A United Nations body has urged listed companies worldwide to embrace the concept of “integrated governance” – that is to say by making sustainability a key priority for their boards – for the sake of creating long-term value for their shareholders.
The Asset Management Working Group for the United Nations Environment Programme Finance Initiative (UNEP FI) unveiled the concept in a new report: Integrated Governance: A New Model of Governance for Sustainability.
According to the 64-page report, only a small number of company boards have made sustainability a priority at all. Citing Bloomberg data from 2011, it said that given a universe of around 60,000 firms, only 3,512 did any reporting at all on environmental, social and governance (ESG) issues. Moreover, only 56 companies had appointed a non-executive director with responsibility for sustainability.
This has not been in the interest of shareholders, the report suggests. It cites a study from Harvard Business School which showed that between 1993 and 2010, the stock price of 90 firms that had made a commitment to sustainability outperformed 90 that didn’t.
The report then explained the concept of integrated governance, saying there were three phases for its adoption. In the first, companies do next to nothing on sustainability and the issue doesn’t even come up during board meetings.In phase two, the board decides to embrace sustainability by making the issue part of its agenda; a committee is set up to advise the board on the issue or a sustainability officer is appointed; and the board elects to measure its performance on ESG according to specific metrics.
Phase three marks the full embrace of sustainability, with the board overseeing adherence to the principle and the company publishing an integrated report – that is one where financial reporting is integrated with performance on ESG issues.
While the report gave examples of firms that are moving toward integrated governance, it also said asset owners, asset managers and regulators need to work together to make the concept part of the mainstream.
Asset owners could contribute by reducing any incentives that lead to short-termism at companies – for example bonuses not linked to performance. Such a reduction can be achieved both by engagement with the firms and “by increasing the capital allocation to asset managers based on long-term performance,” the report said, adding that the same was true for asset managers.
Finally, regulators can significantly encourage the adoption of integrated governance by, for example, ensuring that national governance codes enshrine the principle. “They can also call on proxy advisors covering at least 80% of the market to integrate corporate sustainability performance into their advice to asset managers and asset owners on director elections, remuneration and corporate disclosure.”