Board Oversight of Sustainability

By Alan S. Gutterman

The role of corporations and other business organizations in society has become a hotly debated issue that has attracted the attention of numerous participants in the political arena; however, until recently board members generally showed little interest in the debate and remained focused on their traditional role of maximizing shareholder value.  It is now becoming clear that questions regarding the role of business are tied to essential strategic and operational sustainability-related issues that are critical to the discharge of directors' responsibilities with respect to setting the long-term strategy of their companies and which have attracted the attention of investors, consumers and other stakeholders upon which companies depend for their survival.  A number of studies have confirmed that board oversight is one of the top drivers of a company's attention to sustainability, a result that is not surprising given that the board is uniquely situation within the organizational hierarchy to ensure that sustainability is integrated into the long-term business strategy and that due consideration is given to social and environmental trends that will impact the company's operations and the markets in which it operates.  While CEOs may come and go, and short-term pressures will inevitably batter all companies at some point, the board can offer long-term leadership continuity on sustainability through its strategic planning decisions and succession planning for the CEO and other senior executives.  Traditional notions of directors' fiduciary duties, which assumed primacy of shareholders' interests and maximizing shareholder value, are giving way to a model of directors' duties that gives due weight to the interests of stakeholders and this book is intended to provide directors and their professional advisors with a practical guide to board oversight of sustainability that covers drivers and business benefits of corporate sustainability, the framework for directors' adoption and oversight of sustainability, roles and activities of board committees and evaluation and improvement of sustainable governance processes.

• Language: English
• Publisher: Sustainable Entrepreneurship Project
• Release date: May 19, 2019
• ISBN: 9781393408598

Alan S. Gutterman

This book was written by Alan S. Gutterman, whose prolific output of practical guidance for legal and financial professionals, entrepreneurs and investors has made him one of the best-selling individual authors in the global legal publishing marketplace.  His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which includes almost 200 book-length modules covering the entire lifecycle of a business.  Alan has also authored or edited over 80 books on sustainable entrepreneurship, leadership and management, business transactions, international business and technology management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Oxford, Quorum, ABA Press, Aspen, Euromoney, Business Expert Press, Harvard Business Publishing and BNA.  Alan has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions and strategic business alliances, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company.  He has been an adjunct faculty member at several colleges and universities, including Berkeley Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance, venture capital and law and economic development,  He has also launched and oversees projects relating to sustainable entrepreneurship and ageism.  He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge.  For more information about Alan and his activities, please contact him directly at [e-mail], follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/) and visit his website at alangutterman.com.

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1

Introduction

The role of corporations and other business organizations in society has become a hotly debated issue that has attracted the attention of numerous participants in the political arena; however, until recently board members generally showed little interest in the debate and remained focused on their traditional role of maximizing shareholder value.  It is now becoming clear that questions regarding the role of business are tied to essential strategic and operational sustainability-related issues that are critical to the discharge of directors’ responsibilities with respect to setting the long-term strategy of their companies and which have attracted the attention of investors, consumers and other stakeholders upon which companies depend for their survival. 

According to studies conducted by the Conference Board and the Boston Consulting Group board oversight is one of the top drivers of a company’s attention to sustainability, a result that is not surprising given that the board is uniquely situation within the organizational hierarchy to ensure that sustainability is integrated into the long-term business strategy and that due consideration is given to social and environmental trends that will impact the company’s operations and the markets in which it operates.[1]  The board is the only organizational body that can seamlessly integrate sustainability into decisions and actions that fall within the board’s core functions including oversight of risk management, compliance and the recruitment and remuneration of the CEO.  Moreover, board commitment and leadership on sustainability is highly visible and sends a strong signal about prioritization of sustainability to employees and external stakeholders such as investors.  Finally, while CEOs may come and go, and short-term pressures will inevitably batter all companies at some point, the board can offer long-term leadership continuity on sustainability through its strategic planning decisions and succession planning for the CEO and other senior executives.

For KPMG, the critical sustainability-related issues fell under the broad rubric of environmental, social and governance, popularly referred to as ESG, and included topics such as[2]:

Climate change impacts

Water and waste management

Natural resource scarcity

Product and worker safety

Supply chain management

Workplace diversity and inclusion

Talent management

Employee relations

Human rights

Health

Labor practices

Executive compensation

Political contributions

Board independence, composition and renewal

While board members and senior executives generally understand the issues involved with ESG, corporate social responsibility (CSR) and the strategic value of implementing ESG and CSR strategies, studies have shown that board oversight of environmental and social issues is often deficient.  Researchers on corporate sustainability from the MIT Sloan Management Review and The Boston Consulting Group (BCG) reported that while 86% of companies agreed that boards should play a strong role in their company’s sustainability efforts, only 48% said their CEOs are engaged, and even fewer (30%) agreed that their sustainability efforts had strong board-level oversight.[3]  The report also mentioned a 2014 United Nations Environment Programme Finance Initiative study of 60,000 businesses that found that only 2% of companies that reported on ESG information had a director with responsibility for sustainability and that only 374 companies had a sustainability committee that reported directly to the board (and none of those committees included board members).  The results of a research study published in the Harvard Business Review in 2014 showed that no more than 10% of US public company boards had a committee dedicated solely to corporate responsibility.[4]

The researchers cautioned that a company’s top executives and board members needed to be mindful of the interests and expectations of investors and noted that corporate leaders must recognize that an increasing number of shareholders are (literally) invested in whether a company’s ESG activities connect with its financial success.[5]  Noting that improving board engagement on sustainability issues faced several hurdles (e.g., the unclear financial impact of developing sustainable business practices, competing priorities, a lack of sustainability expertise among board members and short-termism), the researchers recommended that steps to be taken to improve directors’ expertise with respect to sustainability through training, new appointments to the board and accessing external expertise through external/independent advisory boards. 

The researchers also noted that it was essential to integrate ESG considerations into directors’ responsibilities and activities, something that might be accomplished by forming new committees dedicated to sustainability or by instilling ESG duties within existing committees, and to include sustainability on the agenda of top management.[6]  Many larger companies with publicly-traded securities have indeed established committees of the board to exercise some level of oversight of ESG and CSR programs; however, the activities of these committees often do not extend to assessing the environmental and social impact of strategic business decisions and/or monitoring and providing recommendations on ESG and CSR trends and developments.  Many ESG and CSR board committees spend most of their time on compliance activities in relation to existing laws and industry standards and fail to move beyond that level of involvement to brainstorming about stakeholder engagement.

As addressing short-termism, the MIT and BCG researchers noted that directors needed to reconsider and set aside their traditional assumptions that their primary fiduciary duties are to maximize shareholder value and that shareholders care most about short-term profits.  In fact, scholars and judges have been steadily chipping away at the notion of shareholder primacy and recognizing a duty of directors to take into account stakeholders beyond the owners of the corporation including employees, customers, communities, the environment and society as a whole.  At the same time, the concept of value creation has been revisited and refocused to include long-term value for all stakeholders, a target that is best achieved by integrating sustainability into the business.  A related trend is the public acknowledgement by many companies that their compliance obligations extend beyond laws and regulations to include voluntary standards relating to ethics and environmental and social responsibility such as the UN Global Compact and the OECD’s Guidelines for Multinational Enterprises.[7]

KPMG noted that the evidence is mounting as to a strong positive connection between a company’s ability to identify and incorporate these issues into their long-term strategies to achieve a competitive advantage and the company’s return on investment.  Companies that continue to ignore ESG and CSR issues are vulnerable to environmental, legal and reputational risks while companies with strong ESG and CSR performance tend to have a more stable and loyal investor base, lower cost of capital and realize benefits in terms of employee engagement and customer purchaser behavior.  In spite of all this, however, directors continue to struggle with how to make ESG and CSR a priority in the boardroom.  According to KPMG, directors must overcome a number of challenges[8]:

Short-term pressures caused by the need to meet quarterly earnings expectations and maintain the strength of investment vehicles that are valued daily or monthly cause companies to ignore addressing ESG and CSR issues, which by their very nature, are more long-term oriented.

Directors are often confused by the language and nomenclature that surrounds ESG and CSR issues and which includes definitions and concepts such as CSR, corporate responsibility, shared value, conscious capitalism, impact investing, triple bottom line, responsible business, corporate citizenship and sustainability.

Some of the issues associated with ESG and CSR have traditionally been viewed as soft brand/marketing topics rather than strategic issues.  While many companies did make their initial forays into environmental and social responsibility as a marketing tool and relied heavily on philanthropic acts, this approach will no longer do and may even expose the company to negative feedback as being mere greenwashing.  Directors need to change their own mindsets and those of many within their organizations: attentiveness to ESG, CSR and sustainability can be good for branding, but it needs to be more fully integrated into strategy.

There is no cookie cutter approach to ESG and CSR: every company faces different issues and circumstances will change as their operating environment evolves, all of which means that directors must continuously access all of the relevant issues and adjust the company’s strategy and operational activities.

Standards and tools for addressing many of the ESG and CSR issues are still evolving, many in just their earliest stage, and directors often have to act with clear guidelines of the type that have developed in areas where laws, regulations and related interpretations have been in place for extended periods of time.  Sustainability reporting and stakeholder engagement are just two areas, each extremely important, where directors are being tasked to develop sufficient expertise to make critical decisions about communications with investors and other stakeholders on ESG and CSR issues including what is material and thus mandates disclosure and in what form should those disclosures be made.

ESG and CSR issues are not something that can be treated and addressed as an afterthought, instead directors and members of the executive team need to accept a radical redefinition of their focus and activities in order to connect and embed ESG and CSR into the company’s core business activities and processes (i.e., strategy, operations, risk management and corporate culture) and demonstrate strong leadership and commitment in interactions with internal and external stakeholders in order to secure buy in to long-term strategic initiatives.

Support for ESG and CSR programs by the board of directors is an important element of the requisite tone at the top for increasing the chances of success for CSR.  Board members must understand that ESG and CSR programs are consistent with their traditional role and duty to effectively manage the legal, financial and reputational risks to the company that arise from the environmental and social impacts of the company’s activities.  Board members must insist that ESG and CSR be integrated into the company’s strategic decision making and performance management and assessment systems, a priority which includes allocating sufficient resources to ensure that personnel are able to efficiently engage with the company’s stakeholders.  In addition, board members must push for creating and maintaining systems that provide them with the information that they need in order to understand and evaluate the company’s ESG and CSR programs.

Ceres, a non-profit organization advocating for sustainability leadership (www.ceres.org), has developed and disseminated its Ceres Roadmap as a resource to help companies re-engineer themselves to confront and overcome environmental and social challenges and as a guide toward corporate sustainability leadership.[9]  In the area of governance for sustainability, Ceres stated the overall vision for companies is having sustainability embedded from the boardroom to the copy room and managing their entire value chain for sustainability.  Specific expectations regarding governance were as follows:

G1 – Board Oversight: Corporate boards will provide formal oversight for corporate sustainability strategy and long-term performance. Sustainability considerations will be integrated into board discussions on strategy, risk and revenue.

G2 – Management Accountability: The CEO and company management—from C-Suite executives to business unit and functional heads—will be explicitly accountable for achieving sustainability goals.

G3 – Executive and Employee Compensation: Sustainability performance results will be a core component of compensation packages and incentive plans for all executives and employees across the business. Companies will include sustainability criteria in all employee performance assessments.

G4 – Corporate Policies and Management Systems: Companies will embed sustainability considerations into corporate policies and risk management systems to guide day-to-day decision-making.

G5 – Public Policy: Companies will clearly state their position on relevant sustainability public policy issues. Any lobbying will be done transparently and in a manner consistent with the company’s sustainability commitments and strategies.

One of the most significant drivers of enhanced board oversight of sustainability has been the changing expectations of institutional investors, a trend which is discussed in detail below.  In addition, directors have become keenly aware of the expectations of other stakeholders regarding the role and purpose of corporations in society and the need for corporations, through their boards and senior executives, to forge a strategy that takes into account the environmental and social impact of operations as well as traditional financial performance objectives.  Consumers are demanding that companies integrate sustainability into their products and services and employees are seeking to work for companies that aim to make a difference as well as profits.  Lawmakers are imposing additional sustainability-related legal and regulatory compliance requirements on corporations, thus causing directors to make appropriate changes to their enterprise risk management processes.  Finally, traditional notions of directors’ fiduciary duties, which assumed primacy of shareholders’ interests and maximizing shareholder value, are giving way to a model of directors’ duties that gives due weight to the interests of stakeholders.

2

CSR Drivers and Business Benefits

Businesses can no longer afford to ignore corporate social responsibility (CSR) and corporate sustainability given the emphasis that various stakeholders are placing on the environmental and social impacts of a company’s operations.  Stories on the subject frequently appear in the media and companies routinely find that consumers are demanding information on production conditions and routes to market and that non-governmental organizations and trade unions want more information on, and evidence regarding, their commitments to the environment and society.  Suppliers are increasingly being met with CSR engagement demands from their customers and opportunities to participate in the supply chain are becoming dependent upon a company’s reputation with regard to environmental and human right matters.  In addition, businesses of all sizes must be aware of laws, regulations and public policies created by politicians who have begun to champion CSR in response to demands from their constituents. [10]

Business gurus such as Michael Porter have cautioned businesses that the costs of failing to pay attention to corporate citizenship are too high and have counseled that companies can and must identify and implement ways in which they can leverage their unique capabilities to both support social causes and enhance their competitive advantage at the same time.[11]  In particular, Porter, along with Kramer, has argued that sustainability and responsible business practices are integral parts of a corporate strategy that can create shared value for the company, its shareholders and other key stakeholders of the company.[12]  Porter, along with others such as McWilliams and Segal, has also maintained that companies should use the CSR initiatives as part of their business strategies to promote competitive advantage and, in fact, a large percentage of Global 250 firms have explicitly identified issues such as climate change and material resource scarcity as opportunities for the development of new products and services.[13]

According to Willard, attention to CSR was driven during the early 2000s by a combination of mega-issues and demands from emerging stakeholder groups.[14]  The mega-issues included climate change, pollution/health, globalization backlash, the energy crunch and erosion of trust and desire for transparency.  Emerging stakeholders included green consumers, activist shareholders, civil society/non-governmental organizations (NGOs), governments and regulators and the financial sector.  At the same time, companies around the world were being motivated to engage in CSR for various competitive reasons including economic considerations, ethical considerations, innovation and learning, employee motivation, risk management or risk reduction, access to capital or increased shareholder value, reputation or brand, market position or share, strengthened supplier relationships and cost savings.[15]  For example, companies began to realize they could improve their access to capital, and increase shareholder value as measured by market pricing of their securities, by improving their internal processes for identifying, mitigating and reporting business risks.  Companies also began to see that attention to ethical concerns in the marketplace would provide them with access to potentially large numbers of consumers who were demanding goods and services focusing on health, the environment, social justice and sustainable living.[16]  In addition, there was growing recognition that paying more attention to the improved use of resources could lead to greater cost savings and better value for consumer and a stronger bottom line for shareholders.

Hohnen and Potts were among those who perceived CSR as being an integral part of a new business model that aligns core business strategies with changing social and environmental contexts and described CSR as the way that firms—working with those most affected by their decisions (often called stakeholders)—can develop innovative and economically viable products, processes and services within core business processes, resulting in improved environmental protection and social conditions.[17]  Statements from leaders of major global businesses have frequently included intentions to focus on providing goods and services and reaching new customers in way that address major social and environmental challenges. Certainly, these companies believe that these activities will enhance economic performance and polish their reputations; however, they also understand that their businesses cannot be sustained in a world in which societies are struggling under the weight of the problems caused by environmentally unsound practices, poverty and poor education and training.

Hohnen and Potts succinctly made the case for CSR in the following observations:

There is growing recognition of the significant effect the activities of the private sector have—on employees, customers, communities, the environment, competitors, business partners, investors, shareholders, governments and others. It is also becoming increasingly clear that firms can contribute to their own wealth and to overall societal wealth by considering the effect they have on the world at large when making decisions. Business opinion polls and corporate behavior both show increased levels of understanding of the link between responsible business and good business. Also, investors and financial markets are beginning to see that CSR activities that integrate broader societal concerns into business strategy and performance are evidence of good management. In addition to building trust with the community and giving firms an edge in attracting good customers and employees, acting responsibly towards workers and others in society can help build value for firms and their shareholders.[18]

Jamali argued that while governments had traditionally assumed sole responsibility for the improvement of the living conditions of the population, the needs of society have evolved and expanded to the point where they can no longer be satisfied with the capabilities that governments have in hand and it is now necessary for business to assume a greater role in contributing to sustainable economic development.[19]  Drivers of corporate responsibility cited by the Australian Parliamentary Joint Committee on Corporations and Financial Services in its 2006 report on corporate responsibility included competitiveness and profitability, attracting investment, attracting and retaining employees, reputation, risk management. corporate failures, community expectations and license to operate, avoidance of regulation and globalization.[20]

Park argued that the financial crisis of 2008 came at the end of a long period of financial capitalism in which capital markets were dominated by financial intermediaries such as banks, asset managers and brokers and ushered in a new age of fiduciary capitalism in which the rules of the game would be set by long-term focused institutional investors such as pension funds, university endowments, foundations, and sovereign wealth funds.[21]  These institutional investors have certain fiduciary duties of care and loyalty to their beneficiaries.  Private pension funds must satisfy the fiduciary standards set forth in the Employees’ Retirement Income Security Act (ERISA), which prohibits ERISA fiduciaries from subordinating the economic interests of the plan to unrelated interests and mandate that investments must be chosen based on the economic interests of the plan.  However, these standards have been interpreted as not restricting fiduciaries from taking into account nonfinancial factors as long as they do not negatively affect risk and returns and can be integrated into the financial and risk analysis to help choose an investment portfolio that meets the long-term investment objectives of the beneficiaries.[22]  Large public pension funds, such as the Califor­nia Public Employees Retirement System (CalPERS), have made it clear that their focus is on the long term and achieving sustainable returns and when making investment decisions consideration will be given to management of the risks associated with the three forms of capital that contribute to long-term value creation: financial, physical and human.[23]

Many of the arguments for businesses to act in a sustainable manner have been based on the premise that the operational activities of businesses are part of a tightly integrated system that also includes society at large and the environment.  Willard pointed to the teachings of the nested dependencies model of the inter-relationships between the environment, society and companies which depicts society and companies as wholly-owned subsidiaries of the environment and reminds us that if the environment fails then so will society and the companies within it.[24]  People and companies have long assumed that there will be enough natural resources and ecosystem services available for life as we have known it to go on forever; however, the forces of progress, many of which have been driven by businesses, have overstressed the environment and endangered the ecosystem services that have been taken for granted.  The new reality for companies is that the damage their past activities have caused to the environment and society has now come back to challenge their operations and generated significant pressures to identify and implement new business models that can create and maintain environmental and social sustainability. 

Factors Driving Interest in CSR

While CSR has clearly been attracting greater attention, the reality has been that CSR remains a confusing matter for many business leaders as they struggle to understand the role that companies should play in social and environmental issues and develop measures of return on investment in CSR initiatives in order to assess the value of the costs associated with those initiatives.  Some companies have continued to approach CSR as primarily a philanthropic undertaking, or something that generates good publicity.  While there is no doubt that well planned and fully resourced philanthropic projects can and do have significant social and environmental impact, limiting CSR activities to philanthropy misses opportunities for engaging and building relationships with stakeholders and achieving a wide range of business benefits.  In order for companies to successfully develop the new strategies necessary for success in a world in which stakeholder value, as opposed to just financial returns to investors, is the paramount concern, it is first necessary for them to understand the factors that have been driving the emergence of CSR.

Hohnen and Potts

Hohnen and Potts took on the fundamental question of why CSR is important by citing Friedman, who argued that [i]n the flat world, with lengthy global supply chains, the balance of power between global companies and the individual companies and the individual communities in which they operate is tilting more and more in favor of the companies and that [a]s such these companies are going to command more power, not only to create value but also transmit values, than any other institution on the planet.[25]  Assuming there is fair amount of truth to Friedman’s statement, and coupled with the significant struggles of governments to muster the resources to maintain their traditional role as overseers of issues relating to the environment and society, it is clear that the path taken by CSR is crucial to the lives of everyone on the planet in the future.  Honhen and Potts went on to identify and explain the following factors and influences which they believed had led to the growing interest in CSR[26]:

CSR is one of several responses to pressures for attention to the need for sustainable development based on the fear that current usage of natural resources cannot be continued for practical and moral reasons since it will deprive future generations of the resources they will need for their development and survival.

Accelerated globalization in the form of increased cross-border trade, emerging multinational enterprises and greater reliance on global supply chains has raised concerns about treatment of workers in developing countries, environmental protection and health and safety and more and more countries have made it clear that they expect global businesses to act in a socially responsible manner wherever they are operating.

Corporate scandals have driven governments and intergovernmental bodies, such as the United Nations, the Organisation for Economic Co-operation and Development and the International Labour Organization to develop and widely disseminate compacts, declarations, guidelines, principles and other instruments that include norms and standards for governance and acceptable business conduct that companies can incorporate into their own CSR initiatives.

As corporations and other business organizations have assumed great roles with respect to political, social and environmental initiatives, questions have been raised about corporate sector impact and making sure that businesses are held accountable for their actions and the impact that they can have on stakeholders.

Advances in communications technology have made it easier for activists and other stakeholders to track corporate activities and identify and assess business practices that are either sound or problematic, meaning that companies must be more vigilant and understand that their actions will quickly be reported to the public.  It should be noted also that the same technology enables more positive and open relationships with stakeholders.

Interest in support socially responsible businesses has increased among investors and companies that have implemented CSR initiatives have enjoyed finance-related benefits in the form of increased share value, lower cost of capital and improved flexibility in their ability to respond to markets and risks and opportunities.

Ethical missteps by the leaders of high-profile business organizations that have caused substantial damage to investors, employees and other stakeholders have driven companies to adopt codes of ethics that include ethical standards designed to improve governance, transparency and accountability.

While there are companies that prefer to simply follow the minimum legal requirements, if any, when carry out their business activities, other firms realize that governmental action in many of the areas described elsewhere in this publication will either be slow or non-existent and that CSR is an opportunity to take a leadership role in addressing important social and environmental problems.

While sometimes criticized for inconsistency with the notion of doing good and being a good corporate citizen, companies have come to see CSR as a powerful business tool that reduces the risk of business disruptions, opens up new opportunities, drives innovation, enhance brand and company reputation and improves efficiency.

Hohnen and Potts also noted that there are two schools of thought about what drives companies to consider and implement CSR initiatives.  Of course, idealists hope that companies will embrace socially responsibility because it is the right thing to do and with the recognition that CSR provides a framework that facilitates innovation and pursuit of new markets.  On the other hand, some feel that many companies have a compliance mentality, which means that they only do things that are required, and that the CSR efforts of these companies will extend only as far as is necessary to fulfill applicable legal requirements.  Critics of the compliance approach argue that companies taking this route do little to help the fundamentals of their business since they are not willing or able to see the possibilities that CSR might bring in terms of innovation.[27]

For their part, Hohnen and Potts argued that there were two separate drivers for CSR.  The first, which followed from the observations of Friedman above, as well as general public sentiment, was based in public policy and the realization that given the outsized potential impacts of business on society it was imperative for governments and other stakeholders to pay closer attention to what businesses do, how they act and the positive and negative impacts of their operations.  At the same time, companies were finding that CSR can actually be a significant business driver to the extent that it executed in ways that involve innovation (i.e., new products, services or processes to meet sustainability demands), lower costs and/or higher productivity and improved brand value.[28]

Future-Fit Business Network

The Future-Fit Foundation (futurefitbusiness.org) is a non-profit organization whose vision is a future in which everyone on the Earth can flourish.  Future-Fit is dedicated toward working for the achievement of a Future-Fit society that protects the possibility that humans and other life can flourish on Earth forever, by being environmentally restorative, socially just and economically inclusive.  Future-Fit has criticized actors in the global economy for failing to adequately address a host of critical environmental and social issues that are undermining the natural processes and social fabric that business, and society as a whole, relies upon[29]:

Climate destabilization: Accumulation of greenhouse gases in the atmosphere is changing the Earth’s energy balance, causing extreme weather events, rising sea levels, temperature and water stresses on agriculture, and damage to ecosystems.

Ocean acidification: An excess of carbon dioxide absorbed from the atmosphere is causing an increase in the acidity of the Earth's oceans, destroying coral reefs and adversely affecting other marine ecosystems.

Biodiversity crisis: Species are now becoming extinct a thousand times faster than before humans appeared, resulting in irreversible damage to a wide range of ecosystems whose resources we depend upon.

Ecosystems degradation: Ecosystems we depend upon are being degraded and in some cases collapsing as a result of direct actions (e.g. physical encroachment, over-harvesting and pollution) and indirect effects (e.g. climate change).

Access to mined materials: Increasing demand for non-renewable resources (metals and minerals) from a growing population and middle class puts pressure on dwindling virgin supplies, with extraction becoming more resource intensive and disruptive.

Access to renewable materials: Increasing demand for renewable resources is driving over-harvesting, encroachment into biodiverse areas and unsustainable farming methods, thus undermining the regenerative capacity of those resources.

Energy crisis: Increasing demand for energy services from a growing population and middle class contributes to extreme volatility in fossil fuel prices, stressing oil-dependent sectors (e.g. transport) and raising geopolitical tensions.

Fresh water crisis: The quality and quantity of available fresh water is rapidly declining, with demand from a growing population exceeding supply for drinking, sanitation, agriculture, energy production and business operations.

Food crisis: The reliability and affordability of nutritious food is at risk, driven by increasing demand and pressures on agriculture due to extreme weather events, water scarcity, soil degradation and competition for land.

Health crisis: Growing incidence of chronic diseases, an aging population and increasing risk of pandemics are exacerbated by a lack of universal access to essential medicines, nutrition and sanitation.

Infrastructure crisis: Failure to adequately invest in, upgrade, and secure critical infrastructure, coupled with rapid and poorly-planned urbanization, undermines the long-term health and resilience of communities.

Governance failure: Weak or inadequate global institutions, agreements and networks, combined with competing national and political interests, disenfranchise citizens and impede efforts to address global risks.

Financial inequality: A severe income disparity between the world’s richest and poorest citizens both contributes to and is exacerbated by underemployment, a growing skills gap and depressed economies.

Education crisis: A large proportion of the global population has inadequate access to basic education, resulting in a skills gap, poor nutrition and health, and less chance for families to escape from poverty and lead fulfilling lives.

Social instability: Social instability, which negatively impacts communities and markets, arises from a lack of equitable treatment and access to resources, coupled with aggressive policies and actions on the part of regional powers.

Erosion of trust: Trust in institutions, from governments to business, is low and is being eroded by unethical practices, a lack of transparency, and failure to deal effectively with corruption, organized crime and illicit trade.

Future-Fit argued that the aforementioned challenges must be addressed by society, including businesses, in order for the Planet to transition to a sustainable future.[30]  Future-Fit has called on businesses to rethink how they define and create long-term business value and shift their focus away from traditional notions of shareholder value primacy toward system value, a state in which business in no way hinders, and ideally contributes toward achievement of a Future-Fit society.  In furtherance of its goals and objectives, Future-Fit has developed the Future-Fit Business Benchmark as a free tool to help companies and investors transform how they create long-term value, for themselves and society as a whole.  Future-Fit believes that its Benchmark can be used to identify the environmental and social performance thresholds that all companies must ultimately strive to reach, and provide a way to assess progress toward them; help companies zero in on the best ways to have a positive impact on the world, from production and procurement practices to products and business models; and help companies assess and articulate the true value of their actions and ambitions, to foster better engagement with employees, investors and others. 

The Future-Fit Business Framework includes a set of eight system conditions described below, where were intended to serve as the boundaries within which society must operate to protect the possibility that humans and other life can flourish on Earth forever.[31]  It was explained that any activity by any societal actor that breached one of these conditions would in some way contribute undermining the resilience and wellbeing of society as a whole and any company operating within and serving society.  The system conditions were deliberately presented as a definition of what should not happen—an attempt to provide a robust and proven definition of what do no harm means for both society and the environment—and the creators admonished companies to embrace the freedom to do anything within their range of creativity and innovation so long as it did not breach any of the conditions.

In a sustainable society, nature is not subject to systematically increasing concentrations of substances extracted from the Earth’s crust.  Limited extraction and safeguarding so that concentrations of lithospheric substances do not increase systematically in the atmosphere, the oceans, the soil or other parts of nature (e.g., fossil, carbon, metals).

In a sustainable society, nature is not subject to systematically increasing concentrations of substances produced by society.  Conscious molecular design, limited production and safe-guarding so that concentrations of societally-produced molecules and nuclides do not increase systematically in the atmosphere, oceans, soil or other parts of nature (e.g., NOx, CFCs).

In a sustainable society, nature is not subject to systematically increasing degradation by physical means.  The area and quality of soils, fresh water availability, biodiversity and other aspects of biological productivity and resilience, are not systematically degraded by mismanagement, displacement or other physical manipulation (e.g., de-forestation and over-fishing).

In a sustainable society, people are not subject to structural obstacles to health.  This means that people are not exposed to social conditions that systematically undermine their ability to avoid injury and illness, physically, mentally or emotionally (e.g., lack of access to basic services, dangerous working conditions).

In a sustainable society, people are not subject to structural obstacles to influence.  This means that people are not systematically hindered from participating in shaping the social systems they are part of (e.g., through suppression of free speech or neglect of opinions).

In a sustainable society, people are not subject to structural obstacles to competence.  This means that people are not systematically hindered from learning and developing competence individually and together (e.g., obstacles to education or insufficient possibilities for personal development).

In a sustainable society, people are not subject to structural obstacles to impartiality.  This means that people are not systematically exposed to partial treatment (e.g., through any form of discrimination, or unfair selection to job positions).

In a sustainable society, people are not subject to structural obstacles to meaning-making.  This means that people are not systematically hindered from creating individual meaning and co-creating common meaning (e.g., by suppression of cultural expression, or through obstacles to co-creation of purposeful conditions).

Future-Fit explained that the critical environmental and social issues described above could be expected to have a variety of impacts on businesses ranging from price increases and volatility to new regulations, physical and weather changes, change in consumer preferences and resource constraints on production.  Certainly there will be new regulatory, reputational, physical, market, litigation and social risks for companies; however, crisis and challenges also bring new opportunities with respect to reputation and branding; innovation and learning; new products, services and markets; cost reduction and access to capital.[32]  Future-Fit argued that in order for companies to be able to mitigate the risks and seize the opportunities, they must first understand and embrace the following core business principles to guide them in formulating and executing their sustainability initiatives[33]:

A future-fit business eliminates its contribution to pollution from mined substances.

A future-fit business eliminates its contribution to pollution from substances produced by society.

A future-fit business eliminates its contribution to environmental degradation by physical means.

A future-fit business ensures it in no way puts the health of its stakeholders at risk.

A future-fit business ensures it in no way prevents its stakeholders from having a voice.

A future-fit business ensures it in no way undermines the opportunity for its stakeholders to learn and grow.

A future-fit business ensures it in no way prevents its stakeholders from being treated impartially.

A future-fit business ensures it in no way prevents its stakeholders from creating meaning in their lives.

World Economic Forum Global Risks Reports

Drivers for business actions on environmental and social challenges can be identified by reference to the work of the World Economic Forum, which has been publishing a comprehensive and widely praised annual report on global risks since 2006 drawing on the unique expertise available within the Forum itself and its different communities and knowledge networks.  The 2017 Edition of the Forum’s Global Risks Report identified the following major environmental and social risks[34]:

Extreme weather events (e.g. floods, storms, etc.): Major property, infrastructure and/or environmental damage as well as loss of human life caused by extreme weather events.

Failure of climate-change mitigation and adaptation: The failure of governments and businesses to enforce or enact effective measures to mitigate climate change, protect populations and help businesses impacted by climate change to adapt.

Major biodiversity loss and ecosystem collapse (terrestrial or marine): Irreversible consequences for the environment, resulting in severely depleted resources for humankind as well as industries.

Major natural disasters (e.g. earthquake, tsunami, volcanic eruption, geomagnetic storms): Major property, infrastructure and/or environmental damage as well as loss of human life caused by geophysical disasters such as earthquakes, volcanic activity, landslides, tsunamis, or geomagnetic storms.

Man-made environmental damage and disasters (e.g. oil spills, radioactive contamination, etc.): Failure to prevent major man-made damage and disasters, including environmental crime, causing harm to human lives and health, infrastructure, property, economic activity and the environment.

Failure of urban planning: Poorly planned cities, urban sprawl and associated infrastructure that create social, environmental and health challenges.

Food crises: Inadequate, unaffordable, or unreliable access to appropriate quantities and quality of food and nutrition on a major scale.

Large-scale involuntary migration: Large-scale involuntary migration induced by conflict, disasters, environmental or economic reasons.

Profound social instability: Major social movements or protests (e.g. street riots, social unrest, etc.) that disrupt political or social stability, negatively impacting populations and economic activity.

Rapid and massive spread of infectious diseases: Bacteria, viruses, parasites or fungi that cause uncontrolled spread of infectious diseases (for instance as a result of resistance to antibiotics, antivirals and other treatments) leading to widespread fatalities and economic disruption.

Water crises: A significant decline in the available quality and quantity of fresh water, resulting in harmful effects on human health and/or economic activity.

The 2017 Report also included economic, geopolitical and technological risks, some of which, including the following, are especially problematic for businesses[35]:

Failure/shortfall of critical infrastructure: Failure to adequately invest in, upgrade and/or secure infrastructure networks (e.g. energy, transportation and communications), leading to pressure or a breakdown with system-wide implications.

High structural unemployment or underemployment: A sustained high level of unemployment or underutilization of the productive capacity of the employed population.

Illicit trade (e.g. illicit financial flows, tax evasion, human trafficking, organized crime, etc.): Large-scale activities outside the legal framework such as illicit financial flows, tax evasion, human trafficking, counterfeiting and/or organized crime that undermine social interactions, regional or international collaboration, and global growth.

Severe energy price shock (increase or decrease): Significant energy price increases or decreases that place further economic pressures on highly energy-dependent industries and consumers.

Adverse consequences of technological advances: Intended or unintended adverse consequences of technological advances such as artificial intelligence, geo-engineering and synthetic biology causing human, environmental and economic damage.

Breakdown of critical information infrastructure and networks: Cyber dependency that increases vulnerability to outage of critical information infrastructure (e.g. internet, satellites, etc.) and networks, causing widespread disruption.

Massive incident of data fraud/theft:  Wrongful exploitation of private or official data that takes place on an unprecedented scale.

Also relevant for businesses in making decisions with respect to their long-term strategies were the following trends highlighted in the 2017 Report, each of which represented a long-term pattern that was evolving and that could contribute to amplifying global risks and/ or altering the relationship between them:

Changing climate: Change of climate which is attributed directly or indirectly to human activity and that alters the composition of the global atmosphere, in addition to natural climate variability.

Degrading environment: Deterioration in the quality of air, soil and water from ambient concentrations of pollutants and other activities and processes.

Rising chronic diseases: Increasing rates of non-communicable diseases, also known as chronic diseases, leading to rising costs of long-term treatment and threatening recent societal gains in life expectancy and quality

Rising income and wealth disparity: Increasing socioeconomic gap between rich and poor in major countries or regions.

A telling finding was that among the eight global risks mentioned in either or both of the Top 5 Global Risks in Terms of Likelihood or the Top 5 Global Risks in Terms of Impact in the 2017 Report, five of them were environmental or social: extreme weather events, major natural disasters, water crises, large-scale involuntary migration and failure of climate-change mitigation and adaptation.[36]

The 2018 edition of the Global Risks Report warned of continuing signs of strains in the interconnected systems that underpin our world, such as organizations, economies, societies and the environment, and noted that the prominence and urgency of environmental risks was continuing to grow.  Specifically, the 2018 Report noted[37]:

We have been pushing our planet to the brink and the damage is becoming increasingly clear. Biodiversity is being lost at mass-extinction rates, agricultural systems are under strain and pollution of the air and sea has become an increasingly pressing threat to human health. A trend towards nation-state unilateralism may make it more difficult to sustain the long-term, multilateral responses that are required to counter global warming and the degradation of the global environment.

The 2018 Report also raised concerns about cybersecurity risks; potentially unsustainable asset prices in financial markets; elevated indebtedness, particularly in China; protectionist pressures; and a collapse in the norms and institutions towards which the world’s major powers might converge in order to peacefully address geopolitical disputes.  A new and interesting feature of the 2018 Report added another perspective for businesses to consider as they developed strategies to address environmental and social issues and challenges relevant to their operations.  The 2018 Report included a discussion of the following 10 future shocks, described as sudden and dramatic breakdowns in the global systems upon which all businesses depend[38]:

Grim reaping: Simultaneous breadbasket failures threaten sufficiency of global food supply

A tangled web: Artificial intelligence weeds proliferate, choking performance of the internet

The death of trade: Trade wars cascade and multilateral institutions are too weak to respond

Democracy buckles: New waves of populism threaten social order in one or more mature democracies

Precision extinction: AI-piloted drone