Last year, Yahoo announced that they would begin publishing sustainability ratings for publicly traded companies. This could be wonderful news on the investor/consumer front, but what does it really mean for the businesses themselves? It means that if they haven’t felt an urgency to make sustainable changes — or understand the changes that are being made — boards need to kick their understanding into high gear or they are likely to hear some unflattering feedback from investors about a lack of commitment to the environment.
And before boards can ensure that they will have see favorable feedback, they have to understand the sustainability/ESG scores that the corporation will be measured by — how they are derived, what they reveal, and how they should be used by various corporate stakeholders. This could all be a big shift for boards that haven’t been super committed to sustainability yet, so here’s a brief breakdown of what BOD’s need to be ready for:
What are Sustainability Ratings?
While a relatively vague term, in the business world this is a way help maintain ecological balance while minimizing damage done to the environment and reducing the amount of natural resources that are used in production and transportation. The business world tends to break down sustainable efforts into three key disclosure areas: environmental which includes greenhouse gas emissions, water usage, and waste disposal; social which relates to diversity, labor relations, product safety, employee health and safety, and community development; and governance which is focused on ethics, board diversity and composition, shareholder rights, and supply chain engagement.
So when it comes to understanding sustainability scores about these topics they are typically generated by a third party and based on the disclosures a company releases. Typically the more disclosures, the better the score because transparency is a huge factor when it comes to good governance.
Although some companies have found that members of their boards are all in on sustainability, many may not have not felt compelled to gain a better understanding of these factors. Most companies that have been making disclosures about these issues have done so of their own accord because they have seen industry leaders doing so or because they have been required by law to provide such information.
There are challenges in this effort though, since different industries and businesses may use different methods to track their efforts. But a number of common practices providing standardization and transparency have been emerging in recent years and as they continue to evolve, this will help ratings agencies develop a common framework while being able to get their hands on enough data to actually track and compare companies.
What is the Board’s Responsibility?
For boards to be able to review, understand and track their companies’ sustainability rating it’s important that they understand how they were derived as well as how they are being reported on a regular basis by rating services. Since this will only continue to gain more importance in the business world, boards should consider recruiting directors with some experience and/or expertise in the sustainability world. This will provide a different level of understanding the ratings and could help other board members feel more familiar with the results. Of course, it’s also important to remember that a board’s sustainability strategy should not be focused on scores alone. There is concern in the industry that disclosing ESG information for the sole purpose of “gaming” higher scores without a plan to achieve real impact is a possibility. But we definitely believe that meaningful results with the intention to make positives changes should be the true motivation.
What Comes Next?
The significance of sustainable efforts is only going to continue to grow and gain more importance to investors and consumers, so boards of directors need be prepared to understand the implications of growing ESG transparency along with the opportunities and risks that will follow. While the Yahoo announcement puts pressure on public corporate boards, sustainability and ESG standards will hopefully expand to private company boards. So board members, it’s time to study up and get comfortable with the sustainable efforts happening in your company. It’s what’s best for your company, your stakeholders and the world around you.