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What are the implications of the Sustainable Development Goals (SDG) for corporate governance?
by Professor Pascual Berrone
Over the past decades, the world has experienced unprecedented economic growth. Despite evidence of prosperity, progress has been uneven. Climate change, gender inequality, poor labor conditions are just a few of the many social ills that need solutions. The good news is that we, humankind, have a plan: the sustainable development goals (SDGs). Adopted in September 2015, backed by all 193 United Nations Member States, and set to be achieved by 2030, the SDGs are 17 goals aimed at ending poverty, protecting the planet, and ensuring prosperity for all. It is a comprehensive plan for the future of our world. The SDGs are what we want to become in 2030.
Naturally, this poses the question about what the implications for business are and, consequently, how boards of directors should address them. There are at least three clear implications. One is the cost of inaction and its associated risks. These may come in different shapes and sizes. For instance, companies may face regulatory risks, as many governments are passing legislation along the lines of the SDGs. Firms may also face social acceptance risks since non-profits and activists are targeting CEOs for their lack of consistency between words and actions when it comes to environmental and social issues, putting them between a rock and a hard place. This risk can also stem from inside the company. For example, in September 2019, thousands of Amazon employees walked out for a strike in protest the company’s inaction on climate change.
The second implication has a more positive connotation for businesses. In solving humanity’s greatest challenges, new market opportunities may emerge. In its report “Better Business Better World,”, the Business and Sustainable Development Commission estimated an annual value from delivering solutions to the SDGs in the area of $12 trillion. Of course, to materialize these opportunities in full, firms need a tremendous amount of creativity and an equal amount of initiatives.
Finally, pressures for a more sustainable world is shifting our perception of the role of organizations in society. Previously in this newsletter, my colleagues commented on the debate between the notion of shareholder primacy as opposed to a multi-stakeholder conception of the firm. This new conception requires a deep rethinking of the purpose of the organization and the responsibility they have with society beyond being profitable. Some companies seem to be taking action in this regard. A recent example is Microsoft’s pledge and multi-million dollar commitment to become “carbon negative” to offset all the carbon it has emitted to the environment since its founding in 1975.
Why is this relevant for boards? Because risk management, the seizure of opportunities, and the social purpose of a firm fall within boardroom duties. But, are boards using the SDGs as a framework to deal with them? Some of them are. A notable example is the Danish company Novozymes. In 2015, the board approved the proposal made by its CEO Peder Nielsen to use the SDGs to craft its new strategy “Partnering for Impact.” Since then, Novozymes screens and prioritizes its innovations, products, partners, and business model, assessing their impact on different SDGs. This new strategy was coupled with changes in the company’s structure. Novozymes set up two new executive boards focused on the SDGs. In parallel, they also set up incentive systems tied to sustainability targets. The result was strong financial indicators, a strong patent portfolio, and good results in several sustainability-related indicators. Part of its success was a committed, supportive, and vigilant board (anecdotally, Novozymes’ board met 7 times in 2016 with 100% attendance).
If we want to achieve the SDGs by 2030, we need a higher number of companies making bold commitments towards them. Here, a few questions that can help board members to think about how SDGs can be integrated into their firm strategies. Is your board aware of the Sustainable Development Goals (SDGs)? Does your firm discuss the SDGs and their implications at the board level? Has your company mapped your business activities into the SDGs? Have you considered whether or not the SDGs can be integrated into the purpose and strategy to attract a greater breadth of investors, talent, and other key stakeholders? Have you considered the opportunity costs associated with not embracing the SDGs? How can you leverage the SDG to provide a competitive advantage? Answers to these questions can help boards of directors to fully understand the implications, responsibilities, and opportunities that SDGs entail.
Can we end hunger, achieve gender equality, halt climate change, and assure sustainable and inclusive economic models in the next 10 years? I sincerely hope so.
Pascual Berrone
Professor of Strategic Management
IESE Center for Corporate Governance
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