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May 02, 2012
Clock Is Ticking While Corporate Sustainability Lags
    by Robert Kropp

A report from Ceres and Sustainalytics identifies a small number of US corporations leading sustainability efforts, but more decisive action is required to embed sustainability by 2020. First of a two-part series.

My editor recently pressed upon me The End of Growth: Adapting to Our New Economic Reality, by Richard Heinberg. Published in 2011, Heinberg's book argues that two centuries of economic growth have been fueled by spiraling debt and the depletion of finite natural resources. Externalization of the latter—allowing corporations to reap the profits while society is left with the costs of environmental degradation, for example—was effectively codified by adherence to the illusion that growth is the only measure of well-being.

Now that economic growth has run up against natural limits, and future energy production—literally the fuel of those two centuries of economic growth—will inevitably be reduced (Heinberg argues that renewable energy technologies cannot fully replace the energy produced by fossil fuels)—what kind of socioeconomic organization is to come for the nine billion inhabitants of earth expected by 2050?

It's become something of a commonplace among sustainable investors and others that businesses has adapted to the demands of sustainability more effectively than governments have, particularly here in the US where those in denial of widespread scientific consensus on climate change routinely attack every legislative and regulatory effort aimed at reducing greenhouse gas (GHG) emissions. But as Mindy Lubber, president of Ceres, recently stated, "Sustainability has yet to gain traction at anywhere near the scale and speed required given the global threats we face."

Lubber's observation was borne out by a recent survey conducted by Gibbs & Soell. According to the survey results, only 21% of Americans—and perhaps more tellingly, only a quarter of corporate executives—believe that companies are committed to "improving the health of the environment by implementing more sustainable business practices and/or offering environmentally-friendly products or services."

Lubber made her remark upon the publication of a new report from Ceres and Sustainalytics, entitled The Road to 2020: Corporate Progress on the Ceres Roadmap for Sustainability. "There are pockets of leadership and innovation" among corporate sustainability efforts, the report finds.

However, "we still have a long way to go," according to the report. "Just 26 percent of the 600 companies are integrating sustainability within governance and management systems; only a quarter are disclosing supply chain monitoring and performance; and only a third are setting targets for reducing greenhouse gas emissions."

"More companies should be taking stronger action now," the report continues.

The report examines the sustainability performance of 600 large companies—most of which are headquartered in the US—in 19 industry sectors. The performance of all 600 companies was evaluated in the areas of corporate governance, stakeholder engagement, and disclosure. Other key performance indicators (KPIs), such as supply chain management by technology and apparel companies, were weighted according to expectations for specific industry sectors.

The finding that only 26% of companies have embedded effective corporate governance of their sustainability efforts—including board oversight, management accountability, linking executive compensation to environmental, social, and corporate governance (ESG) performance, and policies and management systems—is compounded when the report reveals that more than 50% rank in the lowest of the four tiers established by the methodology. And when one looks at the findings on linking executive compensation to ESG performance, only seven percent of companies explicitly do so. "Given the business case," the report observes, "Investors are starting to ask companies to incentivize sustainability performance and build ESG criteria into compensation systems, a trend expected to expand in the future."

Perhaps the linking of executive pay with ESG performance would improve if companies engaged more effectively with investors and other stakeholders. However, the report finds that only seven percent "conduct frequent, substantive and diverse engagements with an array of key stakeholders." Furthermore, not one company received the report's highest ranking for investor engagement, which it describes as requiring companies to "communicate both sustainability risks and opportunities to investors at their annual general meetings, during analyst calls, in their financial filings and throughout other mainstream investor communications."

A basic shareowner request by sustainable investors has been that companies produce sustainability reports, and by this measure progress can be seen. Almost half of the 600 companies in the report publish sustainability reports, and almost one-third use the guidelines of the Global Reporting Initiative (GRI) when doing so. However, only seven percent of companies submit their sustainability reports to third-party verification.

"While corporate disclosure on environmental factors continues to improve, other notable areas of reporting have received considerably less attention," the report finds. "Companies should also be demonstrating a consistent level of transparency on key areas of social impact."

"Companies must also consider the interconnectedness of social and environmental impact areas and disclose how the business is taking a holistic approach to the design of its sustainability strategy and programs," the report continues.

Despite the notable lack of government support for emissions reduction in the US, one-third of companies have set time-bound GHG emissions reduction targets. However, only nine percent are demonstrating year over year emissions reductions, and fewer still derive energy for their operations from renewable sources.

Furthermore, while 80% of companies in water-intensive industry sectors identify water management as a key business strategy, only 25% of the 105 companies assessed have gone so far as to identify water risks or utilize recognized third-party water risk evaluation tools.

"The Road to 2020 reaffirms the compelling case for deeper, more comprehensive business action on sustainability," the report concludes. "The time to get started is now."

Next: are institutional investors doing enough to grow a sustainable economy?


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