Originally published in The Climate Report, Fall 2010.
As the public becomes more aware of climate change concerns and risks, companies are paying closer attention to how well "sustainability" is reflected in their overall business priorities and goals. This sensitivity is illustrated by two developing trends: the placement of responsibility for sustainability at the highest levels of corporate management and the emergence of market indices to track corporate sustainability performance and climate change risks.
Building Sustainability into Management and Board Structures. Leading global companies report that they are increasingly placing responsibility for climate change strategies at the board and senior executive levels.
One indication of the involvement of high-level leadership on climate change strategy has been the increased establishment of Chief Sustainability Officer positions or the designation of other publicly identifiable executive officers to coordinate and drive a sustainability agenda, along with the emergence of forums to support such officers, such as the Association of Climate Change Officers. Some companies have also publicly linked executive pay to sustainability deliverables to increase accountability and affect company culture.
A number of companies have also built sustainability into board oversight through stand-alone committees or by expanding the responsibilities of existing committees. The investor advocacy group Ceres suggests several guidelines to companies considering adding sustainability responsibilities to a board charter: (a) the charter should explicitly identify the committee's oversight duties, (b) a stand-alone committee's composition should include at least two nonexecutive directors, (c) the charter should specifically reference the company's priority sustainability issues, (d) the charter should clearly describe the linkage between sustainability and business priorities, (e) the charter should include a performance protocol, sustainability reporting, and goal setting, and (f) the charter should provide a framework for the integration of sustainability and risk management.
Benchmarking Indices and Tools on the Rise. The Dow Jones Sustainability Indices, launched in July 1999, were the first global indices tracking the financial performance of the leading sustainability-driven companies worldwide. The FTSE4Good, a series of indices first launched in 2001, were designed to measure the performance of companies meeting globally recognized corporate responsibility standards and to facilitate investment in those companies. Interest in financial indices focused on climate change and sustainability has increased in recent years. Some more recent examples include KLD's Global Climate 100 Index (launched in July 2005 and made up of companies that KLD expects will provide near-term solutions to global warming, while offsetting the longer-term impacts of climate change through renewable energy, alternative fuels, clean technology, and efficiency), the HSBC Climate Index (launched in September 2007 to track the stock market performance of companies best placed to profit from the challenges presented by climate change), and the Prudential Bache Commodity Green Index (launched in June 2009 to offer investors a tool to invest in commodities with an environmental focus).
New indices have continued to emerge over the past year. The Standard & Poor's/IFCI Carbon Efficient Index was launched December 2009 to measure the performance of investable emerging market companies with low carbon emissions. The FTSE CDP Carbon Strategy Index Series, launched in June 2010, measures companies' exposure to carbon risk, relative to their peers, and NASDAQ's new OMX Green Economy Index, launched in September 2010, serves investors who wish to benchmark an investment portfolio based on the segment of the economy that supports clean, renewable, and sustainable economic development.
The rapid growth of such indices represents a response to demands from institutions and individuals for investment tools that address global climate change. Companies have also reported using these indices to benchmark their climate change business strategies. According to the Pew Center on Global Climate Change, companies also frequently use government and nonprofit organization standards to benchmark their performance and strategies, such as U.S. EPA's Energy Star program, The Carbon Disclosure Project, the U.S. Green Building Council's Leadership in Energy and Environmental Design ( LEED), Electronic Products Environmental Assessment Tool (EPEAT), and the Department of Energy/Energy Information Agency: Manufacturing Energy Consumption Survey (MECS).
As the number and scope of market indices and other third-party tools continue to grow, investors will be exposed to increasing data on those companies worldwide that are taking leadership roles in sustainability and climate change, and companies will have access to more methods to benchmark their performance and capitalize on resources invested in sustainable business practices. Executives will play an important role in addressing the market's increasing demand for such ratings and rankings as well as in contributing to an emerging discussion on standardization in the metrics.
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