Rationale

In the backdrop of greater expectation from stakeholders, rising consumer power, increasing economic uncertainty, tectonic changes in technology, environmental risks, and social uncertainty on rising income inequality; financial performance is no longer a sufficient measure of a company’s ability to create sustainable value.

Companies need others’ resources for growth and for a successful business conduct in dealing with challenging problems. To be able to gain access to the resources of others, institutions need to create trustworthy relationships. Companies need: employees for utilizing their skills, trust of society in gaining license to operate, and trust of customers in building brands. Therefore, the key to success and development is gaining the trust of present and potential stakeholders. These stakeholders include shareholders, employees, labor organizations, customers, financial institutions, the supply chain, non-governmental organizations, and the governments. Individuals and organizations in all parts of society are the stakeholders and license to operate increasingly requires fulfilment of the firms’ responsibilities to the society.

A new way of thinking about the role of business and calculating enterprise value is required. Data show that companies which adopt environmental, social, and governance approach in their decision making systems, perform better in the longer-term (BCG, 2016), (Strandberg, 2018) ,(Eccles, 2017) (Kahn, Serafeim and Yoon, 2015). Investor community considers sustainability as a risk management approach and a long-term value creation opportunity. Principles for Responsible Investment Initiative (PRI) has more than 2300 asset owners and investment managers who manage more than$80 trillion of assets. They explicitly recognize their fiduciary role to incorporate environmental, social, and corporate governance (ESG) issues into their investment decision making mechanisms.

17 Sustainable Development Goals (SDGs) have been endorsed by leaders of 195 countries in September 2015 at the UN General Assembly. It has been emphasized that SDGs cannot be achieved without the support of business and civil society. SDGs are the global challenges that need to be solved for a better quality of life. SDGs are also important business opportunities for finding solutions to challenging problems. Both corporate and public institutions have equally important roles in embracing sustainability in dealing with emerging and existing challenges such as climate change.

A growing number of companies prioritized the sustainability issues at the CEO and board level which is a sign of leadership for the initiative. Findings of a survey conducted with 2422 top executives all around the world shows that companies are assigning more weight to sustainability and increasing their efforts for the concept. About 16 % of the surveyed companies have a board committee dedicated to sustainability (which was 12 % in 2014). However, there is still significant room for improvement for better governance and transparency on sustainability issues.

Good sustainability governance is key for successful implementation of sustainability practices. Sound decision making mechanisms and deployment of this system throughout the organization would ensure the implementation of sustainable business practices. Such an approach could be defined as good sustainability governance. Good governance improves the ability to make better strategic choices, more efficient and effective resource allocations, and sound risk management, as well as ensuring continuity of responsible and accountable leadership (Argüden, 2010).

Therefore, the top decision-making bodies for the organizations— their boards of directors—have a critical role to play in building a better future for humanity.9 Board’s role is important in sustainable decision making since some of the long-term decisions would affect a time horizon which is much longer than management’s perspective. They provide guidance and oversight to the management about the long-term operational risks and opportunities. Boards play an important role by designing executive compensation policies to motivate top management teams in alignment and implementation of sustainable business practices.

Corporate reporting provides needed information by all stakeholders to transact with the company. Transparency is not only useful for better decision-making, but also helps the company to be perceived as more trustworthy by its stakeholders. All stakeholders would be encouraged to transact with transparent companies (Serafeim, 2015).

Company reporting serves as a transformative function (Serafeim, 2015). A vast accounting literature shows that firms with better disclosure or accounting quality receive financing on more favorable terms (Francis, Nanda and Olsson 2008). Companies can combine disclosure and transformation functions in a single reporting mechanism by utilizing a more holistic approach. This approach would also affect the internal decision-making systems by diffusing integrated thinking throughout the organization. The relevance of adoption of Integrated Reporting or the concepts of Integrated Reporting have been analyzed in this research.

Our Approach

The Sustainability Governance Scorecard (SG Scorecard) is an impact-research conducted to help improve the state of the world by speeding up learning from peers.

The SG Scorecard is designed to be utilized as an improvement tool for better governance of sustainability issues. The SG Scorecard Model© puts the quality of governance systems, comprehensiveness of implementation, and transparency of reporting at the heart of sustainability efforts. The model assumes a governance lens to approach sustainability efforts and provides an assessment of sustainability governance reporting in 150 Global Sustainability Leaders1 as evidenced in their public disclosures. It is not intended to provide an assessment of the sustainability performance of the companies, but only the governance of sustainability efforts.

The assessment is focused on evaluating the transparency, quality, and comprehensiveness of decision-making processes throughout the sustainability governance cycle – with particular focus on the board’s role in providing proper guidance and oversight on sustainability issues; the implementation coverage of different geographies and dimensions of sustainability issues, and embedding responsible behavior in the organization’s processes and culture through a continuous learning loop.

The SG Scorecard identifies and highlights good examples of sustainability governance by leading companies to facilitate peer-to-peer learning and taking action on sustainability issues.

It seeks the answers to critical sustainability governance questions:

  • How do the companies report their sustainability performance? Do they report only single year results or trends or even better targets?
  • Are they disclosing policies or only the results? Do the policies cover all relevant dimensions? Has there been a stakeholder engagement process and board review for materiality?
  • Is the coverage of implementation comprehensive? Does it cover all areas such as environment, social, anti-corruption etc., in all its operations-including emerging markets, supply chain, and throughout the product life-cycle?
  • Do they publish a board skills matrix and is sustainability one of the key skills sought on their boards?
  • Have they presented linkages between their risks, value creation, and SDGs?
  • Are the non-financial KPIs linked to executive compensation?
  • Do they incorporate SDGs into their sustainability strategy process? Which SDGs attract the attention of the leading companies? Which ones are lagging?
  • Is there a continuous learning process to improve their overall governance and specifically performance with respect to the SDGs?

The model evaluates the comprehensiveness of sustainability initiatives (all processes including policy, KPI and target-setting; all stakeholders including communities and the environment, all geographies in the company’s jurisdiction, value chain including the supply chain and product life cycle); as well as the breadth and depth of sustainability reporting practices. Furthermore, the model provides a view on progress towards SDGs by evaluating which companies have integrated SDGs into their strategy process and which SDGs are leading vs lagging in terms of company engagement.

Aims

The SG Scorecard aims to:

  • motivate the business world to act for a more sustainable future by highlighting good practices and providing benchmarking information, thereby assist better deployment of good practices throughout the business world;
  • contribute to more useful reporting of material non-financial performance information by highlighting processes and measurement tools for ESG issues across different time horizons, thereby contributing to the utilization of these metrics in assessing long-term enterprise value;
  • increase transparency, clarity, and consistency of sustainability performance measurement and integration of a data-based approach to decision-making;
  • assists NGOs, regulators, international organizations and other stakeholders to better understand the state of the world with respect to where we are in terms of responsible leadership for a better and more sustainable future;
  • raise awareness and enable collective action on SDGs by assessing which SDGs are prioritized by the business world, which ones are lagging, and sharing best examples on how to link SDG goals to strategy, how to set targets and how to mobilize relevant stakeholders for action.

Dr. Erkin Erimez