The Three Things Boards Need To Know About Social Purpose

social purposeThe much talked about letter from BlackRock’s Larry Fink to the CEOs of the world’s largest companies is long on advice about demonstrating social purpose and short on specifics. But read between the lines and talk to people in the forefront of developing social responsibility metrics and you begin to get a clearer picture of what’s coming, when, and what boards can do about it now.

What’s coming: business-specific materiality. Tell boards that they need to up their game in ESG, CSR, D&I, and sustainability, as Fink’s letter does, and they’re likely to answer that their companies already disclose voluminous information in all of those areas. But what investors will increasingly look for is not exhaustive reporting but pertinent reporting—social responsibility accounting metrics that are material to the company’s business situation and its financial performance.

A number of frameworks for reporting such material information have recently emerged and are being continually refined. The Sustainability Accounting Standards Board (SASB), established in 2011, maintains standards for 79 industries in 11 sectors to help public companies disclose sustainability information in SEC filings in a way that is useful to investors. Similarly, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), chaired by former New York City mayor Michael Bloomberg, is developing disclosure standards specifically focused on climate-related financial risk and encouraging firms to align their reporting with investors’ needs.

The standards that these groups are proposing go far beyond boilerplate and feel-good statistics. Instead, they focus on highly specific strategic and operational detail. Consider just one line under the SASB reporting standards for the software and IT services sector: “environmental footprint of hardware infrastructure” (like cloud hosting facilities). Companies must provide measurement of total energy consumed, the percentage that comes from the grid, and the percentage that is renewable. They must also account for total water withdrawn, the percentage that is recycled, and the percentage that is in regions with high or extremely high baseline water stress.

“eventually all organizations will be compelled to transform, or find themselves with greatly reduced access to capital.”

For material factors not addressed by specific accounting metrics, companies are asked to include narrative descriptions. That includes sustainability issues related to strategy, competitive positioning, degree of the company’s control, and measures it has undertaken or plans to undertake. The TCFD has also promulgated specific metrics and asks organizations to describe the resilience of their strategies under various climate-related scenarios.

When. Unless you are in an industry that is heavily and directly involved in carbon emissions you likely have time to prepare before you adopt financially material standards for sustainability reporting. Both the SASB and the TCFD standards are voluntary. And although some institutional investors and investment firms have grown more savvy and insistent about non-financial factors generally, the great majority are not yet clamoring for more stringent and specific standards. That’s according to a number of leading executives in the investment sector my firm has interviewed recently. Says one, “Right now you have only a small but vocal set of SRI funds and then the largest and most sophisticated investment firms asking for such reporting—the firms in the middle of the pack aren’t there yet. But they are beginning to realize that to compete for assets they will have to emulate the big firms.”

What boards can do now. Boards should of course review their sustainability strategy, push for best practices, and ask for internal assessments modeled on the emerging standards. But they should also focus on issues of talent, leadership, and culture.

First, consider the composition of the board. If its expertise in socially responsible strategy and operations is weak, the board might want to consider such expertise as one of the attributes required of new appointees.

Second, make sure that the management team has the right capabilities to move the company toward the level of performance that will satisfy increasingly demanding investors. Do all leaders in the C-suite—not just the Chief Sustainability Officer, Chief Risk Officer, or Chief Diversity Officer—understand today’s higher stakes in the realm of social responsibility and purpose? Can they translate non-financial factors into business outcomes?

Third, become a catalyst for speed. The issues in socially responsible behavior are future-oriented and fast moving. They require rapid innovation in technology, operations, and business models. And they require a culture where mobilizing around a set of strategic priorities, efficiently harnessing resources, experimenting, innovating, and quickly pivoting is second nature. Boards will therefore act not only as wise overseers of social purpose, but also as spurs to timely and organization-wide change.

That last point is worth pausing over. Outstanding performance on social measures requires not simply technical competence but outstanding performance overall and at all levels. It suggests that what is ultimately at stake for all companies and their boards is a transformation that will be as consequential and far-reaching as the digital transformations that have many leading companies fundamentally changing the ways in which they do business.

The insistence of investors on more stringent standards is only just beginning. The degree of urgency will continue to vary by industry. Progress will be uneven. But eventually all organizations will be compelled to transform, or find themselves with greatly reduced access to capital. Smart boards will start preparing now.