Have business leaders bought into a sustainable future?
Filed on February 9, 2020
Successful sustainability approaches have to hinge on senior leaders in businesses committing to top-down and focused programs, but as Refinitiv ESG data shows, weak leadership on the issue needs to be addressed and fast.
More than ever before business leaders have a unique opportunity to transform their companies to be part of a sustainable future. While they have traditionally focused on maximizing shareholder value, greater focus on sustainability continues to increase their corporate accountability to all stakeholders. But though the evidence clearly highlights that many forward-looking business leaders are improving their corporate governance practices to enhance stakeholder relations, many others are failing to keep pace.
Refinitiv's Head of ESG Proposition Elena Philipova recently co-authored a report with Professor Andreas Hoepner of University College Dublin and Sociovestix Labs' Gabija Zdanceviciute that analyzes sustainability and long-term business practices. 'Governance & Sustainability: Inside, not just beside the business' presents insightful research findings that highlight positive movement around sustainability but concerning trends in board incentives.
The Governance & Sustainability report features machine learning-based research from Refinitiv's ESG database that has over 400 environmental, social and environmental measures dating back to 2002, covering more than 70% of global market capitalization. When the data was analyzed in November last year, 5,584 companies were covered.
Short-termism in board incentives
It is worrying that a shift to short-termism played out in the analysis of business activity in the research over the last three years.
Although the number of companies with CEO compensation linked to total shareholder return has increased, the number with executive compensation linked to long-term objectives has decreased.
Also, the amount of companies with long-term compensation incentives for board members has decreased - and there is clear trend showing that board independence has decreased.
The increasing trend that corporate executive compensation schemes remain primarily focused on shareholder returns and short-term targets is particularly concerning because a robust sustainability focus depends on taking a long-term view.
Encouraging trends are taking shape
That said, the research highlighted a bright spot around specifically labelled sustainability metrics. More companies are reporting on their sustainability credentials, measures and performance - a trend that is unsurprising given that global pressure on companies to invest in younger generations' futures is intensifying at a pace. However, while sustainability reporting may not be mandatory in certain jurisdictions, a keen willingness to adopt best practice in sustainability and reporting to stakeholders can be a significant differentiator for motivated companies.
Companies have increased sustainability reporting by 15% over the last three years, giving investors and customers greater corporate transparency. Thinking of the adage that only what gets measured can be managed, good progress is being made as more companies are appointing external auditors to conduct their sustainability reporting, helping to improve the quality and reliability of ESG data generally published by businesses.
Refinitiv's ESG data research shows that the number of companies that link executive compensation to sustainable targets has more than doubled in the last three years. Today, 14% of companies focus on sustainability when they reward their executives - it may still be a low percentage but it's progress indeed compared to the 6% figure three years ago.
Taking a deeper dive into the research findings, the machine learning analysis of the corporate social responsibility (CSR) sustainability reporting metric also highlighted a number of interesting findings. Notably, Hoepner and Zdanceviciute found that CSR sustainability reporting leads to:
A 56% increase in the likelihood of a company setting emissions-reduction targets or objectives to be achieved.
A 40% increase in a company's management commitment to and effectiveness both in reducing environmental emissions in production and operational processes and in achieving efficient use of natural resources in the production process.
There is compelling evidence to show that companies that report on their CSR are likely to be more aware of their own ranking within the CSR standard and are more prepared to set objectives and targets around their own sustainability commitments.