Board Oversight of Sustainability Issues in the S&P 500

The following post comes to us from Jon Lukomnik of the IRRC Institute and is based on the summary of a report commissioned by the IRRC Institute and authored by Peter DeSimone of the Sustainable Investment Institute; the full report is available here.

Board oversight has long been viewed as an effective mechanism to direct and monitor corporate management. For example, in the wake of accounting scandals last decade, the Sarbanes-Oxley Act of 2002 requires all publicly traded companies in the United States to have an audit committee comprised of independent directors, charged with establishing procedures for handling complaints regarding accounting or auditing matters and for the confidential submission by employees of concerns surrounding alleged fraud.

While sustainability has been a concern of corporations and investors for years, there has been little research focused on how boards oversee a company’s sustainability efforts. Sustainable and responsible investors also have seen board oversight as an effective way to encourage corporations to accelerate such efforts; they began filing shareholder proposals requesting board oversight of various sustainability issues in the 1970s, and both the numbers of resolutions and the support those resolutions have received have grown exponentially since. It is worth noting that one such model proposal, formulated by The Center for Political Accountability (CPA) and requesting board oversight of political spending in addition to key disclosure features, accounts for the vast majority of sustainability shareholder resolutions on board oversight and resulted in political spending being a top subtopic of board oversight duties.

Sustainability reporting standards also emphasize board oversight, including the Global Reporting Initiative (GRI) guidelines, the International Integrated Reporting Council (IIRC) framework and the Carbon Disclosure Project (CDP) annual questionnaire. By asking companies to disclose on key topics, these organizations also have successfully encouraged companies to consider broad board oversight of sustainability issues and likely have convinced many to create such governance features.

Findings: The Sustainable Investments Institute (Si2) sought to take a snapshot of board oversight of sustainability issues among S&P 500 companies. Following Sarbanes-Oxley requirements, all companies addressed financial fraud and ethics in their audit committees, and, therefore, technically all had some form of sustainability oversight. Focusing solely on voluntary efforts and on environmental and social issues, Si2 finds that 55.4 percent of S&P 500 has board oversight of sustainability issues.

Other headline findings are:

  • Companies with oversight of environmental and/or social issues most often chose the corporate governance/nominating committee to undertake this task (34 percent).
  • Social issues (55 percent) were more often covered by board oversight structures and policies than environmental topics (33 percent).
  • Political spending was the most frequently mentioned subtopic (42 percent), followed by health and safety (21 percent), workplace diversity (9 percent), human rights (4 percent) and climate change (2 percent).
  • Companies’ committee charter text explaining oversight duties covering sustainability issues varied widely from very concise and high level to extremely detailed.
  • Most companies with board oversight of sustainability issues have established independence standards for those committees (81 percent) and permitted them to hire outside counsel, advisors and experts at their discretion to fulfill duties (92 percent). However, only 5 percent had set explicit sustainability expertise standards for members of these committees.
  • The paper and forestry (100 percent), healthcare services (93 percent), oil and gas (81 percent), utilities (80 percent) and aerospace and defense (80 percent) industries were the most likely to have board oversight of sustainability issues, while the real estate (29 percent), construction and engineering (33 percent), technology hardware (33 percent), retail (34 percent), industrials (35 percent) and media (35 percent) sectors were the least likely.
  • There was a very strong correlation between company size, as measured by revenue and net income, and rates of board oversight of sustainability issues. Top quintile companies by revenue were more than three times more likely to have board oversight of environmental and/or social issues than those in the bottom quintile.

Organization: The report is divided into 10 sections. In addition to this executive summary (Section I):

  • Section II reviews the study’s design and method.
  • Section III covers the history of shareholder campaigns on board oversight of sustainability issues and sets out how these resolutions in part explain the results of this study.
  • Section IV walks readers through sustainability reporting standards and the ways they require disclosure of board oversight of sustainability issues as well as their potential influence on the results.
  • Section V looks at the board committees companies chose to task with board oversight of sustainability issues.
  • Section VI parses the sustainability issues most often cited in board charters and other disclosures on board oversight. This section reviews examples of language from companies’ board committee charters.
  • Section VII examines committee features, namely independence and expertise standards for board committees with oversight of sustainability issues, as well as their ability to hire outside counsel, advisors and experts to fulfill their duties.
  • Section VIII provides industry trends.
  • Section IX analyzes correlations between revenue and net income and companies with board oversight of environmental and social issues.
  • Section X suggests areas for future research on this subject.

The full report is available here.

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