Talking Sustainability in the Boardroom

Heiko Spitzeck, Clarissa Lins

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351024884
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

A Global CEO study by Accenture and the UN Global Compact has shown that 94% of CEOs think that their board should discuss sustainability. And yet there is a real danger that boards are not living up to expectations on sustainability, paying lip-service to the concept rather than fully embedding social and environmental issues into their strategies and operations.

Talking Sustainability in the Boardroom sets out why this is the case, identifies the obstacles, and then explains the opportunities for the long-term performance of the organisation that can arise through focusing on social and environmental issues. Written by two leading specialists in sustainability who have significant experience of working directly with boards, this book presents a very practical framework for embedding sustainability into board conversations and strategies. Steps include identifying and prioritising the social and environmental issues that are most pertinent to the organisation and will have the biggest impact on business, presenting the competences and skills to enable this, guidance on how to structure board meetings to ensure that these conversations truly take place, and the development of action plans and tools for measurement.

1
Why discuss sustainability at board level?

What is the biggest barrier to sustainable development? There are many, but I’d like to flag one that I think hasn’t received enough attention so far: boards of directors of companies and asset managers. Too many are only focused on short-term financial pe rformance at the expense of both the organization they represent and our global society and planet.

– Robert Eccles (Chairman, ESG Quant and Professor, Harvard Business School) ¹

Social and environmental concerns shape the environment in which companies operate. This environment is defined by law and regulations, but also by criticism in mainstream media next to the so-called license to operate of communities. If the board does not understand these concerns it might miss that the conditions for successfully competing in the market have shifted. Therefore, the board needs to create and maintain its ability to understand societal changes and assess how these affect its competitive environment.

First, the board needs to understand how social and environmental issues affect the company’s competitiveness and in some cases its survival. Once the link between business and sustainability is clear, the company needs to map existing social and environmental risks, which are to be tracked within the corporate risk register. After risks are being well managed, some companies start looking at opportunities and use sustainability challenges as an impulse for innovation.

Sustainability and the company’s competitiveness

We need boards anywhere to put sustainability at the heart of the agenda.

– H. E. Ban Ki-Moon (Secretary-General, United Nations)

In a first step the board needs to understand how social and environmental issues are creating or destroying value. Unfortunately, many corporations think of their sustainability department still in terms of philanthropy done by tree huggers and fail to understand the link to corporate strategy.

Think about it!

Which company do you consider a leader in sustainability? What does the company do different from their competitors? Which competitive advantages does the company gain by being considered a leader in sustainability?

Inspired by research done by the Sustainability Initiative, a joint research project by the Boston Consulting Group and MIT Sloan Management Review, ² we discussed these questions with more than a thousand executives. They have identified the following value-creation levers from their experience, as shown in Figure 1.1:

Figure 1.1 Sustainability value-creation levers

Pricing power

Some products are able to obtain a higher margin because they have a sustainability edge. According to a Harvard Study, ³ a healthy diet costs US$1,50 more per day, and some brands such as Wholesome Sweeteners look for consumers searching for fair trade and healthy items. In the Brazilian Pão de Açúcar supermarkets, one kilo of União sugar costs R$2,34, while the organic sugar Native is sold for R$4,27. We can’t forget that sugar is a commodity – it has basically the same functionality and it’s traded on the Intercontinental Exchange. But still, Native is able to charge 82% more than the traditional product. Obviously, the company has additional costs and, even with growing sales, operates in a niche market. But this example illustrates that a conscious client is ready to pay more for a sustainable product.

Cost reduction

In the US, Walmart installed roof windows, allowing stores to be illuminated by daylight. Obviously, the company didn’t want to call it “window innovation”. To sell the idea, the project was named Daylight Harvesting System. With that, the company managed to reduce the electricity bill by 20 to 40%, depending on the day. A study showed that naturally lit stores recorded a bigger sales volume than those in which the system hadn’t been installed. ⁴

Attraction and retention of talents

Natura is also an example of the impact from a clear sustainability positioning on the employees’ motivation and engagement. The turnover rate in the company was at 4%, while the industry average was 8% in 2014. ⁵ Human Resources professionals know how much recruiting and capacitating processes cost, not to mention the possibility of labour claims at dismissal. Motivated employees are also associated with higher engagement and consequently operational efficiency.

I doubt that today you can attract talent without showing them a strategy which includes social and environmental value-creation.

– Weber Porto (Regional President South-America, Evonik Degussa Brazil)

Tax incentives

Tax incentives can boost sustainability in two ways: paying more taxes for unsustainable behaviours or relieving fiscal weight with sustainable practices. In 2007, discarding one tonne of waste cost 24 pounds, and that cost increased 8 pounds a year, reaching 48 pounds in 2011 – a good incentive to produce less waste. In the US, the Clean Water State Revolving Fund invests US$5 billion in modern sewer treatment facilities by providing finance with lower interest rates.

In Brazil, a law project in the state of Pernambuco – PE Sustentável – aims to give fiscal and financial incentives to companies that adopt sustainable practices, especially in energy and water efficiency.

Co-financing

The project “Estrada Sustentável” aims to make Brazil’s principal highway more sustainable. One of the objectives is to reduce the number of accidents. As some of the accidents are caused by animals crossing the highway, especially near Eucalyptus plantations, the highway administrator partnered with the paper and pulp company Fibria in order to build wild-life crossings, thus protecting animals as well as reducing accidents. ⁶

Market share

The Global Bioplastics Market Report 2010–2014 points toward a tendency of growth in bioplastics over 30%, and that can have an impact in the overall market, as companies try to reduce emissions and the use of oil. With the release of the “green plastic” – plastic made out of sugarcane instead of crude oil – Braskem managed to increase its market share and export a new product to countries in South America, the US, Europe, Asia and Oceania.

Entry in new markets

When Novo Nordisk (a pharmaceutical company specialized in insulin production to treat diabetes) decided to enter the Chinese market, it used a shared value strategy. First, working with the government, the company trained 55.000 doctors to better diagnose diabetes. Each doctor treated 230 patients for a total of 12,65 million people. By doing so the company improved its market share to 63% and reported sales of US$935 million in 2011. To benefit the local community, a part of the production and R&D was taken to China, with the intent to produce necessary raw materials to the country through 2015. To reduce emissions, the new factory emits 20% less than the company’s most advanced facility in Brazil. With these programmes, Novo Nor-disk gained trust from local stakeholders and reduced adverse effects faced by foreign companies (academically called the “liability of foreignness”).

Stock pricing

Natura is the best example of value increase in the stock market. Since the company entered the market in 2004, through the end of 2016, the Ibovespa index rose approximately 302%, while the company’s actions increased 383% (see Figure 1.2). Obviously, sustainability is not the only reason to explain this, but integration of socio-environmental aspects to management contribute to an administration better able to handle complexities, reduce risks and create a strongly recognized brand in the market.

Large players such as Nestlé, Coca-Cola, Santander and others have bought companies such as Burt’s Bees, Honest Tea, Tom’s of Maine and Banco Real. The new owners paid premiums above

Figure 1.2 Comparison between Ibovespa index and Natura’s stocks

market value...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Foreword
• About the authors
• Introduction
• 1 Why discuss sustainability at board level?
• 2 How to insert sustainability into board talk?
• 3 Board composition and competencies
• 4 A dedicated sustainability committee
• 5 Stages of sustainability governance
• Conclusion
• Interviews and insights
• References
• Index