In a letter to S&P 500 CEOs, BlackRock CEO Larry Fink writes "At companies where ESG [environmental, social and governance] issues are handled well, they are often a signal of operational excellence. BlackRock has been undertaking a multi-year effort to integrate ESG considerations into our investment processes, and we expect companies to have strategies to manage these issues. Recent action from the U.S. Department of Labor makes clear that pension fund fiduciaries can include ESG factors in their decision making as well."
As with any business function, oversight, accountability, and engaged executives are essential to ensure the sustainability function is executing properly. Formal governance establishes Board oversight, ensuring the Board understands the company's sustainability risks, sets corporate sustainability policy, and is accountable to implement that policy; Executive Councils help develop and implement strategy. Formalizing these governance mechanisms is among the significant accomplishments retailers highlighted in 2015. And for the year ahead, retailers say educating retail executives on sustainability is a priority.
As the definition of fiduciary duty evolves, Boards of Directors are taking responsibility to manage sustainability-related risks and opportunities. A survey of thirty-five U.S. retailers found seventeen percent had a Board Committee with formal oversight of social and environmental issues—BestBuy, Kroger, Safeway, Sysco, Tiffany & Co., and Walmart. Globally, the proportion increases to thirty-four percent.
Unilever Global Chairman, Michael
Treschow, describes an “evolutionary process” of increasing regulations and
public demands for transparency, accountability and governance on social and
are driving this trend, asking Boards to be transparent and accountable for
managing social and environmental risks, and often expecting to engage directly
with Boards on sustainability issues. Without such oversight, long-term
shareholder interests are not protected. Going further, companies gain direct
benefits from establishing Board oversight. Given its responsibility for
business strategy, risk management, and legal compliance, the Board takes a
longer-term view of the company’s interests, relative to its management, and is
well positioned to leverage sustainability to mitigate risk and drive revenue.
How Do Retailers Establish Board Governance? A Board can formalize its sustainability governance by explicitly acknowledging that its fiduciary duties include oversight of sustainability issues and the consideration of broader stakeholder interests. It then agrees to integrate sustainability into its duties and decisions. Early on, the Board will want to align on the issues most material to its business and customers—from climate change and sustainable products to human rights and supply chain management—and agree on the stakeholders, other than its investors, that are important to engage. Key activities for the Board include:
In evaluating sustainability issues, the board will want to understand how and when an issue may:
The retail sustainability function can play an important role, galvanizing Board level interest by providing training on the sustainability issues most material to retail, and providing exposure to the changing expectations of investors, customers, and retail employees. Leading companies such as Nike regularly train Board members on sustainability issues to help them better assess the company's business performance.
The second governance mechanism is executive engagement, a key ingredient for success. Engaged executives are well positioned to direct their teams and resources, and in turn to catalyze employees across the company. In 2015, 10% of retail respondents to a RILA survey stated their sustainability goals are set by corporate-level executives. Another measure of executive engagement—the link between executive compensation and sustainability performance—shows 25% of U.S. companies link some portion of executives' compensation to overall progress on sustainability, a link RILA defines as a leadership practice.
How Do Retailers Engage Executives? Executive Sustainability Councils are often the largest asset to a sustainability program. Councils allow companies to move beyond isolated projects and to better integrate sustainability goals across business functions, and drive execution on those goals. RILA benchmarking in 2015 describes how retailers use Executive Councils. Councils meet quarterly, and comprise CFOs, COOs, and EVPs from merchandising, private brands, HR, and legal to ensure alignment between sustainability and business strategies. To implement sustainability goals, retailers use functional-level Councils, which typically meet monthly. These councils include SVPs from procurement, supply chain, logistics, store operations, legal, IT, and others. In some instances, retailers also engage NGO partners to bring external perspectives into the Executive Sustainability Council.
Some relevant resources, case studies, and collaborative opportunities are listed below. RILA's Sustainability Executive Program provides more resources on governance and executive engagement.
Retailer deployment examples
Collaborative opportunities & other resources
Visit www.rila.org/sustainability for more tools and resources.