Sustainability and Good Governance: A Work In Progress

The TakeAway: Two new reports advance convergence of governance and sustainability, but gaps  between formal responsibility and actual performance still need crossing.

The rising popularity of the term ESG (environmental, social, and governance) suggests common ground between sustainability and corporate governance that, in fact, is still maturing.  New regulations from the SEC and Congress to bolster sustainability and governance in response to environmental and economic upheavals push this convergence to some degree, but gaps continue to exist between what’s mandated and what’s implemented, and between aspirations and cultural change.  The transition from what’s professed to what’s practiced looms large, as two recent reports  signal.

On Tuesday, The Corporate Library (TCL), a research firm specializing in corporate governance, and Calvert Asset Management, a socially responsible investing (SRI) mutual fund firm, released an excellent survey analysis entitled Board Oversight of Environmental and Social Issues: An Analysis of Current North American Practice, which examines how companies respond to shareholder pressure to oversee and conduct long-term planning on material sustainability issues.   On Wednesday, GovernanceMetrics International (GMI) – a governance research firm that recently merged with TCL – released its September 2010 quarterly ratings report, which included 22 new metrics for environmental and sustainability issues.

The Board Oversight report finds that almost two-thirds (65%) of S&P 100 firms have a corporate responsibility-related board committee, whereas only about one-fifth of Russell 1000 firms and a mere 4% of Russell 2000 firms do.  “Even where board oversight exists, however, companies often appear to view environmental and social issues in philanthropic or marketing terms, rather than as fundamental business risks or competitive advantages,” the report states.  Overall, the findings reveal:

  • Size matters. Larger firms tended to have visible board-level commitments to sustainability oversight, particularly in industries with greater environmental and labor impact;
  • What’s in a name? An analysis of committee names at smaller firms suggests that fewer firms exhibit such a commitment, although the authors admit that restrictions on access to full information make such conclusions tentative; and
  • Earth mothers. A comparison of director demographics of both “sustainability committees” and the overall board at S&P 100 firms show similarities in age and tenure, yet gender differences: a higher percentage of women serve on these committees (25%) than is represented on boards more broadly (18%).

GovernanceMetrics International adds to the mix by including new measures to its existing coverage of environmental concerns.  Four receive “Key Metrics” designation, including public disclosure of greenhouse gas (GHG) emissions; specific environmental exposure targets; implementation of environmental codes of conduct; and evidence of serious environmental damage.

Both reports help move us toward corporate accountability on the full spectrum of sustainability matters, but the authors admit the implementation gap remains wide—especially on human rights, which appear at the bottom of the list of board-level oversight in the Calvert / TCL report.

Still, these reports help to define what directorship means, particularly those qualities that nominating committees and investors should consider as they vet candidates.  Most important, they shed light on the biggest challenge ahead:  moving from disclosure to daily practice.  In this way, investors and boards can create a culture based on facts, not just aspirations.

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