Boards should develop a sustainability policy in 2021
By Kirsten Aaskov Mikkelsen, Martin Faarborg and Marie Voldby
On 2 December 2020, the Danish Committee on Corporate Governance ("the Committee") published updated Corporate Governance Recommendations. The update focuses on current trends such as social responsibility, sustainability and a company's purpose. The recommendations come into force for financial years beginning 1 January 2021 or later. The first time these areas should be reported on is when the annual report is published in 2022.
In this article, we highlight the role of the board of directors in relation to the fact that the Committee has tightened its previous recommendation that the board of directors adopt policies for the company's social responsibility. The new recommendation thus states that the Committee recommends that the board of directors adopts a policy for the company’s corporate social responsibility, including social responsibility and sustainability, and that the policy is available in the management commentary and/or on the company's website. The recommendation also includes that the board of directors ensures compliance with the policy.
The Committee writes in its comments that the board of directors may consider whether the company should accede to national and international voluntary guidelines or similar initiatives. Information in this respect may be provided in the report in accordance with section 99a of the Danish Financial Statements Act. In addition, the board of directors should continuously ensure that the company complies with the corporate social responsibility policy, and the company should consider providing reports on its website on the development and any new measures within these areas on an annual basis.
The Committee's tightening of the recommendation on social responsibility is natural in view of the increased focus on the environmental, social and ethical responsibilities of companies. Investors are more focused on whether companies are sustainable and responsible, and these elements are now included as real factors in their risk assessment. Some investors even impose requirements on individual companies, such as using the recommendations of the Task Force on Climate-related Financial Disclosures as a basis for climate-related reporting in annual reports.
Politicians have also raised the level of ambition and are increasingly using regulation, for example, to reduce CO2 emissions and strengthen ethical behaviour. Large companies report voluntary but binding targets, particularly in the climate field, which require changes in both their own business and in the behaviour of their suppliers.
Globally, including in the EU, there is a trend towards higher expectations for the board's role in relation to social responsibility. This is particularly evident in the current debate on the EU's work on a forthcoming 'Sustainable Corporate Governance'1 proposal.
Many companies develop or revisit their policies and strategies for social responsibility and sustainability because the issues have a much larger and more direct impact on business opportunities, innovation and business model, as well as on risk management, controls, reporting and data. The board of directors therefore has a key role to play.
It is important that the board of directors discusses and understands the "landscape", the expectations of stakeholders for the company and the importance to the company, and charts the course for the company's long-term and sustainable development. The strategic and priority discussion of the board of directors should result in a relevant, robust and forward-looking social responsibility policy. How such a process is organised will depend on the products and services of the specific company and its current situation, industry and maturity.
Typical questions that the board of directors should consider and discuss would be:
- What are the company's core values (and purpose), and are there areas where the compa-ny would like to take the lead? For example, it may be a value to prioritise the employment of people who otherwise find it difficult to find a foothold in the labour market.
- Which environmental, social and ethical issues are most important to the company in terms of products, services, industry, geography, size and supply chain? The possible topics are many: from CO2 emissions and recycling, over pay and working conditions, to diversity, an-ti-corruption and data ethics. Analysing what is most important in relation to the company's business strategy is therefore important.
- What, in the eyes of investors, customers and other key stakeholders, are the most im-portant issues for the company, and what do they expect from us? The board of directors should have an insight into the questions, investors ask about social responsibility, and what requirements and expectations exist in customer contracts, tenders, etc.
- What do other companies that we compare ourselves to do - both in our industry and with front-runners outside the industry? It is relevant to take inspiration from other companies to establish one’s own level of ambition in the short and long term and to understand de-velopments and trends and their pace.
- Are all essential angles uncovered? A good and strong social responsibility policy is based both on a clear direction for the company's positive contribution to society, for example, through green solutions, and a recognition and management of the risk of negative im-pact, for example, if production takes place in countries at risk of negative impact on hu-man rights.
Some companies choose to adopt one or more of the international frameworks and principles because it can demonstrate dedication to the outside world and increase credibility. For example, it could be a combination of the widely used UN Global Compact and UN Sustainable Development Goals, from which the company selects some particularly relevant development goals and explains its contribution to them2.
As something new, the board of directors must continuously ensure, as mentioned above, that the company complies with its own policy. Emphasis has thus been placed on the board's need to ensure that policies and objectives do not remain words on paper but are implemented in practice and that they are followed up on. The board of directors is not to take over the operational role of management but is to take an interest in and monitor the integration and prioritisation of the efforts in the organisation. It is therefore important that the board of directors is continuously informed about and discusses progress, challenges and new actions.
We recommend that the board of directors consider at least the following:
- Do we have access to the necessary information and the right data from the company to discuss and assess current issues and risks related to social responsibility, or should man-agement reporting be extended?
- How do we ensure that management establishes clear responsibilities for the implementa-tion of the policy in the organisation covering e.g. finance, strategy, law, HR, procurement, investor relations, risk and operations?
- How often do we have to discuss social responsibility, and should it be a fixed item on the board's agenda/annual plan?
- What competences do we have on the board of directors in relation to these issues, and do we need to set up a special committee for social responsibility?
- Are risks related to social responsibility integrated into the company's risk management processes?
- How does the company communicate and report externally on social responsibility, and do we trust that these communications and reports are of high quality and contain reliable information? For example, because clear processes have been implemented for data collection and calculations, internal controls and external validation. In other words, is our external reporting on social responsibility adequate and reliable?
1. Refer to the European Commission’s website ‘Sustainable corporate governance (europa.eu) and to the European Parliament’s website ‘REPORT on sustainable corporate governance’ (europa.eu) for more details. It is also worth keeping an eye on, for example, the EU’s Corporate Human Rights and Environmental Due Diligence proposal and the revised Non-Financial Reporting Directive.
2. The UN Global Compact is the world’s largest private sustainability initiative, covering the universal principles on human rights, labour, environmental protection and anti-corruption Homepage | UN Global Compact. The UN’s 17 Sustainable Development Goals (SDGs) are until 2030 to chart the course for more sustainable developments for both people and the environment Home | Sustainable Development (un.org).