there is still ample room for improvement, as over a third of respondents noted sustainability was not very well integrated or not integrated at all.51 Good sustainability management practices can increase a company’s revenues by up to 20 percent and can enhance a company’s brand and reputational value by 11 percent.52 Aligning sustainability with strategic planning can help companies ensure growth oppor-tunities are recognized early and that physical and reputational risks are managed properly. Siemens, for example, includes the company’s Environmental Portfolio as one of the focus areas of the “One Siemens Management Model,” the company’s strategic framework for sustainable value creation.

“Sustainability and Citizenship” is one of three priorities in the One Siemens Management Model

Siemens is a German industrial conglomerate and one of the world’s largest technology companies, with 2015 revenue of €75.6 billion. The “One Siemens Management Model” is an integral part of Siemens’ strategic framework “Vision 2020” for sustainable value creation. This management model was launched in its current form in 2014 and consists of three layers: a set of balanced financial performance indicators; the operating system and corporate memory; and the foundation of “sustainability and citizenship,” which includes 12 principles along the dimensions of people, planet, and profit. These 12 principles are the evolution of Siemens’ initial sustainability program defined in 2009.

While the framework provides the guiding principles for integrating sustainability into the company’s strategy, the following four elements are key to helping Siemens implement this integration:

• Siemens’ Sustainability Office is part of the corporate strategy team.

• Siemens has a dedicated “division sustainability manager” in the strategy function of each of the company’s 10 divisions.

• Siemens has a dedicated “country sustainability manager” generally in the strategy function of each of the company’s approximately 30 lead countries.

• Sustainable business practices are led by the corporate functions; sustainability sits at the corporate level and is also copied into the countries and divisions.

(Continued on page 41)

51 The State of Sustainable Business 2015 Annual Results, p. 31.

52 Project ROI: Defining the Competitive and Financial Advantages of Corporate Responsibility and Sustainability, IO Sustainability and Babson College, 2015, p. 17.


To drive best practices throughout the company, Siemens holds an annual Sustainability Summit that brings together sustainability managers from each of the company’s divisions, countries, and functions.

Exhibit 3

Source: “Additional Sustainability information to the Siemens Annual Report 2014,” Siemens, p. 6,http://www.siemens.com/investor/pool/en/investor_relations/downloadcenter/siemens_ar2014_sustainability_information.pdf

We contribute to our customers’ competitivenesswith our products, solutions and services.

V

We partner with our customers to identify anddevelop sustainability related business opportunities.

V

We operate an efficient and resilient supply chainthrough supplier code of conduct, risk management, and capacity building.

V

We proactively engage with our stakeholders tomanage project and reputational risks and identifybusiness relevant trends.

V

We adhere to the highest compliance and anti-corruption standards and promote integrity viathe Siemens Integrity Initiative.

V

PROFIT

PLANET

We enable our customers to increase energyefficiency, save resources and reduce carbonemissions.

V

We develop or products, solutions and servicesbased on a life-cycle perspective and sound eco-design standards.

V

We minimize the environmental impacts ofour own operations by applying environmentalmanagement programs.

V

We contribute to the sustainable developmentof societies with our portfolio, local operations,and thought leadership.

V

We foster long-term relationships with localsocieties through Corporate Citizenship projectsjointly with partners.

V

We live a zero-harm culture and promote thehealth of our employees.

V

We live a culture of leadership based on commonvalues, innovation mindset, people orientationand diversity.

VPEOPLE

Siemens’ 12 principles of sustainability and citizenship


The top strategies for meeting the sustainability challenge: Insights from global CEOs

The latest edition of The Conference Board CEO Challenge® survey asks CEOs, presidents, and chairmen across the globe to identify the top strategies they intend to use to meet six key business challenges, one of which is sustainability (see Exhibit 4 on page 43). Results from the survey indicate CEOs are taking a broad view of what sustainability means for their organizations—and the potential risks involved if they fail to respond to evolving stakeholder demands for more responsible business practices. While many companies continue to separate sustainability issues from their risk profile, which creates gaps in effective long-term strategic planning, respondents to this year’s survey cite incorporate sustainability into company risk management strategy as one of their top strategies for meeting the sustainability challenge.

While input from more than 80 senior sustainability executives points to board engage ment on sustainability issues as the business practice most indicative of leadership in sustainability, CEOs appear to be missing the mark: When asked about their top strategies for meeting the sustainability challenge, CEOs ranked “strengthen board oversight of sustainability issues” last.


Top strategies for meeting the sustainability challengeExhibit 4

Strengthen board oversight ofsustainability issues/risk

Invest in new technologies to reduce exposureto resource scarcity (i.e., energy, water)

Encourage improvements insustainability performance fromsuppliers and business partners

Assess vulnerability ofcurrent business model

Develop a sustainabilityproduct pricing strategy

Ensure sustainable development report thatadheres to accepted global standards (GRI)

Engage with stakeholders to balanceshort-term performance pressureswith long-term sustainability goals

Emphasize sustainability values andbrand in talent recruiting

Articulate social purpose to stakeholders

Work more closely with localgovernments to create shared valueand mitigate environmental impacts

Incorporate sustainability goals into individualemployee performance objectives

Support in-house waste reduction andpollution prevention programs

Reduce consumption of energy, water,and other scarce resources

Analyze sustainability of product portfolio(e.g., perform lifecycle analysis)

Align corporate philanthropywith business strategy

Incorporate sustainability intocompany risk management strategy

Encourage and supportcorporate volunteerism

Commit innovation/R&D efforts to buildportfolio of sustainable products/services

Incorporate sustainability goals (reduce consumptionof energy, water, and other scarce resources)

into corporate strategic performance objectives

Ensure sustainability is part of the corporatebrand identity and marketing strategy 53.1%

50.3

38.0

35.3

30.3

29.6

27.4

26.4

26.0

24.0

21.5

19.9

17.8

15.9

14.8

14.2

12.9

11.6

10.0

9.5

Note: N=605. Respondentswere asked to choose fivefrom a list of 20 strategies.Results show the percentageof respondents who chosethe strategy.

Source: The Conference BoardCEO Challenge© 2016, TheConference Board, ResearchReport 1599, January 2016, p. 67.


Sustainability risks and opportunities are clearly identifiedWhile companies are beginning to think more strategically about sustainability, findings from Ceres and Sustainalytics reveal that few companies actually have strong sustainability risk management systems in place.53 Developing a strategic planning and risk management system that incorporates sustainability is a key step toward integrating sustainability into the business. This process, if done well, requires input from both internal and external stakeholders and considers a company’s entire value chain. Companies that have successfully developed a strategic planning and risk management system have begun by identifying a broad set of relevant issues—both risks and opportunities—through discussions with employees as well as external stakeholders. These issues are then prioritized using an issue matrix, typically by plotting the issues based on significance to the company versus significance and importance to stakeholders. The end goal is to arrive at a focused list of key sustainability issues that become a core part of the company’s strategy (see Exhibit 5 on page 45 for an example from DSM). Companies should avoid falling into a trap of prioritizing too many issues as this can result in a loss of focus and significantly hinder efforts to elevate sustainability to a strategic level. A McKinsey report, for example, found that two-thirds of companies from a sample of the S&P 500 have more than 10 different sustainability focus topics, and some companies have more than 30.54 The report recommends focusing the bulk of efforts on just a few of the most significant and relevant issues.


54 Profits with Purpose: How Organizing for Sustainability Can Benefit the Bottom Line, McKinsey & Company, 2014, p. 8.


1

2

3

4

56

7

8910

11

1213

14 15

161718

19

Health & wellnessMalnutrition & nutrition securityEmerging economiesProduct & food safetySharing economy

148

1119

Open innovationCareers & employmentAdvocacy & reputationTrade barriers

9151618

Climate change & renewable energySustainable & circular value chainsWater securitySustainable animal proteinBio-based economyBiodiversity

237

101314

Responsible business practicesTransparencyTaxBioethics

56

1217

Eco Limits Trust & Accountability

Business EnablersSocietal Shifts

PRIORITY TOP PRIORITYBUSINESS IMPACT

INTE

REST

HIG

H IN

TERE

STSO

CIE

TAL

INTE

REST

Example of a sustainability materiality matrix: DSMExhibit 5

Source: “Royal DSM Integrated Annual Report 2015,” p. 24.

DSM formally introduced its first materiality matrix in 2012, followed by a refresh in 2015.DSM's materiality matrix is aligned with the company’s risk management process, ensuringrisks identified in DSM’s Corporate Risk Assessment are reflected in the material topics.The 19 subjects are clustered into four categories: Societal Shifts, Eco Limits, BusinessEnablers, and Trust & Accountability.


Disclosure of climate change risks is increasing

The Conference Board Sustainability Practices report tracks company disclosure and performance across more than 70 environmental and social practices. Data from the report show disclosure on climate change risks is increasing:

More than one-fourth of S&P 500 companies included discussion of the risks associated with climate change in their annual SEC filings, compared to just 5 percent the previous year. The energy sector saw the greatest increase in this practice, with 43 percent of energy companies discussing climate change risks in their annual reports, compared to only 10 percent the previous year.

Source: Sustainability Practices 2015 Key Findings, The Conference Board, p. 8.

Disclosure of climate change risks, rate by indexChart 11

Source: The Conference Board/Bloomberg, 2014.

Note: For S&P Global: in 2014, n=226; in 2013, n=109. For Russell 100:in 2014, n=199; in 2013, n=31. For S&P 500: in 2014, n=135; in 2013, n=26.

19%

S&P Global 1200 Russell 1000 S&P 500

9

19

3 5

272014 2013

IN SUMMARY

• Sustainability-related issues can no longer be ignored by companies wishing to remain competitive in the long term. Environmental risks, such as climate change and water scarcity, now represent major business risks.

• Companies need to be prepared to manage environmental and social risks that can have significant business implications. An issue matrix (developed with input from a broad set of stakeholders) can be an effective tool for prioritizing sustainability issues that belong at the core of a company’s strategy.

• Companies should promote close collaboration between their sustainability and strategy teams by, for example, embedding sustainability leaders into the strategy function, both at the corporate and business unit levels.


IV. Sustainability goals are strategic, ambitious, and long term

Goals and targets play a critical part in rallying employees behind their company’s sustainability strategy. However, simply having a set of sustainability goals is not sufficient—the types of goals companies choose matter and can make all the difference in how successfully companies achieve their sustainability initiatives.

Establishing sustainability goals creates a number of advantages for businesses. It implies sustainability performance will get measured and managed, ultimately leading to greater accountability. Setting goals helps establish a clear set of priorities for the organization and focuses attention on the issues that matter most to the company and its stakeholders. The presence of company-wide goals also helps build the case for allocating sufficient resources to managing sustainability issues and meeting related goals. Employees are also better able to rally behind a sustainability strategy that is accompanied by a clear set of goals. And not least, public sustainability goals also serve a symbolic purpose by announcing a company’s intent and commitment, which can have a significant impact on reputation and brand sentiment.

However, not all goals are created equal, and few companies have appropriate targets. Research from CDP, for example, notes that although 81 percent of the world’s 500 largest companies have emission reduction or energy-specific targets, most of the targets are inadequate to meet the threat posed by climate change, either because the targets do not cover a meaningful percentage of the organization’s emissions or they are insufficiently long term and ambitious.55 Companies that strive to be at the forefront of sustainability leadership develop goals that are strategic, ambitious, and focused on the long term.

55 Mind the Science, CDP, May 2015, p. 3.


Strategic goalsThe most effective sustainability goals are those that closely align with a company’s core business. This is where the “materiality analysis” process (described on page 44) becomes helpful. Companies that are able to articulate the areas of priority to the business are better able to establish goals and targets that will ultimately add value. For example, while a paper reduction goal for an energy company is laudable, effort and time would be better spent establishing goals associated with more material impacts, such as water usage.

Syngenta, a leading agriculture company, provides a good example of how sustainability goals can be crafted around a set of issues that are most relevant and significant to a company. The company’s “Good Growth Plan” focuses on six key issues shaping the future sustainability of agriculture, each with a 2020 goal. The goals include making crops more efficient, rescuing farmland on the brink of degradation, and enhancing biodiversity on farmland.56

In another example, in 2013 Michelin established six “ambitions” for 2020 that bring together the company’s financial, environmental, and social responsibility commitments. These ambitions are aligned with the company’s operational strategy—not just the sustainability strategy—and help guide company-wide decisions. Each ambition is accompanied by a set of specific targets, as shown in Exhibit 6 on page 49.

56 Syngenta Non-financial Performance Discussion 2014, p. 3.


SIX AMBITIONS FOR 2020

FOUR DRIVERS OF FASTER VALUE CREATION

1

4

2

5

3

6

Deployed across the Group, our Six Ambitions for 2020 are designed to make Michelin

a leader in sustainable mobility and one of the world’s top-performing companies

in fulfilling all its responsibilities. (1)

By 2020, Michelin is committed to generating €1 billion in structural

free cash flow (1) and a return on capital employed of at least 15%. (1)

PRODUCT PERFORMANCE

Widen our lead in product performance

by delivering more performance while using less raw materials

and improving fuel efficiency.

PERSONAL WELL-BEING AND

DEVELOPMENTWork together

to continuously improvehealth and safety in the workplace,

while promoting personal growth and diversity.

HOST COMMUNITIES

Strengthen ties with our host communities

by contributing to the vitality of the regions and encouraging

employees to get involved in society.SUSTAINABLE

MOBILITYImprove everyone’s quality

of life through sustainable mobility

by strengthening our road safety initiatives, promoting energy-efficient,

low-emissions mobility, especially in cities, and contributing to the

development of a circular economy by advocating renewable and recycled

solutions.

A RESPONSIBLE MANUFACTURER

Set the industry standardfor responsible manufacturing,

logistics and purchasing.FINANCIAL PERFORMANCE

Secure our financial performance

by pursuing excellence in every aspect of our business.

12

34

INNOVATIONInnovating to nurture

differentiation and loyalty• The tire industry’s most extensive R&D base, a global incubator program focused

on intelligent, sustainable mobility.• Efficient tires offering the best performance for the price in each

segment.• Innovative solutions combining tires and services to create shared value.

• Designs and production processes that use fewer raw materials and less energy,

with biosourced and recycled materials.

GROWTHSeizing every opportunity

• New production capacity to support rising mobility in the new markets

and to meet demand for 17-inch and larger tires.

• Increasingly specialized, powerful, flexible plants.

• Fast-growing proprietary and franchised dealer networks

in both physical and digital channels.• Advanced digital services that are helping improve the performance

of fleet managers and dealers.COMPETITIVENESSBecoming increasingly

competitive• A €1.2-billion competitiveness plan for 2012-2016.

• Two worldwide programs to make the organization more efficient,

agile and digital: Efficiency and OPE.• Global standards and systems to drive continuous improvement:

Michelin Manufacturing Way.• Efficient industrial organizations: Managing Daily Performance,

Empowering Organizations, Autonomous Management of

Performance and Progress.

MOVING FORWARD TOGETHER

Encouraging engagement and contribution

• 77% of employees engaged.• 64 hours of training per trainee, 5,000 mentors to help everyone achieve

their full potential.• 68% of top managers in the growth regions were born there.

• High-quality working environments and trustworthy relationships

with front-line management.

2 SUSTAINABLE, PROFITABLE GROWTH

22 23

(1) All six ambitions for 2020 are backed

by quantifi able objectives and metrics that are

regularly measured. For more information,

please refer to the 2015 Registration Document,

pp. 19 and 20. (1) At constant scope of consolidation.

Exhibit 6

Michelin’s six ambitions for 2020

Source: Michelin


Ambitious and aspirational goalsGoals that are ambitious and aspirational can instill a sense of urgency within a company and can also serve as catalysts for innovation. Some companies intentionally set aspira-tional goals to stretch the organization into new ways of thinking. When Novelis set a goal to achieve 80 percent of the company’s aluminum inputs from recycled sources, CEO Phil Martens admitted the goal felt nearly impossible. Lee Scott of Walmart also admitted to not knowing exactly how the company would achieve its sustainability goals, which include creating zero waste and being entirely supplied by renewable energy. A few years ago, LEGO committed to making all of its products from sustainable materials (replacing oil-based plastic) by 2030, without exactly knowing how this would be achieved.

Carbon pricing and net zero emissions goals: Examples from Microsoft and Disney

Some companies have established internal carbon prices to manage long-term risks or to help fund sustainability efforts, including carbon neutrality goals. Microsoft, for example, in 2012 made a commitment to achieve net zero emissions for its data centers, software development labs, offices, manufacturing sites, and employee business air travel. To achieve this goal, Microsoft focuses on energy efficiency, renewable energy, carbon offsets, and other innovation projects funded by the company’s internal carbon fee. The carbon fee is determined by tracking the amount of energy that each business unit consumes and converting the amount into metric tons of carbon. The cost of offsetting these emissions, along with other investments in environmental initiatives, is then divided by the total carbon emissions to determine the price on carbon. Each business unit is then charged a carbon fee based on the emissions associated with its respective energy consumption. In FY2016, Microsoft is charging its business units approximately $20 million to cover investments to offset emissions.

Another example comes from Disney. The Disney Climate Solutions Fund (DCSF) is one of the tools the company uses to address climate change. Disney charges its business units for the greenhouse gas emissions they generate, and the dollars that are collected make up the DCSF. With the fund, Disney has used this money to invest in reforestation projects and improving forest management techniques around the world, from California to inner Mongolia. Since 2009, Disney has invested more than $48 million in carbon-offset projects to support over 147,000 acres of forested land—the equivalent of four Walt Disney World parks.


Dell’s latest sustainability goals offer a good example of ambition in goal setting. While Dell has been active on sustainability issues for many years (the company’s first CSR report was released in 1998), 2007 marked the beginning of the company’s push for sustainability leadership. CEO Michael Dell’s commitment to making the company a leader in green IT led to the creation of a number of company-wide sustainability goals. In early 2012, the company began an 18-month process of materiality assessments and reviews of best practices in setting long-term sustainability goals. The result was the creation of Dell’s overarching umbrella framework for sustainability goals—a “Legacy of Good”—that ties together 21 sustainability goals across 10 areas of ambition (Exhibit 7). The new goals were released in 2013.

Our 21 ambitious goals identify how we will reach our aspirations. All of these goals are bound by an end date of 2020.

Goals index

How we measure our success

Goals index | 7

FY15 Legacy of Good Update

Reduce greenhousegas emissions from ourfacilities and logisticsoperations by 50%

Reduce our water usein water-stressedregions by 20%

Ensure 90% of wastegenerated in Dell-operated buildings isdiverted from landfills

Develop and maintainsustainability initiativesin 100% of Dell-operated buildings

Demonstrate 100%transparency of key issueswithing our supply chain,working with suppliers tomitigate risks in those areas

Ensure 100% of productpackaging is sourced fromsustainable materials

Reduce the energy intensity ofour product portfolio by 80%

Use 50 million pounds ofrecycled-content plastic andother sustainable materialsin our products

Ensure 100% of Dellpackaging is eitherrecyclable or compostable

Phase out environmentallysensitive materials asviable alternatives exist

Recover 2 billion poundsof used electronics

Identify and quantify theenvironmental benefits ofDell-developed solutions

Engage 75% of teammembers in communityservice by 2020 andprovide 5 millioncumulative hours of serviceto the communities inwhich we live and work

Apply our expertise andtechnology in underservedcommunities to help3 million youth directlyand support 10 millionpeople indirectly to growand thrive

Increase engagementand drive inspirationalleadership on Dell’sstrategies, priorities andgoals through Dell’send-to-end LeadershipDevelopment Programs

Engage 40% of our globalDell team in employeeresource groups by 2020

Encourage eligible teammembers to enroll in Dellflexible work programs,increasing globalparticipation to 50%

Be recognized as a best-in-class Employer of Choice

Increase university hiringto a rate of 25% of allexternal hiring

Achieve 75% favorableresponses (or higher)in team membersatisfaction globally asmeasured through theannual employeesatisfaction survey

Communities

Environment

People

10X20 Goal — A Legacy of Good

By 2020, the good that will come from our technology will be 10x what it takes to create and use it

Exhibit 7

Dell’s “Legacy of Good” goals

Source: Dell FY15 Corporate Social Responsibility Report, p. 7.


One of these goals, the “10x20” goal, represents a summation of the company’s ambition. The “10x20” goal states: “By 2020, the good that will come from our technology will be 10x what it takes to create and use it.” This goal represents an ambitious aggregation of Dell’s other sustainability goals, including emissions reductions and closed-loop supply chain initiatives. When 10x20 was included among Dell’s goals, the company acknowledged there would be challenges in developing a methodology to measure its achievement. In its CSR report, Dell notes that “…this goal is more than a mathematical exercise. It represents an opportunity to innovate new ways of doing business and measuring the results.”57 Given the challenge, Dell is working with multiple partners—including Forum for the Future and World Wildlife Fund—to develop a framework for measuring progress toward this ambitious goal. The aim is to share the framework with the business community to encourage broader adoption of these types of goals.

Goals of the magnitude of Dell’s “10x20” ambition may seem unattainable, but they can be a catalyst for helping organizations reconsider and redesign their business models.

While ambitious long-term targets face the challenge of uncertainty, these targets often lead to improved performance, even if the targets are not actually met. For instance, research by PwC found that companies with the most aggressive carbon reduction goals typically achieved the most reductions, despite having the lowest success rates in meeting their goals.58 The lesson is simple: Companies should not let uncertainties about achieving goals detract from setting ambitious targets.

Long-term goalsTargets that are focused on the long term demonstrate a commitment to longevity and a recognition of the potential need to adapt to future scenarios. These goals signal that a company is thinking about and preparing for future risks and opportunities. While the specific definition of “long term” varies between companies, these goals generally have target dates of at least 2020, with some to 2050 and beyond. Dow Chemical, for example, in 2015 announced a set of seven sustainability goals with a target date of 2025.59 EMC also has a number of long-term sustainability goals, including a goal to obtain half of the company’s electricity needs from renewable sources by 2050.60 These goals serve an important function in defining a company’s strategy.

57 Dell FY15 Corporate Social Responsibility Report, p. 8.

58 Sustainability Goals 2.0: An Evolving Landscape, PwC, February 2012, p. 6.

59 “Dow Launches 2025 Sustainability Goals to Help Redefine the Role of Business in Society,” Dow Chemical press release, April 15, 2015.

60 2014 EMC Sustainability Report, p. 6. NB: A merger between Dell and EMC is under way, with expected completion by the end of 2016.


Long-term targets can be supplemented with a series of shorter-term goals that can help steer companies in the right direction. For example, EMC’s 2050 renewable energy goal also includes a 2020 goal (which the company surpassed in 2014). Similarly, EMC’s GHG reduction goal has a target date of 2050 that is also supplemented by a 2020 target (see Exhibit 8). Alcoa’s GHG, energy, waste, and water reduction goals have target dates of 2020 and 2030. Shorter-term goals can also support long-term visionary goals. Procter & Gamble, for instance, has a long-term vision of powering all of the company’s plants with 100 percent renewable energy, using 100 percent renewable or recycled materials for all of its products and packaging, and having zero consumer and manufacturing waste go to landfills. This vision is supported by a series of shorter-term 2020 goals. Similarly, Disney’s long-term commitments to net zero GHG emissions and zero waste are supported by 2020 goals.

METRIC SCOPE 2005 2010 2011 2012 2013 2014 2020 2050 STATUS

Global Absolute Scopes 1 & 2 GHG Emissions in MT CO2e

All leased and owned global facilities and mobile assets, excluding VMware; VCE is now included as EMC emissions

304,931 335,534 346,715

(312,378 with 34,337

due to RECs)

363,975

(237,969 with 126,006 due to RECs)

379,947

(298,583 with 81,364

due to RECs)

387,258

(257,636 with 129,622 due to RECs)

Target: 40% below 2010

(201,320 MT)

Target: 80% below 2000 (estimated at 274,000 MT, target: 54,800 MT)

ON PLAN

Percent of global electricity needs served by Renewables

% MWh; excludes VMware

N/A 0.0% 8.9% 23.2% 14.9% 20.6% Target: 20%

Target: 50%

ACHIEVED

2020AHEAD OF

PLAN

* NB: A merger between Dell and EMC is under way, with expected completion by the end of 2016.

Source: 2014 EMC Sustainability Report, p. 6.

Exhibit 8

Example of EMC’s Long-Term Sustainability Targets*


For companies setting long-term sustainability targets, goal setting against science-based targets (i.e., emission reduction targets consistent with recommendations by climate scientists to limit the impacts of climate change) can be a useful approach to ensure targets are meaningful and sufficiently ambitious. Many companies, however, set cautious 2020 goals that are not aligned with science-based targets. To help with science-based target-setting, companies can refer to a methodology established by the Science Based Targets initiative, a partnership between CDP, UN Global Compact, World Resources Institute, and World Wildlife Fund.

Sustainability goals: A 2020 vision

In a survey of sustainability and EH&S executives, 79 percent of respondents indicated their companies have set long-term sustainability goals. For the majority of companies (52 percent), the target date is 2020. Respondents were fairly evenly split when asked if they had evaluated science-based goals when setting their energy, CO2, or GHG reduction goals.

Have you set long-term (e.g., 2020) sustainability goals?Chart 12

N=48YES

79.2% 20.8

NO

What best describes the target date for most of your sustainability goals?Chart 13

Source: Results from a 2016 survey of members of The Conference Board Sustainability Councilsand Chief EH&S Officers Council.

Before2020 2020 2025

13.0% 52.2 21.7

N/A

10.9

2030 and beyond [2.2]

In setting your energy/CO2 /GHG goals, did you carefully evaluate science-based goals?Chart 14

YES

0 100%

53.5% 46.5

NO

N=46

N=43


ORGANIZATION COUNTRYPERCENT

REDUCTIONTARGET YEAR*

Aimia Canada 100% 2014

Bank of Montreal** Canada 100 2014

Biogen US 100 2014

Google US 100 2014

Insurance Australia Group Australia 100 2014

Intuit US 100 2014

Kohl’s** US 100 2014

Marks and Spencer Group** UK 100 2014

Microsoft** US 100 2014

TD Bank Group** Canada 100 2014

Royal KPN Netherlands 100 2015

Energy Optimizer US 100 2017

Infosys India 100 2018

Goldman Sachs US 100 2020

Interface US 100 2020

Kingspan Group Ireland 100 2020

Mars US 100 2040

Deutsche Bahn Germany 100 2050

GlaxoSmithKline** UK 100 2050

Tesco** UK 100 2050

VERBUND Austria 100 2050

BillerudKorsnäs Sweden 100 NA

AGL Energy Australia 94 2050

Fabege Sweden 90 2014

NRG Energy US 90 2050

Ricoh Co.** Japan 88 2050

Autodesk US 85 2050

BT Group** UK 80 2014

EMC US 80 2050

Konica Minolta Japan 80 2050

Marshalls UK 80 2050

National Grid UK 80 2050

Obayashi Japan 80 2050

Swiss Post Solutions UK 80 2050

Exhibit 9

Companies with 80-100% GHG emissions reduction targetsBased on the latest responses to CDP and participation in the American Business Act on Climate Pledge, 34 companies have committed to reducing their GHG emissions by 80-100%.

Bold text indicates achieved target.

* Near term targets likely include use of renewable energy certificates (RECs) and/or carbon offsets.

** Target includes emissions beyond direct operations into the value chain (Scope 3)

Source: Unlocking Ambition: Top Corporate and Sub-national Climate Commitments: December 2015 Update, CDP and The Climate Group, p. 4.


UN Sustainable Development Goals

Several companies are aligning their sustainability goals with the UN Sustainable Development Goals, which came into effect on January 1, 2016, and are intended to be implemented by 2030. The goals and associated targets will guide the decisions of heads of state and government and high-level representatives over the next 15 years. The following are the 17 goals:

Exhibit 10

Source: United Nations Division for Sustainable Development


IN SUMMARY

• Settingcorporatesustainabilitygoalshelpscreateaccountabilityandamechanismforimprovingsustainabilityperformance.Themosteffectivesustainabilitygoalsarestrategic,ambitious,andfocusedonthelongterm.

— Strategicgoalsensuretargetsareinlinewithacompany’smostimportantsustainabilityissues,typicallyidentifiedusingamaterialityanalysisprocess.

— Ambitiousgoalscanhelpkick-startinnovationandcreateasenseofurgency.Evenifthesegoalsarenotachieved,ambitioustargetscanleadtosignificantlyimprovedperformance.

— Long-termtargetssignalacompanyisthinkingaboutandpreparingforfuturerisksandopportunities.Thesetargetscanbesupplementedbyaseriesofshorter-termgoals.

• Groundingacompany’ssustainabilitygoalsinscienceandaligningwiththeUNSDGsisgrowingrapidlyinimportance.Manycompaniessettheirsustain-abilitygoalswithoutcarefulattentiontoeitherorboth.

— Carbonreductionandrenewableenergygoalsofleadingcompaniesare‘science-based’andthisoftenmeanssettingmoreambitiousgoalsthancompaniesmightotherwisedo.

— AligninggoalswiththeUNSDGsisimportant—atleastonthosefewmostmaterialissuesacompanyfaces.


V. Executive compensation is tied to sustainability performance

Once goals and targets are established, appropriate incentives need to be created to drive performance against those targets. These incentives are important: A McKinsey survey of executives from 40 companies revealed a lack of incentives as the top reason given by respondents for their companies’ failure to capture the full value of sustain-ability.61 Not only do the right incentives help drive performance against targets, they also serve as powerful tools to reward long-term thinking and can also encourage senior management to integrate sustainability issues in discussions with shareholders.

While incentive compensation can be a strong driver of sustainability performance, few companies actively apply this practice. For example, only 3 percent of companies in the S&P Global 1200 link executive compensation to sustainability performance targets.62 Even among a smaller sample of members of The Conference Board—a group consisting of major industry leaders—only about 39 percent of survey respondents indicated the CEO’s incentive compensation is tied to sustainability performance metrics.63 While current levels are low, the number of companies adopting this practice is likely to increase, particularly as the number of companies with company-wide sustainability performance indicators continues to grow. Investors are also recognizing the role that incentives play in ensuring strong sustainability performance and the positive effects this performance can have on a company’s long-term value. Interest from investors is evident in the 25 shareholder resolutions tracked by Ceres between 2011 and 2015 calling on board compensation committees to tie executive pay to relevant sustainability metrics.64 In 2015 alone, three shareholder resolutions were filed on this topic—at Exxon, Chevron, and Walgreens.65 Though these resolutions are becoming more common, support levels remain very low for now.

61 Profits with Purpose, p. 10.

62 Sustainability Practices 2015: Key Findings, The Conference Board, February 2015, p. 12.

63 Results from a 2016 survey by The Conference Board of sustainability and EH&S executives at 62 member companies.

64 Ramani, View from the Top, Ceres, p. 23.

65 Based on data provided by FactSet for Russell 3000 companies.

Is the CEO’s incentive compensation linked to sustainability (including EH&S)performance metrics?

Chart 15


N=62

YES

0 100%

38.7% 61.3

NO


The specific sustainability indicators companies choose to include in their incentive compensation schemes vary depending on how material those issues are for the company. As noted by Ceres, where sustainability is tied to executive compensation, the board of directors typically prioritizes the most material sustainability issues.66 Establishing a link between incentive compensation and sustainability performance can thus encourage boards to focus on the sustainability issues of highest priority, which vary by company and by sector. One study found that the three most common nonfinancial metrics linked to executive remuneration were in the areas of occupational health and safety, employee satisfaction, and customer service.67

The Principles for Responsible Investment (PRI) offer the following guiding points for linking ESG metrics to remuneration frameworks:

• ESG targets should be integrated into an appropriate time horizon that is in line with business strategy;

• ESG targets should be stringent and challenging to ensure incentivizing outperformance;

• Companies should select appropriate mechanisms and structures when creating incentive pay packages to ensure long-term shareholder value creation;

• Incentive compensation should be subject to downward discretionary adjust-ments by the compensation committee to account for unusual events or unintended consequences as well as claw-back provisions;

• In quantifying ESG metrics and measuring performance, the board may apply a clearly substantiated degree of discretion.

Source: Integrating ESG Issues into Executive Pay: Guidance for Investors and Companies, Principles for Responsible Investment (PRI), June 2012, p. 2.

66 Ramani, View from the Top, p. 23.

67 Alice Klettner, Thomas Clarke, and Martijn Boersma, “The Governance of Corporate Sustainability: Empirical Insights into the Development, Leadership and Implementation of Responsible Business Strategy,” Journal of Business Ethics 122, no. 1, June 2014, p. 160.


The following are some examples from companies that link executive compensation to sustainability performance:

Alcoa In 2010 Alcoa’s CEO introduced sustainability metrics into the company’s variable compensation scheme. Up to 20 percent of employees’ variable (cash incentive) compensation is linked to achieving sustainability targets, which include safety targets (5 percent) and CO2 emissions reduction targets (5 percent). Alcoa’s management-level employees also have an additional target to improve the diversity of the company’s workforce (10 percent).

DSM DSM includes sustainability metrics in the managing board’s short-term incentive (STI) scheme as well as the long-term incentive (LTI) performance share plan. The STI opportunity amounts to 50 percent of the annual base salary for on-target performance and 100 percent in the case of excellent performance. Half of the STI opportunity (i.e., 25 percent of base salary at on-target performance) is related to financial targets, the other half to sustainability and individual targets. The sustainability metrics linked to the STI scheme include:

• The percentage of DSM’s successful product launches that meet ECO+ criteria (DSM’s ECO+ solutions are products and services that, when considered over their whole life cycle, offer a clearly lower eco-footprint compared to the mainstream solutions they compete with);

• Results from the company’s employee engagement survey; and

• Safety performance (as measured by the frequency index for recordable injuries).

In addition to the STI scheme, DSM includes four performance measures with equal weighting for the calculation of the vesting of LTI performance shares:

• Comparable total shareholder return performance versus a peer group;

• Greenhouse gas emissions reduction over volume related revenue;

• Return on capital employed; and

• Energy efficiency improvement.


Verizon The Human Resources Committee of Verizon’s board of directors oversees the development and implementation of the total compensation program for Verizon’s named executive officers. In 2014 the committee added an environmental sustain-ability target to the company’s STI plan. This new carbon intensity target, along with the diversity targets, accounts for 5 percent of Verizon’s compensation plan. The included diversity and sustainability targets are:

• Increase the number of US-based minority and female employees year over year;

• Direct at least 9.2 percent of the company’s overall supplier spending to minority- and female-owned firms;

• Reduce the company’s carbon intensity by at least 3 percent compared to the prior year.

Verizon’s 2014 Short-Term Plan Performance MeasuresExhibit 11

Source: 2015 Verizon Proxy Statement

Diversity andSustainability

5%

Total Revenue20%

Free Cash Flow25%

Adjusted EPS50%


Shell Sustainable development measures account for 20 percent of Shell’s executive bonus structure. One-half of these are related to safety (personal safety and process safety), and the other half are related to environmental sustainability (energy intensity, oil spill volume, and water use).

Copyright of Royal Dutch Shell plc

30% weight

CFFO

50% weight

Operational Excellence

2015 EXECUTIVE BONUS STRUCTURE

20% weight

Sustainable Development

10% weight

Safety

10% weight

Sustainability

5% weight

Personal Safety

5% weight

Process Safety

4% weight

Energy Intensity

4% weight

Oil Spill volumes

2% weight

Water use

STRATEGIC KPIS AND EXECUTIVE INCENTIVES

14 April, 2015

Exhibit 12

Shell’s 2015 Executive Bonus Structure

Source: Shell 2015 Annual Roundtable for Socially Responsible Investors


IN SUMMARY

• Business leaders point to a lack of incentives as a significant obstacle to achieving their companies’ sustainability potential.

• Linking incentive compensation to a set of sustainability targets helps make sustainability a priority for the organization and can steer company leadership to consider initiatives with long-term benefits that may otherwise have been ignored.

• While the number of companies that have introduced pay for sustainability performance is growing, the sample remains fairly low. For companies that introduce this practice, the sustainability benefits can be significant: Incorporating pay for sustainability performance can reward long-term thinking, elevate sustainability issues to the CEO’s agenda, and drive performance against sustainability targets.


VI. Sustainability is part of the innovation process

For many companies, the value of sustainability initiatives goes beyond operational efficiencies, particularly as companies increasingly realize the potential of sustainability as a driver of business growth and innovation. Almost half of respondents in a McKinsey survey of executives from 40 companies mentioned business and growth opportunities as a reason to get started on sustainability.68 Furthermore, in the latest edition of the CEO Challenge survey by The Conference Board, respondents identified “commit innovation/R&D efforts to build portfolio of sustainable products/services” as a top-three strategy for meeting the sustainability challenge (see Exhibit 4 on page 43).

The extent to which sustainability initiatives can contribute to market growth is significant. Simply having sound corporate responsibility management can potentially increase a company’s revenues up to 20 percent.69 In a recent report, The Conference Board further investigated the extent to which companies are generating revenues from sustainability and found that among a group of 12 S&P Global 100 companies, revenues from portfolios of sustainable products and services accounted on average for 21 percent of total revenues (see Exhibit 13 on page 65). Revenues from these portfolios also grew at six times the rate of overall company revenues.70

Companies should be paying attention to growing demand for products and solutions that help address sustainability challenges. In a 2015 Nielsen survey, 66 percent of global online consumers indicated they were willing to pay more for products and services from companies that are committed to positive environmental and social impact, an increase from 55 percent in 2014 and 50 percent in 2013.71 Similarly, results from the Tork Green Business Survey reveal that almost half (46 percent) of Americans would spend more money on purchases if they could be guaranteed of ethical and responsible manufac-turing practices, up from 40 percent in 2014.72

Consumers, and customers, are increasingly demanding products developed with fewer raw materials or with safer materials, or products that consume fewer resources (e.g., energy, water) and are easier to recycle or reuse, among other sustainability advantages. Several leading companies are recognizing this demand and investing resources to improve existing products or develop new products with a sustainability lens. 3M, for example, embeds Product Responsibility Liaisons (PRLs) within the company’s businesses and countries of operation to ensure sustainability is integrated into product development.

68 Profits with Purpose, McKinsey & Company, p. 14.

69 Project ROI, IO Sustainability and Babson College, p. 17.


71 2015 Nielsen Global Corporate Sustainability Report, The Nielsen Company, October 2015, p. 8.

72 “American Consumers Take Sustainability to the Next Level,” PR Newswire, September 23, 2015 (www.prnewswire.com/news-releases/american-consumers-take-sustainability-to-the-next-level-300147756.html).


Change in Revenue fromSustainable Products and Services

vs. Change in Total Company Revenue (Average, 2010 vs. 2013, n=7)

Allianz BASF

CaterpillarDow Chemical

DuPontGE

Johnson & JohnsonKimberly-Clark

PanasonicPhilips

SiemensToshiba

21%

BASFDow Chemical

DuPontGE

Kimberly-ClarkPhilips

Siemens

For Business Trailblazers, Innovation in Sustainable Products and Services DeliversIn 2015 The Conference Board investigated the extent to which companies are generating revenues from sustainability. Among a sample of select companies within the S&P Global 100 Index, companies are recognizing the potential of sustainability initiatives, committing to them with R&D investments, and realizing results in their topline growth.

Strong foundations and sustained commitment are needed to successfully launch and grow portfolios of sustainable products and services. Many of the companies in the sample are not newcomers to sustainability; they have been active participants in developing and refining their sustainability strategies and initiativesover the past several years. More than half are included in the Dow Jones Sustainability Index (DJSI) andthe majority are signatories to the UN Global Compact.

Revenue from SustainableProducts & Services as a

Percentage of Total Revenue (Average, 2013, n=12)

91%

15%

…grew at six times the rate of overall company revenues

Sustainability R&D Spendingas a Percentage of Total R&D

Spending (Average, 2013, n=7)

38%

BASFDaimlerDuPont

GENissanPhilips

Toshiba

…and represented two-fifths of R&D investment.

Sustainable products& services contributed 21 percent of total revenue…

Sustainable P&S

Total Revenue

Source: Driving Revenue Growth through Sustainable Products and Services: Strategic Overview, The Conference Board, Research Report 1583, June 2015.

Exhibit 13

Revenue and innovation from sustainable products and services


The PRLs serve as a link between 3M’s Business Teams and the Corporate Staff Groups (Environmental, Toxicology, Industrial Hygiene, and Safety) and ensure the appropriate risk assessments are made and improvements are incorporated into product development. The company performs selected product life cycle assessments on a prioritized basis, which may include elements relating to energy use and greenhouse gas emissions, material selection, safety, and product “end of life” design, among other areas.

In another example, IKEA has a product innovation team dedicated to identifying and building new sustainability-related business opportunities (see box on page 69 for more details). Companies are increasingly recognizing the link between sustainability and innovation and the role sustainability can play in driving market growth. For instance, in a survey by The Conference Board, over half of respondents indicated they explicitly market a portfolio of products as “sustainable,” “green,” or “healthy,” and of these companies, more than half noted they have sales targets associated with these portfolios.

Do you explicitly market a portfolio of products as ‘sustainable’ or ‘green’ or ‘healthy’?Chart 16

N=47

YES

57.4% 42.6

NO


Do you have sales targets ($ or % of sales) associated with your ‘sustainable’ product portfolio?Chart 17

N=32

YES

0 100%

56.3% 43.8

NO

Percentages do not add up to 100 due to rounding.


A green R&D budgetA report by The Conference Board examined the extent to which large companies disclose R&D investments allocated to sustainability. The research found that, while few companies track or disclose this spending separately, those that do are investing heavily in sustain-ability-related innovations. For example, among a sample of seven companies, sustainability R&D spending on average accounted for 38 percent of overall R&D spending.73 Some examples of companies that track sustainability R&D spending include the following:74

• At DuPont, environmental R&D investment for new product development accounted for 46 percent of the company’s total R&D budget in 2013, or about US$1 billion. Sustainable innovation is one of the three key strategic areas in DuPont’s 2020 sustainability goals. As part of these goals, DuPont is challenging all products in its pipeline to contribute to a safer, healthier, more sustainable world, and through 2020 the company will measure and report on the quantifiable safety, health, and sustainability benefits from its major growth innovations.75

• BASF spends about one-third of the company’s R&D budget on product and process innovations where the R&D target is related to resource efficiency and climate protection.

• In 2014 GE allocated about 54 percent of the company’s R&D budget to its EcomaginationSM portfolio, or about US$2.3 billion. Since the initiative’s launch, total EcomaginationSM R&D investments have surpassed $15 billion, with an additional $10 billion committed by 2020.

• In 2014 Philips allocated 28 percent of R&D spending to “green innovation,” which includes developing the company’s green products portfolio; tackling water, air, and waste challenges; and developing advances in materials and energy efficiency. Over half of Philips’ spending on green innovation is allocated to the company’s lighting business, which, among other innovations, has introduced Lighting as a Service solutions (whereby light service for customers is charged on a subscription basis while Philips retains ownership of all fixtures and installations, motivating customer and vendor to conserve energy) as a more sustainable alternative to the traditional business of selling lighting fixtures.


74 Unless otherwise noted, all data points are from Driving Revenue Growth through Sustainable Products and Services, p. 31.



• In 2015 DSM’s ECO+ solutions accounted for 91 percent of the innovation pipeline, exceeding the goal set by DSM in 2010 to have ECO+ solutions account for at least 80 percent of the innovation pipeline by 2015.76 DSM’s Innovation Center, which focuses on sustainable, long-term innovative growth, contains a dedicated “Business Incubator” focusing on climate change-induced innovation and cradle-to-cradle solutions.77

Integrating sustainability into product design at Nike

Sustainable innovation is a significant part of Nike’s business strategy, and the CEO and senior leadership view sustainable innovations as important drivers of the company’s future growth and profitability. The strategic importance sustainability has to innovation is evident, not least, in the company’s reporting relationships: Nike’s Sustainable Business & Innovation (SB&I) team sits within the company’s Innovation function, and Nike’s chief sustainability officer reports directly to both the CEO and the president of Innovation.

Many of Nike’s current sustainable innovation initiatives have their roots in 2005, when the company launched Considered Design—Nike’s ethos to create products that address environmental impact by reducing waste, increasing the use of environmentally preferred materials, and eliminating toxics. Considered Design was established to empower the company’s designers to champion sustainability-driven innovations and to fully integrate sustainability into the product design process. This led to the creation and 2007 launch of the Considered Index, a way of scoring products based on their environmental impact throughout the product development stages and the precursor to the company’s current sustainability indexes: the Footwear Sustainability Index and the Apparel Sustainability Index. These indices provide a way for Nike’s product creation teams to measure the environmental profile of each new product, and both are fed by the Materials Sustainability Index, established in 2012 to provide scores for specific materials and for material vendors based on a variety of environmental criteria.

Nike made its Materials Sustainability Index publicly available to facilitate consistent assessment of materials across the apparel industry. By the end of the company’s FY13, the Footwear Sustainability Index and Apparel Sustainability Index had scored about 50 percent of the company’s annual total Nike brand footwear and apparel product volume.

Sustainable innovation is also a core component of Nike’s manufacturing strategy. The company’s manufacturing initiatives fall into three broad categories: sustainable manufacturing excellence (such as lean manufacturing), manufacturing modernization, and manufacturing innovation. The latter focuses on efforts to completely reconsider how products are made in order to minimize their environmental impact.

76 Royal DSM Integrated Annual Report 2015, p. 13.

77 Royal DSM Integrated Annual Report 2014, p. 25. Cradle-to-cradle broadly refers to an approach to the design of products and systems in which all material inputs and outputs can either be recycled or reused with no loss of quality, or they can be composted or consumed.


Developing sustainability innovation projects that boost IKEA’s bottom line

After IKEA launched its 2020 sustainability strategy and hired its first chief sustainability officer, the company moved to ensure sustainability was embedded in its innovation function. In 2011 IKEA’s newly hired CSO formed a small team with the purpose of spearheading sustainability-related innovations. The group, known as the Sustainability Innovation (SI) team, works on identifying and building new sustainability-related business opportunities for IKEA. The SI team reports to the CSO, and its primary forum for decisions is IKEA’s nine-person executive management team, as well as smaller steering groups formed for the purpose of reviewing different projects.

Product innovation at IKEA considers the five dimensions of democratic product design: form, function, quality, sustainability, and affordability. The product innovation process at IKEA requires all five dimensions be addressed. While the company’s traditional innovation teams can begin product innovations in any of these dimensions, the SI team begins all product-related projects from the sustainability angle and then moves on to consider the other product dimensions.

The work of the SI team is guided by IKEA’s sustainability strategy, which focuses on three change drivers the company sums up as:a

1 Inspire and enable millions of customers to live a more sustainable life at home.

2 Strive for resource and energy independence.

3 Take a lead in creating a better life for the people and communities impacted by our business.

The team uses these three focus areas to identify and develop sustainability innovation projects that represent business opportunities for IKEA. One example includes the launch of IKEA’s new residential solar photovoltaic business for customers, which was successfully piloted in three countries and is now being rolled out to additional markets. The SI team also initiated and led the efforts for large-scale production of plastics from renewable sources, now brought into the line organization for execution. This directly supports IKEA’s 2020 commitment that all plastic material used in its home furnishing products be 100 percent renewable and/or recycled. While the initial intent is to develop these alternative plastics for IKEA’s own use, the company’s ambition is to eventually be able to share the benefits with other businesses as well.

The SI team prioritizes projects based on a scorecard that measures new revenue potential, sustainability impact, and brand positioning. Ultimately, the projects that score the highest are given the green light. In addition, all new SI team projects must ultimately have an equal or lower cost than the product or process the innovation is replacing. For example, the cost of switching to renewable plastics has to be the same or lower than the cost of using petroleum-based plastics. The goal is to eliminate the notion that sustainability innovations must come at a premium.

(Continued on next page)

a “People & Planet Positive: IKEA Group Sustainability Strategy for 2020,” IKEA, June 2014 (http://www.ikea.com/ms/en_US/pdf/reports-downloads/sustainability-strategy-people-and-planet-positive.pdf).


In addition to the SI team, IKEA also has a corporate venture capital arm (IKEA GreenTech) that invests in sustainability-related technologies and companies that can help IKEA deliver on its sustainability strategy. The SI team works in close collaboration with GreenTech on an as-needed basis in the process of identifying new business opportunities.

Top-line growthInvestments in sustainability innovation can help companies develop portfolios of products and services that will help them remain competitive in an increasingly resource-constrained world. Examples from several leading companies demonstrate these portfolios are not only viable, but also a significant source of revenue growth. For instance:78

• Johnson & Johnson’s Earthwards® portfolio grew from nine products in 2009 to 73 products in 2014, representing about 11 percent of the company’s 2014 revenue, or US$8 billion. The portfolio houses the company’s most broadly sustainable products. To be included in this portfolio, products must achieve three significant improvements across seven sustainability action areas: sustain-ability in materials, packaging, energy, waste, water, social impact, or innovation.

• Kimberly-Clark’s ecoLOGICAL portfolio accounted for 52 percent of the company’s revenue in 2014, or more than US$10 billion79 In 2010 the portfolio accounted for only 10 percent of Kimberly-Clark’s overall revenue. Before being included in the ecoLOGICAL portfolio, products must be evaluated and qualified in at least one of four categories: responsible materials (including rapidly renewable materials, third-party-certified materials, and postconsumer materials); life cycle footprint; third-party certification; and breakthrough environmental innovation.

• Siemens’ Environmental Portfolio accounted for 43 percent of the company’s overall revenue in 2015, or almost €33 billion.80 The Environmental Portfolio consists of products, solutions, and services that contribute to environmental and climate protection. Inclusion in the portfolio is primarily based on three criteria: energy efficiency (specifically products that offer at least a 20 percent energy efficiency increase over comparable solutions or a reduction of at least 100,000 metric tons of carbon dioxide per year in the customer use phase); renewable energy sources (such as wind turbines, and smart grid applications and components, such as smart meters); and environmental technologies (such as pollution control or water treatment systems).

78 Unless otherwise noted, all data points are from Driving Revenue Growth through Sustainable Products and Services, p. 24.

79 Kimberly-Clark 2014 Sustainability Report, p. 8.

80 Siemens Sustainability Information 2015, p. 21.


• Philips’ “green products” accounted for 52 percent of the company’s overall revenue in 2014, or about US$14 billion. The portfolio is defined by products which offer a significant environmental improvement in one or more focal areas: energy efficiency, packaging, hazardous substances, weight, recycling and disposal, and lifetime reliability.

• DSM’s ECO+ solutions accounted for 57 percent of the company’s total sales in 2015.81 The company’s ECO+ products are those that offer greater quantifi-able environmental advantages over mainstream alternatives on the market. DSM uses comparative Life Cycle Assessments (LCAs) and/or expert opinions to determine whether a solution should be considered ECO+. ECO+ sales have an average annual growth rate of around 10 percent, and across DSM’s Life Sciences and Materials Sciences businesses, ECO+ sales have higher margins than do non-ECO+ sales.82



IN SUMMARY

• Companies are increasingly pointing to business and growth opportunities as a reason to get started on sustainability.

• “Commit innovation/R&D efforts to build portfolio of sustainable products/services” is a top-three strategy among global CEOs for meeting the sustainability challenge.

• To meet customers’ growing demand for solutions that address sustainability challenges, leading companies are investing significantly in sustainability R&D and innovation and are developing portfolios of sustainable products and services with strong contributions to revenue growth. Several companies are generating as much as half of their total revenues from these portfolios.


VII. Sustainability is woven into company

reporting and engagement

A reporting evolutionLeadership in corporate sustainability requires establishing the right internal struc-tures, strategies, and policies, as well as a strong element of external communications, reporting, and engagement. Sustainability leaders excel at transparency; they are comfortable with openly reporting sustainability challenges and not just opportunities, and they see value in discussing company financial and nonfinancial performance side by side. Among these companies, sustainability is not viewed as an add-on; rather, it is woven into communications with stakeholders and is an integrated and core component of the company’s reporting process.

Corporate sustainability reporting—broadly defined as the reporting of nonfinancial indicators including those related to a company’s environmental and social impacts—has grown significantly over the last decade. For instance, 92 percent of the world’s 250 largest companies by revenue issued a corporate responsibility report in 2015, up from 64 percent in 2005.83 The growth in sustainability reporting has been driven by a number of factors, including pressure from stakeholders and, perhaps more significantly, increased regulation requiring companies to report this type of information.

However, simply issuing a separate report with nonfinancial data does little to assure stakeholders and investors that a company takes sustainability seriously. Instead, companies that are recognized as leaders in sustainability reporting typically:

Follow standard reporting guidelines Adhering to standard guidelines and frameworks for sustainability reporting helps ensure comparability and consistency in reporting. The Global Reporting Initiative (GRI) Sustainability Reporting Guidelines, for example, have become the most widely used standard. Almost half of S&P Global 1200 companies issue sustainability reports that follow GRI guidelines.84

Ensure content is well balanced Sustainability reports should provide an honest and well-balanced review of a company’s sustainability activities, including progress against targets, risks, opportunities, and challenges. Reports that focus only on a company’s sustainability achievements do little to inform stakeholders on how the company is addressing sustain-ability challenges and risk being perceived as an attempt to “greenwash.”

83 The KPMG Survey of Corporate Responsibility Reporting 2015, KPMG, p. 30.

84 Sustainability Practices 2015: Key Findings, p. 4.


Focus on issues that are material The most useful sustainability reports are those that provide data and detail on issues that are most relevant to a company or on which a company has the greatest impact. In the United States, for example, the Sustainability Accounting Standards Board (SASB) is developing standards to help public companies disclose the most material sustainability issues to investors. Medtronic’s integrated report, for instance, follows the GRI reporting guidelines and also references specific issues identified by SASB for the medical equipment and supplies industry.

Integrate financial and nonfinancial information Some companies at the leading edge of sustainability reporting are integrating their traditional financial reporting with sustain-ability reporting. Integrated reporting essentially combines a company’s analysis of financial and nonfinancial performance. The International Integrated Reporting Council (IIRC), for example, defines an integrated report as “a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.”85 Some companies have been publishing integrated reports for a number of years. Novo Nordisk, for example, released its first integrated report in 2004. BASF released the company’s first integrated report in 2007 and later participated in a pilot to develop the integrated reporting framework of the IIRC. Integrated reporting remains an emerging practice in most countries, with only about 1 in 10 companies referring to their reports as integrated.86

Update information regularly Sustainability-related data are dynamic, and a number of companies supplement their sustainability reporting with periodic updates. These updates can take various forms, such as quarterly reports or updates to data on the companies’ websites. Dow Chemical, for example, releases quarterly sustainability updates that supplement the company’s annual sustainability report.

Provide assurance With the growth in sustainability reporting also comes the need for report assurance. This practice is becoming increasingly common, with almost one-third of S&P Global 1200 companies issuing sustainability reports that include some degree of third-party verification and assurance.87 The scope of assurance varies and might extend to an entire sustainability report, only specific sections, or just individual indicators. Sustainability reporting may eventually be expected to undergo verifications and assurance approaching the level currently applicable to financial reporting, particularly as assurance can help improve data quality and help companies reduce risks associated with data inaccuracies.

85 International Integrated Reporting Council (http://integratedreporting.org/).

86 The KPMG Survey of Corporate Responsibility Reporting 2015, p. 38.

87 Sustainability Practices 2015: Key Findings, p. 6.


Quantifying sustainability impact across the value chain through environmental profit and loss accounts

A small but growing number of companies are creating environmental profit and loss accounts (EP&Ls). EP&Ls quantify the costs and benefits generated by a company’s environmental impact, across both internal operations and the supply chain. An EP&L communicates vividly to stakeholders the extent and location of a company’s environ-mental impacts along its entire value chain, which can help companies develop strategies based on a holistic view of performance that goes beyond a traditional analysis of financial performance. In 2011 Puma became the first company to establish an EP&L, and in 2015 Kering (Puma’s parent company) released a group-wide EP&L, along with an open-source methodology to encourage other companies to develop natural capital accounting. Exhibit 14 below and Exhibit 15 (page 75) summarize results from Kering’s 2014 EP&L and the impacts across the company’s value chain:

(Continued on next page)

Kering’s overall 2014 Group revenue and 2014 Group EP&L resultsExhibit 14

Source: Kering Environmental Profit & Loss (EP&L) 2014 Group Results, p. 5.

Kering’s 2014 Group EP&L shows that between 2013 and 2014 Group revenue growthoutstripped the growth of environmental impacts. In 2014 Group environmental impactswere estimated to be €793M, a 2.2% increase compared to 2013. Revenue growth overthe same period was 4.5%.

2013 PF

Revenue€9,656m

E P&L€776m

Revenue€10,038m

E P&L€793m

2014 Revenue+4.5%

E P&L+2.2%


Source: Kering Environmental Profit & Loss (EP&L) 2014 Group Results, p. 6.

Exhibit 15

Kering’s EP&L impacts across the tiers, split by impact area

The EP&L also provides an analysis of Kering’s Group environmental impacts across the value chain. The analysis shows 93% of Group impacts are generated in the supply chain, primarily from the production and processing of raw materials.

http://www.kering.com/en/sustainability/results


Breaking the silence with investorsDespite the growth in sustainability reporting and improvements in the quality of these reports, few companies are fully integrating sustainability into their discussions with investors: A 2014 survey by PwC, for example, found that 61 percent of US investors are dissatisfied with the current level of corporate disclosure regarding matters relevant to climate change, resource scarcity, social corporate responsibility, and good citizenship.88 According to the survey, the greatest levels of dissatisfaction are about “how risks and opportunities are identified and quantified in financial terms” and the “comparability of sustainability reporting between companies in the same industry.”89 While sustainability reports are a useful source of information for investors, it is evident companies need to do more to communicate and engage with investors on their sustainability activities. Recent figures show that, while over half of large US companies are engaging investors on sustainability issues, only about 13 percent proactively engage by integrating sustainability information into mainstream investor communications, highlighting sustainability performance and innovations at annual meetings, or directly engaging with shareholders on sustainability topics.90 Discussions on these issues are predominantly absent from investor presentations. For example, research from New York University tracked the language used in quarterly reporting by US companies via public conference calls between 2002 and 2007 and found that less than 1 percent of total words in quarterly earnings calls included sustainable development language. A separate research exercise further emphasizes how infrequently sustainability issues feature in investor presentations: In a word count of SAP’s second quarter 2012 analyst call (and the three calls that preceded it), 52 percent of the keywords identified related to financial performance, 32 percent related to social terms (primarily from the word “customer”), and 16 percent were governance terms. The exercise did not find a single mention of an environmental term.91

To be fair, the absence of sustainability issues from quarterly earnings calls is largely a reflection of the primary audience for these calls: short-term investors. These investors are less concerned with issues that could affect the company’s long-term viability and thus see little need to ask about its sustainability strategy. In light of this, some companies are providing regular sustainability updates to their investors through different avenues, such as ESG-specific briefings. Shell, for example, has held annual events for socially responsible investors since 2007, where the CEO and senior management discuss the company’s approach and performance in key sustainability areas. Presentation materials from each of these events since 2010 are made available on Shell’s website.

88 Sustainability Goes Mainstream: Insights into Investor Views, PwC, May 2014, p. 7.

89 Sustainability Goes Mainstream, p. 8.


91 Robert G. Eccles and George Serafeim,“A Tale of Two Stories: Sustainability and the Quarterly Earnings Call,” Journal of Applied Corporate Finance 25, no. 3, Summer 2013, p. 74.


Similarly, AkzoNobel has hosted an annual ESG analyst call since 2014, led by the company’s CEO. In a different example, the Johannesburg Stock Exchange (JSE) has since 2011 held an annual ESG Investor Briefing, which provides an opportunity for companies listed in the JSE Socially Responsible Investment (SRI) Index to present their sustainability strategies and engage with about 100 investors. To encourage wider adoption of these types of briefings, the UN Global Compact and the Principles for Responsible Investment jointly launched the ESG Investor Briefing Project in 2012. Since the projects’ launch, pilot briefings have been held by SAP, Enel, Pirelli, Eni, and Norsk Hydro.

CEO engagement matters (as always)In addition to incorporating sustainability into annual reporting and investor presentations, signs of leadership in this area include the willingness of CEOs to consistently reference sustainability in their speeches and actively participate in the development of global sustainability initiatives. The number of CEOs who do this, however, remains low. There are a few exceptions, with Paul Polman of Unilever being a notable one. Polman served on the UN’s High Level Panel of representatives that advised on the development framework that became the Sustainable Development Goals (SDGs). He now serves on the SDG Advocacy Group, which was launched in early 2016. (See page 24 for more examples of CEO leadership in sustainability.)

While the vast majority of CEOs are less vocal about sustainability than Polman, many are banding together to express their unified support for and commitment to sustainability. For example, Sir Richard Branson (founder of Virgin Group) and Jochen Zeitz (director of Kering and Harley-Davidson) established the “B Team” initiative in 2013 to “create a future where the purpose of business is to be a driving force for social, environmental and economic benefit.”92 Members of the team include the CEOs and/or founders of Salesforce, Safaricom, Unilever, Nautra, Celtel, Tata Group, and Kering. CEOs also express their commitment to sustainability through open letters, such as one signed by the CEOs of 79 companies urging world leaders to reach an ambitious climate change agreement in the lead-up to the 2015 Paris climate conference (COP21).

92 The B Team ( http://bteam.org/about/).


Benefit corporations: Broadening the for-profit paradigm to include sustainability

A benefit corporation is a new class of corporation that voluntarily meets different standards of corporate purpose, accountability, and transparency. The benefit corporation is designed to accommodate a growing number of entrepreneurs and investors seeking a form of business that allows them to pursue an expanded mission that embraces societal good along with profits. In the United States, benefit corporations:

1 have a corporate purpose to create a material positive impact on society and the environment;

2 are required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment; and

3 are required to make available to the public, except in Delaware, an annual benefit report that assesses their overall social and environmental performance against a third-party standard. Such reports do not need to certified or audited by a third party, but use a third-party standard as an assessment tool.

Currently more than half of the states in the United States have authorized companies to register as benefit corporations, and there are well over 2,000 active ones.a Notable companies that have incorporated or reincorporated as benefit corporations include Kickstarter, Patagonia, Warby Parker, and Method. Where the legal structure does not exist, companies can still be certified by third parties, such as the B-Corp certification offered by the nonprofit B Labs, which pioneered the benefit corporation movement. Natura, for example, in 2015 became the largest and first publicly listed company to be certified as a B-Corp.

At the end of 2015, Italy became the first country outside the United States to introduce the benefit corporation legal structure.

a Ellen Berrey, “How Many Benefit Corporations Are There?” May 5, 2015 (http://ssrn.com/abstract=2602781).

Sources: “Benefit Corporation,” B Lab (www.benefitcorp.net); “What Are Benefit Coporations?” reSET – Social Enterprise Trust (www.ctbenefitcorp.com/what)

http://www.benefitcorp.net

http://www.ctbenefitcorp.com/what


IN SUMMARY

• Sustainability leaders ensure they have robust external communications, reporting, and engagement. They follow standard guidelines and best practices for reporting sustainability information, including integrating the reporting of financial and nonfinancial performance.

• While sustainability reporting has become more widespread, few companies include relevant sustainability information in discussions with investors and analysts. Companies should regularly engage with investors on their sustainability activities and should consider incorporating relevant sustainability information in their analyst calls or holding separate ESG briefings.

• CEOs play an important role as spokespeople for their companies’ sustain-ability leadership. CEOs can strengthen their companies’ sustainability profiles by ensuring their speeches and presentations consistently reference the strategic importance of sustainability to their businesses and by actively participating in multistakeholder initiatives shaping the development of corporate sustainability.


About the AuthorThomas Singer is a principal researcher in corporate leadership at The Conference Board. His research focuses on corporate social responsibility and sustainability issues. Singer is the author of numerous publications, including Driving Revenue Growth through Sustainable Products and Services and the comprehensive corporate sustainability benchmarking report Sustainability Practices. In addition to his work at The Conference Board, Singer serves as an independent

consultant advising on corporate sustainability strategy. Prior to joining The Conference Board, Singer worked with Blu Skye Sustainability Consulting and SustainAbility, helping clients embed sustainability into their core business. Over his career, he has supported engagements with industry leaders across sectors, focusing on strategy development, opportunity assessment, competitive analysis, and stakeholder engagement. He began his career as a management consultant with Kaiser Associates, advising clients on white space opportunities, competitive analysis, and benchmarking. Singer is a graduate of Tufts University.

The author would like to thank the members of The Conference Board Sustainability Councils and their program directors, Gib Hedstrom and Uwe Schulte, for their valuable input on this research.


The Conference Board Initiative on SustainabilityThe Conference Board Initiative on SustainabilityTM focuses its research, peer learning, and leadership development activities on the practice of sustainability. These efforts produce insights to help executives develop, implement, and benchmark programs that improve shareholder value and contribute to a societal mission. The initiative’s focus reflects a wide perspective in which corporate philanthropy, citizenship, and sustainability are converging and provides practitioners with a portfolio of services in the areas of research, peer learning, and events.

For additional information on The Conference Board Initiative on Sustainability, please visit: www.conferenceboard.org/sustainability

Reports from The Conference Board

Driving Revenue Growth through Sustainable Products and Services

CEO Challenge® 2016

Sustainability Practices 2015

Navigating the Sustainability Transformation

Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?

China Wants to Go Green: Sustainability Imperatives for Multinationals

The Business Case for Corporate Investment in ESG Practices

Integrating Sustainability into Your Core Businesses—A Road Map

Sustainability Matters 2014: How Sustainability Can Enhance Corporate Reputation

Framing Social Impact Measurement

Proxy Voting Analytics (2010-2014)

To enable peer comparisons and benchmarking, The Conference Board offers a portfolio of data and analyses on corporate governance, proxy voting, sustainability, and citizenship. It can be accessed at: www.conferenceboard.org/intelligence

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