Sustainability in the governance of Spanish listed companies

The 2020 reform of the Good Governance Code for listed companies (CBG) in Spain, from a sustainability perspective, brought about a formal—often terminological—change, as it replaced the board’s previous responsibility for corporate social responsibility with a responsibility for environmental, social, and governance (ESG) matters. 

It also acted as a stimulus for listed companies to reinforce the role of their boards in this area, encouraging the creation of sustainability committees and fostering a more proactive attitude toward understanding and supporting executive actions in these matters. The CBG raised the level of board attention and oversight and marked a shift in governance practices, aligning with the growing societal commitment to sustainability, especially among younger generations, boosting pioneering companies and attracting the rest of the market. 

Sustainability has moved from being anecdotal to becoming a key part of the board of directors’ agenda

In March 2021, one year later, a study by the Esade Center for Corporate Governance identified that 60% of IBEX 35 companies had a board committee that explicitly included sustainability among its responsibilities (in some cases exclusively, in others in combination). On the one hand, the need to monitor new regulatory requirements and, on the other, the opportunity to access more favorable financial conditions (sustainable financing) significantly contributed to strengthening board agendas in this area. 

Sustainability on the board

Today we can identify board members specialized in sustainability who help connect it to strategic discussions: they enhance the board’s ability to better oversee risks associated with non-financial aspects and motivate executives to keep making progress on challenges such as non-financial controls, adopting enabling technologies, and preparing for the more complex verification levels to come. Investors and analysts expect rigor in companies’ non-financial disclosures so that they can easily compare companies and trust that the information meets the same quality standards as financial reporting. 

The past five years have seen the most significant progress toward sustainability by listed companies

Investor and shareholder interest in verifying listed companies’ true commitment to sustainability has increased the level of scrutiny. This has even led some companies to submit their environmental plans to a non-binding vote at annual general meetings or to report this commitment explicitly and concretely in annual remuneration reports, integrating sustainability targets into executive directors’ variable pay plans.

In the past five years, we have witnessed the greatest progress yet in the commitment of listed companies to sustainability, which has been integrated into strategic planning, operations, and the day-to-day management of many companies. On the board of directors, sustainability has moved from being anecdotal to a relevant part of the agenda, influencing both board member profiles and board structures.

Future challenges

However, many challenges remain ahead, and boards will need to make further efforts. To move from a compliance-based approach to a more strategic and business-oriented view of sustainability, it is necessary to continue strengthening the knowledge and skills of many boards—particularly those of small-cap companies—and to integrate sustainability targets into all long-term incentive plans for executive directors, not just short-term plans.

Regulatory decoupling between Europe, the US, and China presents new dilemmas for investors

In this regard, the new Technical Guide on Audit Committees issued by the Spanish CNMV has led some companies to reassess the role of their sustainability committees in the areas of reporting and financial information oversight. The regulatory decoupling on sustainability between Europe and the United States (and also China) presents new dilemmas for investors operating across geographies and for the boards of global companies.

Supervisory bodies are fine-tuning their strategies and closely reviewing the consistency between the commitments disclosed in sustainability reports and the financial data that should confirm that the necessary investments and expenditures have indeed been made.

The importance of governance

One final reflection: the board’s growing focus on environmental and social issues—driven by new regulations—may have distracted us somewhat from the importance of the third ESG pillar: good governance. And over the past five years, we have already seen that sustainability is not sustainable without good governance. Good governance ensures that board discussions are not limited to ticking compliance boxes, but instead focus on what is core from a business perspective.

Sustainability can have a positive impact on our balance sheet and income statement, as it can generate efficiencies (e.g., energy costs) and business opportunities. It is the board’s role to bring these issues to the center of strategic discussions, whether reviewing corporate operations, the supply chain, or when considering a new alliance or partnership.

Sustainability helps transform traditional ways of operating across many industries and clearly has economic value. It is the directors’ responsibility to inspire, motivate, and support executives along this path.