Geneva, 11 September 2019 – The recent Business Roundtable Statement on the Purpose of a Corporation recognizes that companies have responsibility to a broad range of stakeholders – such as customers, employees, suppliers and the environment – on par with their responsibility to shareholders.
WBCSD welcomes the commitments laid out in the statement aimed at making society more inclusive and resilient. However – as with all such statements – the challenge is making them actionable.
The time has come to accelerate the transition to a sustainable world where business and the capital markets contribute to a flourishing society and managing a company within the boundaries of the planet is the norm. We have been working for over two decades with 200 member companies from across the globe – including 40 headquartered in the US – to develop practical solutions to accomplish this.
For the statement of purpose to come alive, companies will need to do three things:
1) Adopt an integrated approach to performance management,
2) Move to an integrated enterprise risk management system,
3) Review and adapt their board governance.
1) Shifting performance management
If the commitments in the Business Roundtable statement of purpose are to be achieved, the way companies gather, process information and manage their performance must change.
Before the 1990s, 80 percent of a company’s value was found in tangible assets such as plants, property and equipment. Now, up to 80 percent is represented by intangibles — brand, ideas, relationships, skills and resources. Businesses must broaden their focus beyond just financial information to assess their performance and inform capital decision-making by integrating these “new tangibles” that cover natural, social and human capital.
This integrated approach to performance management must drive long-term business success and value creation to deliver the necessary product, service and business model innovations that contribute to a flourishing society.
To make better decisions, businesses need timely, reliable, relevant and fit-for-purpose data on these new tangibles alongside financial information.
We need to bring global efforts together in order to agree upon a set of generally accepted prescriptive methodologies and scientifically rigorous datasets that enable timely, consistent and comparable results.
The Natural Capital Protocol as well as the Social and Human Capital Protocol are frameworks for business to measure and value their environmental, social and governance (ESG) impacts and dependencies to help manage risks and leverage opportunities that may not be visible using traditional business processes.
Assessing new tangibles alongside financial capital will provide more meaningful information, and better decisions for business, society, the environment and – ultimately – investors, ensuring the most sustainable companies are the most successful.
2) Shifting risk management
Ten years ago, the top global risks in terms of impact and likelihood in the World Economic Forum’s (WEF) annual risk report didn’t include social or environmental issues for the most part.
But this has changed.
In WEF’s 2019 risk report, ESG-related risks account for nearly all of the world’s top risks in terms of impact and likelihood. It is becoming clear that ignoring or underestimating the impact of these risks can be very damaging for business.
A robust enterprise risk management (ERM) framework that includes social and environmental aspects protects value and reduces downside exposure, helping to connect risk, strategy and decision-making while enhancing corporate performance. Leveraging and enhancing a company’s ERM framework is an effective way to reduce potential risk and map opportunities.
In research conducted by WBCSD in 2017 we observed that only a third of global companies show some alignment between what they say about risks in their sustainability report and what they disclose in their mainstream financial filings.
One way to address this is through implementing the guidance to help organizations aligning ERM to ESG-related risks which is the result of a historic partnership between WBCSD and the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The guide is designed to help organizations worldwide respond to the increasing prevalence and severity of ESG-related risks, ranging from extreme weather events to product safety recalls.
Moreover, one of the essential functions of financial markets is to price risk to support informed, efficient capital-allocation decisions. Yet, one of the most significant – and perhaps most misunderstood – risks that organizations face today relates to the physical risks of climate change and impacts of the transition to a low carbon economy. The recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) help companies disclose better, more comparable and complete information on their climate-related financial risks and opportunities.
3) Broadening the concept of boards’ fiduciary duty
Investors are increasingly holding company boards to account for their ESG performance.
Boards must embrace shifting measures of success and risk management to consider the potential impact of ESG-related risks on the long-term sustainability of their business.
Failure to do so can result in destruction of value which does not serve the interests of investors and many other stakeholders and conflicts with their fiduciary duty.
Now is the time to act.
Although boards are increasingly acknowledging the critical nature of sustainability, many still struggle with the right policies: two thirds of companies recognize sustainability as a management agenda item but only a fifth of executives believe that their own boards properly oversee sustainability issues.
Based on this, here are a few recommendations to make board commitment actionable:
- Ensure appropriate ESG-related skillsets are in place for board members and senior executives;
- Ensure board-level responsibility for – and oversight of – ESG issues;
- Insist on embedding ESG into all business practices and decision-making;
- Transparently disclose ESG ambitions and progress on a timely basis; and
- Link executive and board remuneration to ESG success.
Sustainability can no longer be considered in isolation, it should be integrated into board governance and internal decision-making, so that investors can make more informed capital allocation decisions and reward the most sustainable companies.
In conclusion: the statement of purpose signed by over 180 CEOs is the right thing to say. If now all companies will reflect this new purpose in their performance management, integrate it in their risk management approach and make it a part of their board’s fiduciary duty, it will drive the Capital Markets to reflect these new tangibles and as such make capitalism work for all.
