Sustainability in corporate governance: my key takeaways from the European Corporate Governance Conference 2022

Corporate governance is firmly in the spotlight today as a result of the huge social and environmental challenges facing our world. Boards can – and must – ensure that companies help accelerate the transition to a more sustainable economy by mitigating their social and environmental impact on the world and doing business in fairer ways.

On 29 November 2022, Martina Kneiflova and I were privileged to co-host another European Corporate Governance Conference. It was held in Prague under the auspices of the Czech Presidency of the Council of the European Union . The conference explored some of the hottest sustainability-related topics in corporate governance, including the #EU’s proposed Corporate Sustainability Due Diligence Directive; how to link remuneration to environmental, social and governance (#ESG) objectives; the new reporting framework that will be introduced with the Corporate Sustainability Reporting Directive; and the revision of the G20/OECD Principles of Corporate Governance.

Some lively debates took place and we were privileged to hear the views of a succession of expert speakers, including Czech business leaders and Didier Reynders , the European Commissioner for Justice. Here are some of my key takeaways:

1. Boards must lead the way on sustainability. By setting corporate strategy and acting as stewards of their companies’ assets, boards can ensure that companies understand the impact of their activities on the world around them and take society and the environment into account when making business decisions. Boards can also provide oversight around the specific three pillars of sustainability – E, S and G – and hold management teams accountable for delivering on targets.
2. Boards should see sustainability as a strategic opportunity and not just as a strategic risk. Companies often talk about sustainability in the context of risk management. While it is true that sustainability-related issues can present considerable financial, operational and reputational risks, sustainability also presents companies with huge opportunities to enhance their competitiveness in a rapidly changing world. They can use the transition to a more sustainable economy as inspiration for new business models that boost their bottom line while enabling them to build deeper and more enduring relationships with their customers.
3. Boards should ensure that sustainability targets are material, specific, measurable and publicly available. Greenwashing – whether real or alleged – is one of the biggest challenges in business today, and it presents substantial reputational risks. It also threatens to damage the overall cause of reducing the effects of climate change and achieving a more sustainable economy and society.?The best way for companies to avoid greenwashing allegations is to set specific and measurable targets and be transparent about their progress with meeting these targets. The targets should not only relate to the environment but also to social and governance objectives, such as upskilling employees, driving diversity within the business (including at board level), and promoting responsible business conduct throughout the value chain. Board members can be responsible – both individually and collectively – for ensuring that their company delivers on the specific objectives it has set itself.
4. Boards should develop thoughtful remuneration policies. Investors are supportive of remuneration policies that are linked to #ESG criteria. Nevertheless, these policies must be well thought out, or they risk rewarding behaviors that are not consistent with promoting long-term sustainability as a holistic concept. For example, policies should not prioritize emissions reduction if it comes at the expense of biodiversity or human well-being. Remuneration policies will also need to reflect the medium- to long-term timescales involved with sustainability – which will often be different from the short-term timescales that are typically used as the basis for rewards linked to financial returns. As part of a holistic approach to sustainability, it is important that remuneration and reward strategies consider social factors, like social equality and organizational goals around diversity, equity and inclusion. For example, how can a CEO’s remuneration package be said to address sustainability holistically while at same time being hundreds of times higher than that of the average employee??Lastly, for #ESG-linked remuneration policies to be effective, companies must be able to access robust data that reliably indicates their performance in a wide range of sustainability areas.?
5. Boards must educate themselves on sustainability. At the conference, the Chief Sustainability Officer at a major Czech company, highlighted that if the board is to provide responsible oversight around #ESG strategy and effectively link that strategy with remuneration, it must be informed on #ESG issues. Training will help individual board members to make better decisions. This is because they will more fully appreciate the principal issues involved with sustainability, as well as how investors and regulators view those issues.
6. Boards should be preparing now for the Corporate Sustainability Reporting Directive (CSRD). The CSRD comes into force on 1 January 2024 for companies that are already subject to the Non-Financial Reporting Directive. These companies will have to report in 2025 for their 2024 financial year. Other companies that fall within the scope of the directive will have to start reporting in 2026 or 2027. When companies report, they will use a new set of sustainability reporting standards (ESRS) that have been developed by the European Financial Reporting Advisory Group. Boards will need to provide oversight around the reporting prepared using these standards.

Shaping the future

The world of corporate governance is constantly evolving, driven by trends in business and society as well as legislative and regulatory developments. This is particularly true in the current European context, where new legislation – particularly the proposed Corporate Sustainability Due Diligence Directive (CSDDD) – has significant implications for boards.

It is vital that boards familiarize themselves with the content of the proposed Corporate Sustainability Due Diligence Directive so they can get a better understanding of what will be expected of both them and their companies in future. One notable element of the draft directive from a corporate governance point of view is the obligation on directors to ensure that they consider human rights, climate change and the environment as part of their decision-making.

While a greater focus on sustainability at the policymaking level is undoubtedly putting pressure on boards, it is also giving them a chance to shine. Through the oversight they provide today, they can help to build a better tomorrow – a fair, safe and sustainable world for future generations to enjoy.?

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.