LEAD FROM THE TOP: BUILDING SUSTAINABILITY COMPETENCE ON CORPORATE BOARDS ACKNOWLEDGEMENTS board member at Silver Bay Realty • Suzanne Klatt, director of Trust Corporation Sustainability & Environment at Report Author: Veena Ramani, Program Prudential Financial, Inc. Director, Capital Markets Systems • Dianne Dillon-Ridgley, former Program, Ceres board member at Interface, Inc. • Rakhi Kumar, head of ESG • Margaret Foran, chief governance Investments and Asset This project is generously funded by officer, senior vice president and Stewardship at State Street Global the Gordon and Betty Moore corporate secretary of Prudential Advisors Foundation. Financial, Inc.; board member at Occidental Petroleum Corporation • Sophie L’Helias, president at We would also like to appreciate our LeaderXXchange; board member • Michael Garland, assistant colleagues at Ceres who provided very at Kering useful assistance with the project, comptroller for Corporate including Hannah Saltman, Shelley Governance and Responsible • Maria Elena Lagomasino, chief Alpern, Kristen Lang, Andrew Logan, Investment at the New York City executive officer and managing Eliza Roberts, Chris Davis, Sara Office of the Comptroller partner at WE Family Office, LLC; Sciammacco and Karen Rivera. • Helene Gayle, chief executive board member at The Walt Disney officer at McKinsey Social Initiative; Company; board member at The PROJECT CONTRIBUTORS board member at The Coca-Cola Coca-Cola Company Ceres would like to thank the Company; board member at Colgate-Palmolive • Karina Litvack, board member at following people for contributing Eni their valuable time and thoughtful • Patricia Geibel-Conrad, board feedback to this project and informing member at Hochtief • Suz Mac Cormac, corporate our recommendations. The views partner at Morrison & Foerster • Julie Gorte, Ph.D., senior vice expressed in this paper are those of president for Sustainable Investing • Mary Hartman Morris, investment Ceres alone and do not necessarily and portfolio manager at Pax officer of Corporate Governance at reflect those of these contributors. Ellevate Global Women's Index the California State Teachers’ Fund • George M. Anderson, leader of Retirement System (CalSTRS) professor of Board Effectiveness Services at • Virginia Harper Ho, • Jane Nelson, director of the Spencer Stuart Law at University of Kansas School Corporate Responsibility Initiative of Law • Yilmaz Arguden, chairman of ARGE at Harvard Kennedy School; board Consulting; chairman of Rothschild • Catherine Harris, principal member at Newmont Mining; board consultant at Acre Resources Ltd. Turkiye and founder of Arguden member at the Abraaj Group Governance Academy • Rebecca Henderson, John and • Mary O’Malley, vice president • Marcia Bateson, investor and Natty McArthur University professor of Corporate Governance at former board chair at Ruby’s at Harvard Business School; board Naturals; board chair at NP member at Amgen Inc; and board Prudential Financial, Inc. International member at IDEXX Laboratories • Lynn Paine, John G. McLean • Carmel Bellamy, corporate • Alexis Herman, chief operating professor of Business secretary and senior director officer at New Ventures, LLC; Administration at Harvard Business of Governance, Member & Co- board member at The Coca-Cola School operative Relations at The Co- Company • John Replogle, chief executive operators Group Ltd. • Jeff Hollender, co-founder and officer at Seventh Generation; former chief executive officer at • Carol Browner, former EPA board member at Cree Inc., administrator; board member at Seventh Generation; member of Counter Brands LLC Bunge Institute for Sustainable Investing Advisory Board at Morgan Stanley director of ESG and • Rinaldo Brutoco, founding • Timothy Smith, president at World Business • Helle Bank Jorgensen, chief Shareowner Engagement at Academy; board member at executive officer at B.Accountability Walden Asset Management Tailored Brands, Inc. • Edward Kamonjoh, executive • Anne Stausboll, former chief • David Crane, senior operating director at The 50/50 Climate operating officer at the California executive at Pegasus; board Project Public Employees’ Retirement member at Lighting Science Group • Courteney Keatinge, director System • Stu Dalheim, vice president of of Environmental, Social & • Barbara Turley-McIntyre, vice Shareholder Advocacy at Calvert Governance Research at Glass president of Sustainability & Research and Management Lewis Citizenship at The Co-operators • Tanuja Dehne, board member at • Thomas King, former chief Group Ltd. Advanced Disposal Services, Inc; executive officer at National Grid board member at Granite Point US; board member at EnergySavvy; • Heather Zichal, board member at Mortgage Trust Corporation; former vice chairman at Peak Reliability Cheniere Energy LEAD FROM THE TOP: BUILDING SUSTAINABILITY COMPETENCE ON CORPORATE BOARDS 1 FOREWORD Companies are beginning to exposure to environmental and experience first-hand the financial social issues affecting corporate impact that unaddressed performance. sustainability risks can have on their business. But recruitment is only the first step. Companies should plan Climate change is the clearest for the future by empowering example. Nearly every sector board members with expertise of our economy is feeling the in sustainability to serve as effects of a warming planet. decision makers. This expertise Energy companies are dealing will empower companies to with changes to their demand make informed, smart decisions Carol Browner forecasts and insurers are facing on climate change policies that former EPA record losses from extreme impact strategy, risk and corporate administrator; weather events. Food and apparel business models. board member, Bunge businesses are struggling to adapt to climate disruptions to Sustainability should be a primary their supply chains brought on by matter for all board members, not drought and changing weather just those with environmental or pattern. energy backgrounds. Expanding board expertise on sustainability Yet, as these issues are hitting should be part of every company’s companies in their bottom lines, board strategy. Boards that are corporate boards for the most open to hearing from outside part do not have the expertise influencers, even detractors, make they need to address the business smarter decisions that govern the challenges driven by climate success of companies. Bring them change. Companies must treat in, listen to them and let boards be sustainability as they do other informed as they weigh important significant business threats like cybersecurity and financial reform decisions. Understanding the by building up the sustainability material risks and opportunities expertise on their boards. When for the company is inherent sustainability is material to a in a director’s responsibility company, it is essential to recruit to ensuring long-term value directors with expertise to build a creation and resilience. As a board sustainability-competent board. member, I have encouraged and helped make these interactions One of the biggest stumbling possible. All boards should be blocks in building sustainability- utilizing this approach. competent boards is the selection system. Current practices This Ceres report lays out practical too narrowly define the traits steps for approaching these and that constitute strong board other options that companies can members. For boards to serve consider ways to make their board companies and investors well, that competent in addressing climate definition must change to include change and other environmental, candidates with experience and social and governance issues. 2 CERES.ORG FOREWORD At SSGA our mission is to invest The ability to fully and responsibly to promote economic systematically incorporate prosperity and social progress. ESG considerations into our We do this by helping clients investment process is impacted achieve their investment goals, by the availability of consistent, whether it is saving for retirement, comparable and material funding research and innovation ESG data. This is why we have or building the infrastructure urged boards to incorporate of tomorrow. Most, if not all, of sustainability issues into their these desired outcomes are long-term strategy and report long-term in nature. As one of the in a detailed and consistent largest global providers of index way on their actions. We hope Rakhi Kumar strategies, we are a supplier of that through our continued quasi-permanent capital for listed engagement, more companies head of ESG companies. Therefore, we need to will report the kind of data needed Investments and monitor long-term risks. We view to integrate ESG issues into the Asset Stewardship material environmental, social and investment management process. at State Street governance (ESG) factors as ‘low This report gives boards a Global Advisors probability, high impact’ factors, practical guide on how companies where the probability of something have enhanced the sustainability going wrong from a sustainability competence of their boards. or ESG perspective is low but when By defining what it means to it does goes wrong, the financial be a ‘sustainability-competent impacts for shareholders are high. director’ and a ‘sustainability- In recent years, incidents such competent board,’ it helps anchor as oil spills, poor food safety investor expectations of boards, management and aggressive while giving boards the freedom sales practices at various to pursue their own path to companies