Five key areas that boards need to focus on to be future-ready and resilient

Part 2 of this article is a continuation of that discussion, with a specific focus on how and what it means to integrate sustainability in business, from a top-down, holistic and long-term perspective.

Embracing sustainability has become a reality for corporations and business enterprises around the world. It can no longer be approached as a separate agenda or dealt with merely by one group of experts sitting in a detached specialist department.

A truly sustainable organisation is measured by the particular organisation’s capacity to measure up to three factors, which are:

 Its responsibility to the environment  Impact to the society at large  Its adherence to corporate governance

The most widely used definition of sustainability is that developed by the Brundtland Report of the World Commission on Environment and Development, which defines sustainability as “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Since 2015 in Malaysia, the regulator of the local bourse, Bursa Malaysia requires all listed companies to disclose a narrative statement of its best practices in sustainability.

For sustainability to become a competitive advantage, it needs firstly to be present in the boardroom. sustainability must be discussed as a strategy and effectively transformed into concrete actions to be implemented and followed up by Management. The strategies on EES need to be holistically integrated into a company’s business ethos and activities.

Directors are in a unique position to embed sustainability into corporate purpose and strategy.

1. Build Sustainability-Competent Boards: As a start it is important for all board members to be sustainability-competent. Effective directors are the foundation of an effective board. Companies need to first build a sustainability-competent board, not just a board with one or two sustainability-proficient directors. sustainability–competent boards will be able to tackle material risks as one cohesive body, with the right perspectives and priorities. This creates an effective, healthy environment for the right questions to be asked, to support or challenge management, and most importantly make informed decisions.

2. Changing board mindset focus from short-term to long-term financial performance Boards need to articulate a vision for what sustainability means for their organisations and how its organisation would respond to sustainability-related risks and opportunities. Top-down, organisations need to understand and resonate with this mindset to effectively play their roles in ensuring that sustainability principles are integrated across all areas of the organisation and business.

This would require a complete analysis of the organisation, encompassing:

i. Assessing Materiality • Identify and define sustainability issues, i.e. EES risks and opportunities, material to the business, i.e. potential to incur significant impact on business operations, performance and long-term goals.

ii. Engaging Stakeholders • Identify and prioritise stakeholders, internal and external, with the most influence and potential to impact, indirectly and directly, on the organisation’s operations and performance. Engage stakeholders to identify, capture and address their concerns.

iii. Setting Goals and Commitments • Focused initiatives on reducing risks and capturing opportunities around the identified EES concerns.

iv. Establishing Sustainability Policies and Practices • EES policies and practices need to be pervasive. It also has to clearly guide the entire organisation and its people in order to achieve and maintain the company’s sustainability goals and agenda.

3. Integrating Sustainability Principles into Corporate Strategy: It is incumbent upon the board to factor those material EES sustainability risks, both financial and non-financial, and ensure the necessary considerations are integrated holistically in the company’s strategy, instead of running compartmentalised sustainability programmes. This starts with setting the right tone from the top and uniformly assimilated throughout the organisation, and then, emanating outwards through the external supply-chain.

The recent launch of the world’s first formally constituted, country-level Climate Governance Initiative (CGI) chapter in Malaysia in May this year signalled to the world the country’s commitment to driving Sustainability principles in Corporate Malaysia.

Initiated by a group of Non-Executive Directors (NEDs) who sit on the boards of various Bursa Malaysia-listed companies, the call to action is for companies and directors to place greater emphasis on integrating climate change priorities in the business agenda; the specific encouragement is for NEDs to acquire the practical skills needed as long-term stewards of the business to help steer their companies through an effective climate transition strategy, taking into account the need for financial stability, increased resilience and sustainability.

4. Board Accountability and Oversight: Boards are expected to provide oversight for corporate sustainable strategies and long-term performance, which means integrating Sustainability considerations into board discussions:

i. Continuous evaluation and review of sustainability risks need to be in place, which can be undertaken by a risk committee appointed by the board.

ii. At the operational level, bringing in a sustainability specialist in the initial period to assist the board in providing a guide for the framework and principles in the development process will help ensure that the right metrics are in place. Feedback and buy-in from internal stakeholders are also key in the success of the implementation of sustainability policies and measures across the organisation.

iii. Importantly, there needs to be accountability across the board and management. From the Chairman, CEO to heads of business and operational units, the consistency and alignment, is necessary to ensure sustainability goals are achieved across all aspects of the business.

5. Sustainability Reporting Investors and Regulators want boards to be more proactive in informing them how the company identifies, measures and integrates EES factors into corporate strategies to mitigate risks and maximise business opportunities.

Since 2016 companies listed on Bursa Malaysia are required to disclose a narrative statement of their material EES risks and opportunities in their annual reports.

Compliance with the initiative may sound easy to some companies, but it would in fact require a lot of thinking, internal alignment and possible organisational changes to reflect full value and intent of sustainability. The focus on materiality, governance and management as suggested by Bursa Malaysia encourages companies to bring the whole organisation, not just the investor relations and Sustainability teams, together and agree how sustainability supports the investment proposition.

It is time for corporate boards to take Sustainability seriously.

Even the most seasoned directors will need to enhance their knowledge and skills on various topics related to the ever-changing business and economic landscape. The negative impacts of EES concerns on company reputation and financial performance ought to compel boards and companies as responsible corporate citizens, to discard their short-term views for long-term financial goals, to enable business longevity and ensure competitive advantage.

And the change must come from the top.

Boards need to drive the change on sustainability not just strategically, but with strong oversight to ensure a holistic integration throughout the company and drive value for the organisation.

To find out more about topics and matters related to boards and directors, do join us at ICDM’s inaugural International Directors Summit 2019 on the 14 and 15 October 2019.

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* Michele Kythe Lim is CEO and President of Institute of Corporate Directors Malaysia (ICDM).