Introduction to Sustainability Governance

What factors are important for demonstrating sound governance in sustainability?

Demonstrating sound governance in sustainability requires a strong sustainability framework that is signed off by the Board of Directors, either as a standalone report or as part of the company's Annual Report. Interactions between the board and management are crucial in this process, as they focus on whether the company has taken an interest in sustainability measurements and whether they are regularly embedded into Enterprise Risk Management, as well as the evolving landscape of financial sustainability disclosure. The structure of the board also plays an important role, as it affects the board's value-creating contributions. If a Board Sustainability Committee is formed, expectations surrounding the quality of disclosure are higher, as this committee is responsible for overseeing and signing off on sustainability progress and metrics.

What is the role of scenario planning in the oversight of sustainability governance and how does communication and disclosure oversight contribute to effective sustainability governance?

Scenario planning is a key aspect of the oversight of sustainability governance by Boards and Board Sustainability Committees. By "thinking of the unthinkable," Boards can better assess risks and align strategic corporate objectives with emerging areas of liability, changing market dynamics, and investor priorities. Effective communication and disclosure oversight also play a crucial role in sustainability governance by enabling Boards and Sustainability Committees to ensure that information related to sustainability risks is publicly disclosed and comparable to that of competitors. Management reporting via transparent and readily available sustainability performance communication is key to sound sustainability governance, and hubs such as the IR function or a sustainability hub can facilitate this process.

How did the Rio Tinto case in May 2020 highlight the importance of appreciating the expectations of stakeholders?

The Rio Tinto case in May 2020 demonstrated the importance of appreciating the expectations of stakeholders, whether legal or regulatory, in sustainability governance. The case involved the demolition of the Juukan Gorge in Western Australia's Pilbara region by the Anglo-Australian mining corporation Rio Tinto to extract $135 million worth of high-grade iron-ore. The company's response to the incident, including high-powered resignations, demonstrated the power of increased stakeholder assertiveness. The Board and executives were held accountable for failing to meet environmental, sustainability, and governance responsibilities, and it was found that the Board was reluctant to challenge the CEO, leading to a major expectations gap and serious governance failure. Ultimately, Rio Tinto lost its social licence as a result of the incident, highlighting the importance of sustainability governance in meeting stakeholder expectations and avoiding negative consequences.