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Feb 28, 2018

Execs, more than boards, responsible on sustainability, Ceres finds

Almost two thirds of the companies studied identify an executive charged with meeting sustainability targets

Large US companies are increasingly making executives responsible for their sustainability efforts – but less than a third of boards have written instructions for tackling what is an area of growing concern to investors, according to new research.

The Ceres study finds that 65 percent of the companies assessed identify in their public disclosures a senior-level executive charged with ensuring the firm meets its sustainability targets. This is up from 42 percent in 2014.

Kristen Lang, a director of the company network at Ceres, tells Corporate Secretary that this trend is driven not only by investor demands but also by the emergence of new challenges as sustainability issues develop. As a result, she says, it becomes part of executives’ fiduciary duty to consider these potential threats and opportunities.

By contrast, the study finds that only 31 percent of companies formally integrate sustainability into their board committee charters. Indeed, just including sustainability in board charters is not enough, Lang says, although she notes that conversations about sustainability are starting to take place at the board level.

The next step is to ensure the board includes directors with expertise in the field, she explains. That expertise may come from having worked in a sustainability-linked role at another company, or having a relevant scientific background, for example. It should also not be limited to one director or the focus of one committee, Lang adds. Rather, sustainability considerations need to be integrated into all board discussions, where relevant. With this in mind, the board may also need to receive training on sustainability-related matters, she argues.

In preparing the report, Ceres analyzed how more than 600 of the largest publicly traded companies in the US are responding to calls for corporate action on climate change and other sustainability issues such as water pollution and scarcity and human rights abuses.

The assessments look at progress the companies have made against what Ceres calls ‘20 key expectations of sustainability leadership’ within the areas of governance, disclosure, stakeholder engagement and environmental and social performance.

In other findings, the report’s authors state that financial risk disclosures are ‘improving, but lack detail and nuance.’ Fifty-one percent of companies assessed discuss climate change risks in their annual financial filings, up from 42 percent in 2014.

But around a third (32 percent) of companies disclosing climate risk in their Form 10K filing are doing so ‘only from the lens of regulatory risk,’ the authors write, meaning they are doing the minimum to comply with 2010 SEC guidance to public companies regarding disclosure requirements as they apply to climate change matters, often using boilerplate language.

‘As the financial implications of a changing climate, increasing resource scarcity, data privacy violations and human rights abuses become ever more tangible, investors expect more transparency about actions companies are taking to address these risks,’ the Ceres authors write. ‘While more companies disclose sustainability risks in annual financial disclosures, most stick to boilerplate language, failing to provide investors [with] decision-useful information.’

Compensation is often regarded as a key means to incentivize corporate behavior, and with this in mind, Lang says: ‘We believe climate change has to hit the paycheck.’ She notes, however, that just 8 percent of companies studied by Ceres link executive compensation to sustainability issues ‘beyond compliance’ with basic requirements they face, though this is up from 3 percent in 2014.

Similarly, the report’s authors note that more companies are committing to improving diversity, but largely don’t provide incentives for change: 66 percent of companies assessed implement formal training or employee resources in regard to diversity and inclusion, but only 3 percent link executive compensation to diversity performance metrics.

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