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The seven pillars of sustainability leadership

1. The Seven Pillars of Sustainability Leadership 2. THE CONFERENCE BOARD creates and disseminates knowledge about management and the marketplace to help businesses…
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  • 1. The Seven Pillars of Sustainability Leadership
  • 2. THE CONFERENCE BOARD creates and disseminates knowledge about management and the marketplace to help businesses strengthen their performance and better serve society. Working as a global, independent membership organization in the public interest, we conduct research, convene conferences, make forecasts, assess trends, publish information and analysis, and bring executives together to learn from one another. The Conference Board is a not-for-profit organization and holds 501(c)(3) tax-exempt status in the USA. THE SEVEN PILLARS OF SUSTAINABILITY LEADERSHIP is part of a suite of products on this issue. For additional resources, visit: © 2016 The Conference Board, Inc. All rights reserved. ® The Conference Board and the torch logo are registered trademarks of The Conference Board, Inc. ISBN 978-0-8237-1239-7
  • 3. The Seven Pillars of Sustainability Leadership RESEARCH 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
  • 4. The Seven Pillars of Sustainability Leadership www.conferenceboard.org4 Introduction and Methodology Each 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 methodology Between 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.
  • 5. 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 or contact 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:
  • 6. The Seven Pillars of Sustainability Leadership www.conferenceboard.org6 Executive Summary Business 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.
  • 7. The Seven Pillars of Sustainability Leadership 7 2 The CEO and C-suite champion sustainability The 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 planning 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, 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 term A 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).
  • 8. The Seven Pillars of Sustainability Leadership www.conferenceboard.org8 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 performance It 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.
  • 9. The Seven Pillars of Sustainability Leadership 9 6 Sustainability is part of the innovation process The 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.
  • 10. The Seven Pillars of Sustainability Leadership www.conferenceboard.org10 The past couple of years have seen a rapid acceleration in the pace of corporate sustain­ ability ini
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