May 10, 2021

Ingraining Sustainability into Governance Structures — How can companies ensure a sustainable transformation?

Within a company, governance structures are important for many different reasons. They make it clear how an organization should model its behaviour and what its priorities are. Governance structures are also an integral part of preserving and strengthening stakeholder confidence.

Stakeholders have become increasingly aware of the responsibility companies have to increase their sustainability efforts, as those efforts affect society as a whole and specifically the environment. Now that it is becoming a necessity for companies to integrate sustainability into their core business model, a new question arises: how should companies incorporate sustainability into their governance structure?

Morten Jastrup, one of the Partners at Nordic Sustainability, has helped some of our international clients integrate sustainability into their governance structure and ensure that companies have clarity on responsibilities, mandates, incentives, and lines of communication to guide them to achieve a sustainable transformation. Morten shared his expertise by answering a few questions:

Why is sustainability a necessary component of a company’s governance structure?

“The short answer is because stakeholders care about both sustainability and governance. Investors, in particular, have turned the attention to how a company integrates sustainability into its decision-making and responsibility structures. So you might as well ask, why is a governance structure needed? Without it, an organization can’t be efficient. As sustainability becomes more and more obvious as an integrated part of any business, it naturally needs to be reflected in the governance structure.”

What should a governance structure that incorporates sustainability be able to do?

“When helping a company incorporate sustainability into the governance structure, we look at four key elements: responsibilities, what is it that a department or an employee needs to do that no one else in the organization does, mandates, who gets to make which decision and how to resolve disagreements, incentives & constraints, how to incentivize the things a company wants such as sustainability, energy efficiency, sustainable leadership, and how do we put in place procedures, rules, and guidelines that help employees navigate their freedoms, and lastly communication, who gathers what data, who passes it on to who, who meets who and when and so on. By addressing these four areas and defining them for the different parts of the organization, it creates clarity on who does what when and knowing how to handle things that weren’t foreseen. While you want to create as much freedom within the framework that allows for each employee to excel at what they do, the framework will help you handle some of the tougher discussions.”

Why is high-level anchoring key?

“Becoming a more sustainable company is often a long journey, at least if you want to follow what science shows us is necessary to do. A lot of things need to be done differently, perhaps not a radically different way, but throughout the organization, there is a new mindset to be adopted and there are new tools, procedures, approaches, and success criteria to be entrenched. You don’t do that without having backing from top management. They need to make sustainability a priority because otherwise, most organizations will experience too much inertia or organizational resistance to make this happen.”

Do you recommend having a specialized sustainability department?

“There has been a trend amongst some companies to say they don’t want specialized CSR departments anymore. I agree with the fact the traditional CSR department doing mostly reporting is not adequate for what most companies need. On the other hand, I also see that sustainability, especially nowadays, is a very fast-moving agenda and there are so many things happening, both in terms of overall societal expectations towards companies but also the speed at which new tools and skills are developed. Therefore, I would recommend having a specialized sustainability department, as a sustainability excellence center, to ensure that companies have specialists that are keeping up with the development in this area, which you cannot expect the different operational units to do.”

What are some of the downfalls of the excellence center model?

“There’s been a tendency to talk about the need to decentralize sustainability and get it into core functions. For some organizations, that might work, but often that is not what we would recommend.  While it makes sense to put sustainability closer to the core of the business, it’s something that requires a high degree of maturity within the organization. As the agenda is moving so fast, we would recommend that companies create a sort of excellence center for sustainability to support the rest of the organization, ensuring sustainability ambitions stay in alignment with the strategic goals of the organization.”

Would you advise companies to set up a sustainability advisory board?

“There are several dimensions to this. There is the accountability dimension because you often report on sustainability metrics just as you report on financial metrics and of course, you want someone within your organization, such as a committee within the board to verify this. Naturally, you want to anchor this responsibility within the board instead of the organization itself. Very often, as demand for reporting and valid, transparent, and encompassing data on sustainability increases, you also want to extend that accountability to your reporting on sustainability. Sometimes this is a part of the auditing committee within a board, and sometimes you do it differently by including external actors. We also see companies set up a sustainability board with a representation of a broader stakeholder group. Companies need to make sure that they have someone who is not too close to the operations that can look at what the company is doing to help them stay ambitious and focused, in line with what their stakeholders expect of them on sustainability. The other function that a board sometimes needs is to have someone who helps you stay on track and aligned with stakeholder expectations, so then you have a board that has more of a challenger function, making sure that you are actually being challenged on what you do as a company. They are able to ask some of the tough questions, such as ‘are we greenwashing here?’”

What is the most important thing to keep in mind when incorporating sustainability into the governance structure?

“Anchoring at high-level and engaging with the employees so they understand what is happening, to clarify what they are expected to do differently. Often when you want someone to do something differently you get them to take a course. When they have completed the course, they have usually learned more but have not necessarily acquired new skills. They’ve been taught about new opportunities, but they don’t know how to bring them to life. They may have learned about Greenhouse Gas accounting, but they don’t know how to build up an inventory themselves. Organizations need to ensure that employees have access to knowledge in order to learn more while acquiring new skills and tools, but they must also be granted the freedom to do certain things differently. Overall, a governance structure with sustainability ingrained into it plays a big part in catalyzing a sustainable transformation, and makes it clear that things need to be done differently now.”