Executive Summary

Today, the corporations’ response to emerging sustainability challenges will determine not only their long-term viability and competitiveness, but also the viability of the planet and its inhabitants. Sustainability is no longer a “nice to have” issue for companies, but a crucial element for preparing for the future. Companies need to adopt a long-term and holistic view of how they create value that encompasses environmental, social, and governance issues which are fundamentally core to sustainable value creation.

A growing number of companies prioritized sustainability issues at the CEO and board level. There is an increasing number of companies, both public and private, committing to the Sustainable Development Goals (SDGs). However, business reporting on credible contributions to SDGs is falling short and the key challenge companies face is their inability to translate goals into action and lack of outcome measurement.

We believe the next leap in sustainability management will come from corporations taking on the responsibility to proactively manage their sustainability efforts. To aid them with this effort, we designed the Sustainability Governance Scorecard© – an impact-research conducted to help improve the state of the world by speeding up learning from peers. Our approach can be utilized as an improvement tool for better governance of sustainability issues. Our aim is to motivate the business world to act for a more sustainable future by highlighting good practices and providing benchmarking information.

First of all, the results of the SG Scorecard show that there is a significant room for improvement in the effectiveness of execution and accountability of the sustainability programs of even the leading companies; let alone the large number of enterprises all around the world:

  1. 1License to operate in today’s world requires responsible leadership – companies who actively manage sustainability benefit both the company and the society. Our research shows that leaders in this arena have successfully integrated policy, KPIs, and results coverage to include environmental, social and governance issues. To move forward, companies will have to adopt a data-based management approach to sustainability through:
    • Showing commitment by setting and publicly sharing targets for environmental, social, and governance (ESG) related outcomes: Among the Global Sustainability Leaders only 69%, 70%, 53% set targets for ESG, respectively,
    • Aligning management incentives with sustainability targets: We find that 55% of Global Sustainability Leaders link executive compensation to non-financial targets and only 15% link to sustainability targets.
  2. 2Board Leadership in leading change in sustainability is key and there is room for improvement in ensuring the right people and processes are in place for managing sustainability:
    • Board skills in sustainability need to be developed and assessment of skill combination, as well as diversity, is required to address today’s complex challenges: We find that only 26% of the companies in our sample reported a board skills matrix, and only 11% of companies identified sustainability as a required board member skill,
    • Oversight over material issues should include environmental, social, and governance areas as well as supply chain: We find that all of the companies analyzed have an independent audit for financial results, but independent audit coverage for environmental, social, and governance issues are 72%, 59%,56% respectively, and only 48% for supply chain.
  3. 3Stakeholder Engagement needs to take a central position and companies should proactively integrate external stakeholders – especially communities and the environment - into their value creation model: We find that all the companies analyzed measure value for internal stakeholders, but only 44% for external stakeholders.
  4. 4Aligning incentives with the world we want in the future requires changes in the system. For this system change, Global Sustainability Leaders (GSLs) need to take leadership. We find that companies tend to prioritize SDGs that align with their core business model, rather than taking an all-encompassing approach to creating the right climate and environment for sustainable development. Going forward, GSLs should:
    • Link strategy to SDGs to mobilize resources, manage risk and effectively communicate the company’s contribution to sustainable development: Currently, only 65% of Global Sustainability Leaders link their strategy to SDGs. We find that GSLs have embraced the global climate change agenda (53% of GSL linked SDG 13: Climate Change to their strategy) and that SDG engagement is higher for SDGs that are actionable within their business models - SDG 8: Decent Work and Economic Growth (51%) and SDG 12: Responsible Consumption and Production (44%).
    • Increase action and partnership around creating the right climate for sustainability through institution-building: We find that engagement of GSLs with SDG16: Peace and Justice Strong Institutions is only 16%. Promoting the rule of law; fighting corruption, bribery, and organized crime; protecting fundamental freedoms and non-discriminatory laws and policies; and in short ensuring responsive, inclusive, participatory and representative decision-making at all levels (good governance) should be a priority of not only all citizens, but particularly the business leaders as well.
  5. 5Integrated reporting is a holistic tool to help companies tell the story of how they create value now and in the future. Companies should adopt transparency in reporting practices and can use Integrated Reporting as a transformative tool for continuously getting better at managing sustainability. We find that companies embracing the UN Global Compact and the Integrated Reporting (<IR>) Framework seem to have better chances of incorporating sustainability into their culture by providing better governance of their sustainability efforts. Among the GSLs, all UNGC LEAD Companies are in Tier 1, and 80% of UNGC 100 Companies and 52% <IR> Reporting are in Tier 1 or Tier 2, whereas among only 12% of UNGC Signatories 12% and 13% of <IR> Reporting companies are in Tier 5.

Secondly, our research shows that there are extensive peer-to-peer learning opportunities based on good practices shared by the Global Sustainability Leaders on how they approach their sustainability efforts. These examples cover the following areas and will be presented in the last chapter of this report.

We find that best-in-class companies:

  • Integrate sustainability into their core value creation model and lead the way in extending their strategy and management beyond pure financial outcomes, to encompass environmental, social, and governance-related factors that are critical for the future viability of their organizations;
  • Understand that engaging stakeholders is key to obtaining the social license to operate in the 21st century and engage openly with stakeholders, including their communities;
  • Conduct materiality analysis to gather insight on the relative importance of environmental, social, and governance issues to not only prioritize their sustainability effort, but also to inform sustainability reporting and communication with stakeholders;
  • Ensure that their boards are fit to drive change towards a sustainable business by having diverse boards (age, tenure, gender, ethnicity, cultural background, geographic, functional, and industry experience);
  • Show commitment by setting targets for sustainability performance abd report their targets based on geography;
  • Align incentives by including sustainability KPIs in executive compensation;
  • Ensure comprehensiveness of policy and implementation throughout the value chain including the supply chain, the product lifecycle, all stakeholder groups, all levels of the organization as well as geographic coverage and reporting of sustainability performance;
  • Ensure board oversight responsibilities cover environmental, social and governance issues which are core to sustainable value creation;
  • Establish a learning loop for continuous improvement and create a climate of learning with measurable indicators (trends, benchmarking).

To move toward a more sustainable future, we need to have organizations that assume their sustainability responsibilities and act on them. Corporations—with their resources, efficiency, innovation capabilities, and access to talent—have the opportunity to be at the forefront of this change. To achieve this, companies need to embark on a broad transformational change journey and lead the way in re-evaluating their traditional performance models and challenging the long-term viability of their prevailing definitions of how they contribute to a better future for the world.

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