Corporate boards of directors must tackle questions about sustainability in a new and urgent manner. If they don’t, they will hear from investors about their lack of action. In just the latest indication of the investor community’s increasing scrutiny on sustainability, Yahoo announced in 2018 that it would start publishing sustainability ratings for publicly traded companies. In order to fulfill their obligations, every listed company board must now become “sustainability fluent.” A first step is an understanding of sustainability/ESG scores—how they are derived, what they reveal, and how they should be used by various corporate stakeholders. Here is a guide to these scores and what they mean for directors.
“Sustainability” in modern parlance has served as rather nebulous shorthand for maintaining ecological balance while avoiding harm to the environment and depleting natural resources. In the business and investor worlds, “sustainability” has come to be viewed and measured more expansively in three distinct categories: environmental, social, and governance, known as “ESG.” “Environmental” disclosures include greenhouse gas emissions, water usage, waste disposal, and more. “Social” disclosures include diversity, labor relations, product safety, employee health and safety, community development, and more. “Governance” disclosures include ethics, board diversity and composition, shareholder rights, supply chain engagement, and more.
While some board members have been become increasingly “sustainability/ESG fluent” over the past few years, many companies have not expected, nor have their directors felt required, to understand sustainability and ESG or to provide board education in that area. Corporations using a sustainability lens and associated metrics have largely done so voluntarily, either for their own strategic business purposes, because they see it becoming common practice among their industry leaders and competitors, or because they are required by law to provide an ESG disclosure.