Executive Summary

This year, we have an agenda which will be discussed even more in the near future: Climate-Neutral World. Following the Paris Agreement, the European Commission set policies with the European Green Deal to reach climate neutral Europe by 2050. The Green Deal isn’t a lay but will inspire legislative firestorm which may increase transparency and accountability.

Companies became more aware about the interconnectedness of the world with the global pandemic. The necessity for all actors to cooperate for a more sustainable future is relatively more visible than ever.

The global nature of problems we face requires companies to SHIFT their understanding of responsibility; by focusing on Sustainability, adopting a Holistic approach, implementing continuous Improvement, understanding their impact on economic, environmental, and social issues through Fact based impact analyses, and sharing their sustainability Targets transparently to become accountable and to enable collaboration with stakeholders.

Successful companies are the ones that do not only measure their own risk, but measure their sustainability risk. In other words, sustainability is no longer a “nice to have” issue for companies, but a crucial element for the future. To move towards a more sustainable future, we need to have organizations that assume their sustainability responsibilities and take actions. Corporations –with their resources, efficiency, innovation capabilities, and access to talent– have the opportunity to be at the forefront of this change. To achieve this, companies need to embark on a broad transformation journey and lead the way in re-evaluating their traditional performance models to encompass sustainability issues and ecosystem-level thinking for a more sustainable future.

Sustainability is over and above environmental and social issues. It is the governance of all economic, environmental, and social effects. This is the reason why we focus on the governance of sustainability, instead of sustainability performance alone. Governance is the key to deal with sustainability issues in a consistent manner.

Integrating sustainability into a performance management approach requires a continuous improvement mindset and cooperation between boards, management, investors, regulators, and civil society. To support this effort, we analyzed 197 Global Sustainability Leaders (GSLs) who are part of Sustainable Stock Exchange Initiatives from 7 countries and 10 industries (see Appendix II). We analyzed publicly available data through a ‘governance lens’ to identify and share insights from the GSLs on how they provide governance to their sustainability efforts and also best-practice examples to accelerate learning from peers.

The Sustainability Governance Scorecard© leans on the analysis of three main chapters: Responsible Boards, Sustainability Performance, and Sustainability Journey. As a result of our detailed analysis, we present a how-to guide on governance of sustainability and provide peer-to-peer learning opportunities based on good practices shared by the Global Sustainability Leaders on how they approach their sustainability efforts. These examples are presented in the relevant chapters throughout this Report.

Sustainability Governance Scorecard©

Sustainability Governance Scorecard 2021 (SGS 2021) results show that GSLs have improved on several fronts compared to the previous year. However, there is still significant room for improvement in the effectiveness of execution and accountability of their sustainability programs, and significant opportunity to learn from peers to accelerate progress.

SGS 2021 results show that GSLs should SHIFT their understanding of responsibility:
Sustainable, Holistic, Improving, Fact Based, Targeted.

SGS2021 SHIFT

Key Conclusions

  1. 1Boards should provide proper guidance and oversight in sustainability. Good Governance is essential for sustainable value creation in the long run: This is possible through setting the right governance mechanisms, ensuring the board has the composition and skills to lead sustainability issues, and linking executive compensation with sustainability metrics to incentivize management towards sustainable value creation in the long run.
  2. Skills Matrix: Indian companies outperform in disclosing the skills matrix (82% with a 70% improvement compared to SGS 2020). In India, SEBI had introduced a requirement for listed companies to enlist the core skills, expertise, and competencies of their Board members in 2019. This increased the transparency in disclosing the skills matrix, which is inspiring for other countries. We are happy to raise this issue at the Indian Stock Exchange Sustainability Governance Scorecard event in 2019.
  3. Executive Compensation: Best-in-class companies align executive compensation with strategic sustainability targets to sharpen management’s focus and incentivize the management to prioritize sustainability. All companies in our research sample share executive compensation, 88% share a link of executive compensation to financial targets, but only 31% share a link to sustainability targets. Companies focus more on social sustainability KPIs (28%), whereas only 18% link to environmental KPIs and 12% to governance KPIs.
  4. 2What gets measured gets improved: Companies should adopt a holistic approach to improve performance management in sustainability, which consists of identifying KPIs for material sustainability issues, setting targets, reporting on progress, and evaluating results to consistently get better at managing sustainability. As part of our research, we analyzed whether a company adopts a holistic approach in sustainability management across governance of specific economic, environmental, and social matters in depth.
  5. In SGS 2021, Global Sustainability Leaders show progress in holistic performance management with respect to sustainability in comparison to SGS 2019 and SGS 2020. However, in the depth of environmental, social, and governance context, a significant improvement opportunity remains. This year, we have updated our evaluation method for targets which should be SMART. With this perspective, the gap between policies and targets is the highest for Compliance, Product Design and Safety, Hazardous Materials, Biodiversity, and Responsible Sourcing (more than 50% difference).
  6. 3Companies can not position their business isolated; they have to admit they are part of the ecosystem and should act accordingly: Taking only reactive actions for sustainability is not sufficient. It requires not only managing the negative and positive sustainability impacts of the company’s operations but also taking responsibility for the company’s wider sphere of influence.
  7. Managing the ecosystem includes taking responsibility for the environment, communities, and networks in which the company operates. In SGS 2021, the reporting of GSLs revealed their prioritization of local empowerment in addition to environmental stewardship. They either support local suppliers, communities, or their ecosystems. Best-in-class companies perform gap analysis to assess the need in an area, do stakeholder engagement, create an action plan with KPIs, and disclose results and impact.
  8. Most of the GSLs set targets across environmental, social, and governance categories (81%, 70%, and 86% respectively). There is an increasing trend in target-setting for sustainability areas in comparison to SGS 2020. Companies tend to set targets for their ecosystem rather than their value chain in social and governance issues. However, it is the contrary for environmental issues, where GSLs prioritize sharing results and targets for their value chain rather than their ecosystem.
  9. 4Adopting global initiatives or approaches and aligning with the SDGs make a reasonable difference for the sustainability governance quality of the GSLs: When we compare our three reporting periods (SGS 2019, SGS 2020, and SGS 2021), companies that adopt at least one initiative outperform in several areas. For instance, all SASB companies disclose supplier code of conduct covering each environmental, social, and governance issue. The percentage of companies that define sustainability KPI for Executive Compensation is higher for companies which adopted at least one global initiative compared to the companies which did not adopt any.
  10. Sustainable Development Goals (SDGs) not only have a significant impact on the economic, environmental, and social issues, but also on the governance of all, in which businesses will operate in the future. There is an increasing number of companies –both public and private– committing to the SDGs. However, the business world is falling short in disclosing their credible contributions to SDGs and there is still an intention-action gap. Despite a positive trend towards adopting SDGs compared to the last two years, there is still room for improvement, especially in sharing results and setting targets for the SDGs. Link to the SDGs increased by 13% both for strategy alignment (from 73% to 86%) and results alignment (from 58% to 71%) in comparison to SGS 2020. Target setting for SDGs is 50%, and similar to the previous year, strategy and results alignment is the highest for SDG 8, 13, and 12 –focusing on areas relevant to the core value proposition. If we are to reach the global goals by 2030, companies should step-up to set targets, measure outcomes and partner for scale-up.