Managing Risks with Sustainable Practices

Introduction

On March 11, 2010, the Coalition for Environmentally Responsible Economics (Ceres) issued its report The 21st Century Corporation: The Ceres Roadmap for Sustainability. Ceres hopes to target boards of directors of modern corporations with this report, encouraging boards to take advantage of sustainability opportunities with relation to managing risks. The report contains twenty key expectations related to governance, stakeholder engagement, disclosure and performance. Through focusing on setting new standards and expectations for business leadership, Ceres hopes to guide companies on their journey to comprehensive sustainability.

The twenty expectations created by Ceres offer an approach for embedding environmental and social concerns into the corporate world. With regards to risk management, the most relevant expectations are within the governance category of the roadmap. These expectations include: board oversight, management accountability, executive compensation, corporate policies and management systems, and public policy.

Board Oversight

Ceres suggests that boards of directors provide oversight and accountability for corporate sustainability strategy and performance. Specifically, companies should establish a board committee to assume responsibility for this role. The designated committee should communicate regularly with senior executives to drive the company’s sustainability agenda. In order to ensure this committee is effective, companies should also be intentional about recruiting directors with diverse backgrounds in sustainability and provide training for all directors on key sustainability issues.

Management Accountability

Within each company, C-level executives should be held responsible for achieving sustainability goals. For larger companies, the CEO should appoint one C-level executive to coordinate sustainability efforts. In addition, a management committee chaired by the CEO or Chief Sustainability Officer (CSO) can be effective in integrating sustainability into strategy, planning, and operations. These roles should also be identified in corporate communications in order to encourage personal accountability for sustainability endeavors.

Executive Compensation

Senior executive performance and compensation packages should be linked to sustainability performance within a company. This leads to increased accountability and positive impacts on culture. For example, Xcel Energy listed in its 2009 Proxy statement the compensation weights assigned to emissions reductions and safety performance, along with earnings per share.

Corporate Policies and Management Systems

The expectations discussed previously set the goals and strategies for achieving sustainability. To ensure these strategies are executed, companies should integrate them into corporate policies and risk management systems. Policies should be created on key issues, such as human rights. The involvement of stakeholders can also help identify the relevance of existing policies and identify gaps where new policies should be formed.

With respect to risk management systems, companies should incorporate environmental and social risks and opportunities into their business processes. This allows companies to identify events relating to sustainability that are relevant to their business objectives and assess the magnitude of their impact. For example, PepsiCo requires that all capital expenditure requests over $5 million be accompanied by a review of related sustainability risks and opportunities. This helps PepsiCo track the sustainability payback on capital and results in improved investment decisions over time. Many banks are also beginning to use the Equator Principles, which provide a framework to integrate sustainability risk assessment and project finance. These practices allow companies to utilize sustainability to better manage their everyday risks.

Public Policy

The last governance expectation is for boards and executives to be involved in the development of the company’s public policy positions. These positions should be disclosed, along with the company’s membership in and contributions to trade organizations. This expectation calls for transparency and encourages companies to develop best practices for sustainability that are consistent with their social and environmental goals.

Conclusion

The overall vision of governance for sustainability is as follows: “Companies will embed sustainability from the boardroom to the copy room and will manage their entire value chain from a sustainability perspective.” This vision highlights that sustainability begins with board oversight and trickles down into the day-to-day decisions of a company. Corporate board members are obliged to address risks, which include the financial impact of climate regulation and the scarcity of resources. While these items are not always key issues, all represent examples of risks to business. With their Roadmap for Sustainability, Ceres is simply emphasizing that the companies who embrace strong governance will be better positioned to foresee and adapt to changing economic, social, environmental, and political conditions, allowing them to better manage their risks to maximize value in the future.

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Original Article Source: “The 21st Century Corporation: The Ceres Roadmap for Sustainability,” Ceres, March 2010