When talking about governance, we are first of all talking about a Board of Directors and, nowadays, it is no longer an option for companies not to have a structured sustainable governance in place. The integration of sustainability into the practices of companies’ governance means turning the gaze to the future and to long-term changes, and the Board of Directors must be able to address future challenges linked to the sustainability trends. Sustainable governance therefore starts with a solid structure in place, guided by a Board who develops a long-term ESG vision to determine how a company will look like in the future, whose scenarios are full of uncertainties, making it crucial that the Board anticipates these changes and guides the company accordingly through structured risk management processes. Sustainability-related impacts analyses travel in parallel to financial risks and, if not properly addressed, can lead to reputational repercussions.
The success in the integration of sustainability strategies is also linked to stakeholders listening and the consequent identification of the material topics that are most relevant according to the company’s business and the interests of its stakeholders. The material topics must be linked to emerging risks and future scenarios based on the adoption of a robust Enterprise Risk Management (ERM) model, which provides companies with risk-appetite frameworks that need to be constantly reviewed by management and supported by a carefully designed system of checks through internal audits. Audit plans are built on the basis of the priority of risks and, among these risks, there is sustainability. In fact, today, talking about sustainability means talking about business, since intangible values are becoming more tangible than ever. In this framework, it is important to define roles and responsibilities beforehand, alongside policies to effectively manage and respond to ESG impacts. This does not only apply for the holding company, but also for its subsidiaries.
In line with the constant evolution of regulatory and reporting standards, businesses should be guided by the objective of preventing and mitigating ESG impacts. However, this exercise does not only look inward at a company, and goes beyond to encompass its suppliers. This is the reason why risk assessments in the supply chain are becoming fundamental to understand the criticalities faced by companies within a broader perimeter. Historically, larger players have been able to work in synergy with suppliers conveying their values over time, whereas small and medium enterprises face more challenges, with their future depending on the ability of the former to share tools and best practices. In fact, when innovation leads the way and economic sectors transform to keep pace with change, companies must be able to get suppliers on board in order to pave the way for a full and complete transformation. Therefore, it is important to avoid negative competition and instead embrace and foster partnerships aimed at also achieving a successful integration of sustainability along their supply chains.
A structured risk assessment sets the basis for defining clear-cut and forward-looking ESG strategic plans, as targets will have to be based on priority impacts for the business and its stakeholders. In order to implement risk-based plans and guarantee targets are reached, it is pivotal to link management’s economic compensation to the company’s sustainability goals. This applies to both short and longer-term remuneration, which should be carefully coordinated by remuneration committees prior to being evaluated by the Board, as short-term decisions can often be discordant with longer-term ones. At the same time, today, remuneration and disclosure policies linked to sustainability are key issues of concern for investors, together with the integration of diversity in a company’s Board. Whilst progress has been made on gender equality thanks to recent legislation, more diversification is also needed in terms of competencies, age and nationality, since the presence of different, technical and specific skills and backgrounds sets the basis for fostering and strengthening the collaboration between members. It will therefore be crucial to bring the right people on board, who know how to collaborate and address change, responding to future challenges. In this context, committees are fundamental and should complement and work side-to-side with the Board, especially the ESG Committee, which could bring unquestionable benefits if combined with the theme of innovation. Finally, as sustainability is a cross-cutting topic, all committees should be strictly interlinked, to ensure ESG topics can be integrated at all levels.
All these aspects sit at the core of the European Union’s agenda, the region at the forefront of sustainability integration. In fact, having contributed to industrial development and having seized the greatest benefits from the mechanisms of linear production, Europe was able to reach an important level of well-being – but also of awareness – about the damage to the environment and people, before other countries or regions. This awareness brought the EU to fast-track on sustainability-oriented policy and regulatory initiatives that recently started including smaller businesses, since making global decisions means understanding impacts on a global scale, actions that in fact are part of a larger and global effort which began in 1972 with the Club of Rome. In fact, whilst the EU is leading by example, ultimate success in this complex scenario will be made possible through a web of long-term partnerships and collaboration amongst companies, institutions, associations and governments at the global level.