Director Oversight of Sustainability Issues Increasingly Important, According to NACD

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By Michael Greene

Oct. 22 — Oversight of companies' sustainability activities is increasingly becoming a board level issue, according to the National Association of Corporate Director's recently released handbook Oversight of Corporate Sustainability Activities.

One of the board's duties is to safeguard the company's assets, which includes protecting the “company's social license to operate,” the handbook states.

Robyn Bew, the NACD's director of research, told Bloomberg BNA that sustainability oversight is on more boards' radars because these issues create the connection between understanding how the management team is “executing and adapting a company's business model and strategy in a dramatically changing operating environment.”

These issues are an important “part of how companies are thinking about their opportunities for growth and the risks they have to manage,” she added.

Gaining Traction With Investors

Environmental, social and governance issues are “definitely becoming an increasing priority for the investment community,” according to Bew.

Environmental and social topics accounted for almost half of all shareholder proposals submitted in the U.S. during the 2014 proxy season, according to an Ernst & Young report cited in the handbook.

“UK and European investors are even more focused” on these types of issues, Bew said.

Although each investor has its own set of priorities, investors expect the board to represent their interests and this sometimes includes challenging management to take a holistic view of the company's risks and opportunities, she added.

Not Just Environmental

Sustainability often has been defined in strictly environmental terms, but more companies are taking a “broader, more holistic definition” that takes into account a “fuller spectrum of issues,” said Bew.

According to the handbook, some of these issues include major global trends such as “population growth, an expanding urban middle class in emerging markets, demographic changes, resource scarcity, and climate change.”

One of the key recommendations in the handbook is that directors need to understand how companies define sustainability.

Ultimately, the definition is “company specific,” said Bew. However, a definition will help the board understand what it should be looking at when it oversees management.

Key Recommendations

The handbook, which was released Oct. 8, includes practical guidance for sustainability oversight, as well as benchmarking tools.

In addition to the need for directors to understand the company's definition of sustainability, the handbook provides three other key recommendations: aligning the board and management on what the company chooses to report, clarifying roles for oversight responsibility for sustainability activities and establishing parameters for sustainability reporting to the board.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

A link to the handbook is available at http://www.nacdonline.org/sustainability.