Calvert Drives Sustainable Governance Forward
Increasing recognition of the business implications of environmental and social factors highlights need for board level oversight of sustainability risks
One of the most interesting and important developments in corporate sustainability of the recent past relates to the role of senior corporate leadership, both executives and boards of directors, in leading the evaluation of and providing oversight for environmental and social risks. When disaster strikes—as it did with BP's Deepwater Horizon accident in April 2010—it puts a harsh spotlight on the degree of board involvement in identifying and diminishing such risks. That accident is only one of a number of incidents and issues over the last several years that affected a number of companies across a range of industries and that should serve as a wake-up call to boards in virtually every industry that the buck stops with them.
With the continued mainstreaming of corporate social responsibility it is becoming more widely accepted that companies are accountable to a broader set of stakeholders and have a role to play in addressing societal challenges. Requirements for conducting business have changed and boards of directors must ensure that management is operating within these confines. There is greater acknowledgement that issues like human and labor rights, and water and energy scarcity have financial materiality, and through their role as the ultimate stewards of companies, boards have an obligation to help firms manage these risks and opportunities.
In an effort to accelerate this trend, Calvert expects companies to establish clear governance and accountability mechanisms in order to ensure appropriate management of sustainability challenges and opportunities.
Calvert's view is that Board level oversight of environmental and social factors can help to establish a strong corporate culture of sustainability and responsibility, enhancing corporate disclosure, practices and performance. And we are not alone. Leading organizations including the National Association of Corporate Directors, The Organization for Economic Cooperation and Development, and the International Finance Corporation link good corporate governance to responsible management of environmental and social risks.
Fortunately corporate boards increasingly recognize that effective management of environmental and social risks is linked to business performance as we discovered in 2010, when we teamed up with the respected governance research firm The Corporate Library 1 to publish a report titled, Board Oversight of Environmental and Social Issues.
Building on the report, Calvert has called upon companies, though direct dialogue and shareholder proposals, to establish explicit board oversight of sustainability programs by adopting language in board committee charters. To date five companies, including Comcast, Xerox, and Jones Apparel Group have agreed to adopt formal board oversight of sustainability, in most cases assigning oversight to a specific board committee.
Once explicit oversight is established, the dialogue continues with an inquiry into how the board fulfills its role, including whether companies establish compensation systems that link executive rewards to environmental and social performance hurdles, whether the board monitors key stakeholder views, and whether boards have the information they need to provide effective oversight. Responsible boards and directors will overcome any lingering dismissal of so-called "non-traditional" risks that have taken their place among the make-or-break- determinants of corporate success and shareholder value in the early twenty-first century.
As of February 29, 2012, accounts managed by Calvert Investment Management, Inc. had securities issued by Comcast Corp., Xerox Corp, and Jones Apparel Group. Calvert may or may not still invest in, and is not recommending any action on, companies listed.
Calvert Investment Management, Inc., 4550 Montgomery Avenue, Bethesda, MD 20814.
1. The Corporate Library is now part of GMI following its 2010 merger with GovernanceMetrics International and Audit Integrity