Boards of directors play a central role in advancing sustainability within SOEs. This chapter examines how sustainability considerations can be integrated into SOE board nomination processes and broader governance frameworks to equip boards to effectively manage sustainability risks and opportunities. It also explores how SOE boards can effectively integrate sustainability into corporate decision making and operational activities, including by setting and overseeing sustainability strategies, approving measurable targets, ensuring management accountability, and integrating sustainability into enterprise risk management and internal control systems. These practices help boards embed sustainability into core business functions and support long-term value creation for their shareholders, stakeholders and the public.
State‑Owned Enterprises and Sustainability
Abstract
While the state as an owner sets overall sustainability-related expectations, SOE boards are responsible for embedding these into corporate strategy and operational activities. Even in the absence of such expectations, SOE boards have an interest and a responsibility to address sustainability-related risks and opportunities to support the enterprise’s resilience and long-term performance.
As part of their corporate governance responsibilities recognised by the corporate laws of most jurisdictions, SOE boards have duties to act in the best interests of the company and its shareholders. This increasingly includes anticipating and responding to sustainability-related risks and opportunities. Even in the absence of specific state expectations, directors are expected to take a long-term perspective that supports the company’s resilience and value creation (OECD, 2022[1]). In some jurisdictions, directors’ duties also include the obligation to take into account stakeholders’ interests. Failing to adequately consider and communicate potential negative externalities to stakeholders may entail legal risks for the enterprise and its board. This is particularly important for SOEs as they often operate in sectors with important social or environmental externalities.
Embedding sustainability-related considerations into corporate decision making is associated with improved risk management, productivity and financial performance.1 It is also linked to enhanced employee engagement and brand reputation (Pranta et al., 2024[2]; Euromonitor, 2023[3]), and may become a source of lasting competitive advantage, for example by enabling the development or improvement of products and services or expanding the consumer base and loyalty (Yang et al., 2023[4]; Panda et al., 2020[5]). This chapter examines how SOE boards can effectively embed sustainability into their strategic and oversight functions. It first reviews the board composition and governance structures that can support the integration of sustainability into corporate decision making (Section 3.1) and then discusses the role and responsibilities of SOE boards in this context (Section 3.2).
This section examines key aspects of 1) board composition and 2) governance structures that are relevant to advancing sustainability objectives.
3.1.1. Board composition
Good practice calls for SOE boards to include an appropriate number of independent directors with diverse experience, backgrounds and profiles relevant for the enterprise’s key areas of operations. This includes having the appropriate skill sets in the boardroom to identify and manage sustainability-related risks and opportunities when material to the business.
In line with the SOE Guidelines, state owners increasingly incorporate sustainability-related considerations into board selection and nomination processes. Examples include:
Finland’s state ownership policy specifically requires board-level qualifications to include sustainability criteria.
Austria’s ÖBAG regularly appoints directors with sustainability expertise, which helps stimulate informed debate within SOE boards.
In addition, sustainability expertise is increasingly integrated into board tools. For example:
Skills assessments and matrices: these are used to assess whether current board composition aligns with the strategic needs of the organisation and identify any potential gaps.
Board evaluations: these support the identification of potential skill gaps on the board and guide future appointments.
Education and training: depending on their results, some countries offer educational and upskilling opportunities for directors to ensure they are up to date on rapidly evolving expectations and the regulatory developments.
Diversity and the presence of independent directors contributes to enriching boardroom discussions where different experiences and viewpoints are considered. This can improve the board's readiness to address complex sustainability risks and opportunities. Diversity may include criteria such as gender, age or other demographic characteristics, as well as on experience and expertise, for example on accounting, digitalisation, sustainability, risk management or specific sectors.
The state may set expectations with regards to board governance arrangements (i.e. establishment of sustainability committee) and composition (i.e. board-level qualifications to include sustainability) for enterprises of a certain size and/or risk profile (Annotations to Guideline VII.A.1).
Several jurisdictions have introduced gender targets for SOE boards and executive management positions (OECD, 2024[6]). Some have set mandatory quotas for the entire portfolio or for individual SOEs (e.g. Austria, Brazil and Costa Rica). Others have set aspirational targets, sometimes specific to SOEs, or based on the prevailing practice enshrined in legal requirements or corporate governance codes applicable to listed companies. Often, targets in place for SOEs are set higher than for other companies with the aim of having SOEs lead by example, as in Australia, Belgium, Chile, Costa Rica, Finland, France and Ireland, among others. In a few cases, targets apply to both board and executive positions. A growing good practice – as in Australia – is to expect SOEs to report on attainment of gender quotas or targets, meaning that this information is monitored both for SOE boards and executive positions. Table 3.1 provides examples.
Note: OECD analysis based on self-reported information. The legal scope of application for the targets or quotas varies depending on the national legal framework. While some of the targets cover all SOEs, some are general targets that affect SOEs through company law or applicable corporate governance codes, when applicable to them. Countries marked with an (*) denotes that the target only applies to a sub-set of the SOE portfolio.
** Women and men shall be represented equally among the members of the supervisory board of SOEs.
Source: OECD, (2024[6]), Ownership and Governance of State-Owned Enterprises 2024, https://doi.org/10.1787/395c9956-en.
3.1.2. Governance structure
Beyond skills and expertise, SOEs must be supported by a governance structure that facilitates effective oversight of material sustainability-related matters. There are multiple ways boards of directors can organise themselves. Figure 3.1 outlines a typology of board governance models to embed sustainability in board decision making depending on the level of maturity and risk profile. While full integration of sustainability into board deliberations is increasingly seen as a best practice, the optimal approach may vary depending on an enterprise’s size, risk profile and maturity. For less mature enterprises, a phased approach may be more appropriate, with the aim of fully embedding sustainability into strategic decision making over time (INSEAD, 2022[7]; IFAC, 2022[8]).
Note: The characterisation of the fully integrated model as “ideal’ is that of INSEAD. The authors of this report do not express a view on the designation.
INSEAD also identifies different measures that could be used to help enhance sustainability governance. These include receiving advice from: 1) external experts invited on an ad hoc basis; 2) a permanent (or semi-permanent) external advisor to the board; 3) a permanent (or semi-permanent) internal advisor; 4) sustainability management; 5) a sustainability taskforce of board members and executives (as an informal version of the dedicated sustainability committee); and, 6) an independent external sustainability council (as an extra board, focused on sustainability but without voting rights).
Source: INSEAD (2022[7]), Designing Sustainability Governance. Board structures and practices for better ESG performance, https://www.insead.edu/insead-corporate-governance-centre/designing-sustainability-governance.
In practice, boards often establish specialised committees or sub-committees to support the strategic oversight of sustainability (Box 3.1). As recommended by the SOE Guidelines, such committees should be composed of qualified members and an appropriate number of independent members, whose role will be to advise the board on social and environmental risks, opportunities, goals and strategies.
Specialised board-level sustainability committees play a role in supporting board-level oversight of sustainability matters and may be tasked with overseeing them. Their main responsibilities generally include:
conducting materiality assessments to identify key sustainability issues
monitoring short- and long- term sustainability trends
identifying key risks and opportunities that might impact the long-term competitiveness of the firm
proposing and overseeing relevant sustainability initiatives
setting sustainability goals and targets and monitoring and reporting on progress
collaborating with the Audit Committee to ensure accurate sustainability reporting
collaborating with the Nomination Committee to identify the key sustainability skills and expertise required by director(s)
collaborating with the Remuneration Committee to design appropriate incentive schemes and compensation packages
ensuring integration of sustainability issues into the company’s Code of ethics.
These responsibilities and the committee mandate should be reflected in the company policies, committee charters and any other relevant document.
Source: Rey, M., (2022[9]) The role of board-level committees in corporate governance, No. 24.; UNEP FI, (2014[10]) Integrated Governance: a New Model of Governance for Sustainability.
As of 2022, listed companies representing more than half of the world’s market capitalisation had established sustainability committees reporting directly to the board (Figure 3.2). While this practice is most common among listed companies, large and systemically relevant companies, including SOEs, are also generally encouraged to strengthen their strategic oversight with sustainability committees (OECD, 2024[11]). Countries such as France, Norway, and Austria have introduced such expectations for their SOEs.
Over half of companies (measured by market capitalisation) have board committees overseeing sustainability risks
Source: OECD, (2024[12]), Global Corporate Sustainability Report 2024, https://www.oecd.org/en/publications/global-corporate-sustainability-report-2024_8416b635-en.html
While some companies may choose to establish board-level sustainability committees to support strategic oversight, alternative governance arrangements can also be effective. For example, board responsibilities can be assigned to existing board-level committees with the requisite competence to advise the board on social and environmental risks. Ad hoc or special committees can also be set up to respond to specific needs or corporate transactions. In some cases, sustainability oversight may be supported through alternate governance arrangement – such as a management-level committee on sustainability, which in turn reports to the board (see Box 3.2). Regardless of the structure, it is essential – consistent with the SOE Guidelines – that the full board adequately considers sustainability risks and opportunities when fulfilling their key functions.
Coillte is an Irish state-owned commercial forestry company responsible for managing 440 000 hectares of mainly forested land. It is the country's largest forester and producer of certified wood, as well as the leading provider of outdoor recreational spaces. The company also supports wind energy development on its estate, processes forestry by-products and carries out large-scale nature rehabilitation projects.
Coillte embeds sustainability into its overall corporate governance framework under a unitary board structure.
Source: OECD based on interview with Coillte, 2024.
The company aims to ensure environmental, social and ethical considerations are fully integrated alongside financial oversight. Effective governance is supported by clear reporting lines across three levels:
Boards of directors: the board provides strategic direction and oversight, including the approval of sustainability and climate-related targets. It receives quarterly updates on relevant risks and integrates these considerations into investment and strategic decision making.
Operating Executive: the Operating Executive is in charge of the Diversity, Equity and Inclusion Committee. The Executive recommends sustainability targets and ambitions to the board and advises on investment decisions. It receives monthly updates on sustainability and climate related risks and approves sustainability disclosures.
Chief Sustainability Officer (CSO): the CSO leads Coillte’s sustainability framework and strategy. The CSO oversees the Group Sustainability Committee, chaired by the Sustainability Manager and composed of senior sustainability experts. This committee meets quarterly to review ongoing projects and reports its findings to the Operating Executive.
Source: Interview with Coillte, 2024.
To strengthen board-level sustainability oversight, state owners and SOE boards may consider the following practices:
Ensure SOE board diversity and independence. Ensure board composition contributes to gender and other forms of diversity, and includes an appropriate number of independent directors to strengthen objectivity and enrich boardroom deliberations.
Build board-level sustainability expertise. Embed sustainability expertise at board-level by identifying and addressing skill gaps through tools such as skill matrices, board evaluations and director training.
Encourage tailored governance structures. SOEs should adopt fit-for-purpose sustainability governance structures that align with the enterprise’s size, risk exposure and maturity. Options include establishing dedicated sustainability committees, appointing board-level sustainability champion(s), or establishing ad hoc committees or working groups.
Boards of directors are accountable for an enterprise’s long-term performance and resilience. In this context, their responsibilities increasingly extend to overseeing how sustainability considerations are embedded in the enterprise’s strategy, operations and risk management systems. This section outlines the core responsibilities of SOE boards in integrating sustainability into their decision making, including by (Figure 3.4):
1. overseeing corporate strategies, policies and performance targets
2. supervising and incentivising management
3. establishing effective risk management systems as well as internal controls and compliance mechanisms.
3.2.1. Overseeing corporate strategies, policies and performance targets
SOE boards are expected to guide the development and oversight of sustainability-related strategies, policies and performance targets. This includes ensuring that sustainability is integrated into the enterprise’s business model and strategic priorities, rather than being treated as a stand-alone issue. Doing so will ensure that boards translate sustainability expectations or objectives into meaningful improvements while helping to address reputational risks such as “greenwashing” or “social washing” (i.e. provision of misleading information on environmental or social performance to gain reputational or commercial advantage). To effectively address sustainability-related risks and opportunities, boards of directors should 1) oversee corporate strategies and policies that embed sustainability considerations; and 2) include appropriate performance indicators and targets to track progress and enable effective and consistent disclosure.
SOE boards should review and guide the development, implementation and disclosure of material sustainability-related objectives and targets as part of the corporate strategy (Guideline VII.B.1).
Embedding sustainability into corporate strategies and policies
According to the SOE Guidelines, “Sustainability strategies and/or plans should be integral to and aligned with the overall business strategy of the enterprise.” To effectively embed sustainability into the corporate strategy, the board must account for material sustainability risks, opportunities and impacts, and work with management to identify relevant ways to mitigate them. Figure 3.5 provides practical guidance on questions the board should be considering when integrating sustainability into the corporate strategy, and ensuring the business model translates the strategy into actionable steps.
A report on ESG governance issued by Accountancy Europe, EcoDa and ECIIA sets out practical questions that boards should consider when integrating sustainability in their company strategy and business model.
Source: Based on Accountancy Europe, EcoDA and ECAII (2023[13]) ESG Governance: questions boards should ask to lead the sustainability transition, https://accountancyeurope.eu/wp-content/uploads/2023/11/ESG-Governance-toolkit-for-boards_FINAL.pdf.
An important first step is for the board to undertake a robust materiality assessment. A materiality assessment is a process by which companies identify and prioritise the financial and non-financial matters that are material to their business, shareholders and stakeholders (see Sections 3.1 and 3.2 for more information on materiality). The information helps identify issues that 1) can significantly impact the company’s performance, value or long-term success; and 2) are important to investors and stakeholders. There is no universal approach for assessing materiality as it will vary by organisation and sector. Materiality assessments typically begin by identifying relevant sustainability issues which will then be narrowed down to key elements with business impact and importance to stakeholders. Common practices include:
conducting internal workshops or surveys to identify material risks
consulting with stakeholders to validate priorities
engaging with the board directly to interpret the results.
Engaging with stakeholders can provide valuable input for understanding the company’s main risks and impacts. They can also help track progress during the implementation and offer feedback which can drive improvements (see Section 4.2 for more information on stakeholder engagement).
Austria’s state holding ÖBAG provides a good example. ÖBAG has performed a materiality assessment using a stakeholder survey – the results of which were subsequently discussed and validated through tailored stakeholder workshops (see Section 4.2 for more information on stakeholder engagement).
Once material issues are identified, these should be translated into a viable strategy and implementation roadmap to be approved by the board, with relevant resourcing, governance and targets. These should:
clearly define goals and milestones
allocate resources and responsibilities
be monitored regularly by the board or a dedicated committee.
Where relevant the board may need to approve implementation roadmaps, including transition plans (see Box 3.3), “just transition” measures for affected workers and communities, and diversification and adaptation measures (World Bank, 2022[14]). In carbon-intensive sectors, for instance, boards may need to consider bold transitions such as plans to (De Kleine Feige, 2021[15]):
retire and repurpose carbon-intensive assets
divest from carbon-intensive activities
build resilience against operational disruptions and physical losses due to climate hazards
invest in new low-carbon technologies and businesses.
An example of a state-owned enterprise applying a risk-based strategic approach includes Colombia’s Ecopetrol – which has adopted a transition agenda that includes diversification away from hydrocarbons, emissions reduction targets, and investments in renewable energy and low-carbon infrastructure (CSIS, 2022[16]).
A transition plan aims at setting out how an organisation will move from its current business model to one that is aligned with its net-zero commitments (and increasingly with other long-term sustainability goals). Such a plan should not only set sustainability targets but contain strategic guidance on how the corporate strategy will enable getting there, including any financial impacts.
Credible transition plans are important for financial market participants as they signal that sustainability strategies are not only disclosed but internally actionable. According to the Climate Policy Initiative, credible transition plans, with a focus on climate-related issues, include the following six elements:
quantitative, detailed and time-bound interim emission targets supporting a 2050 net zero goal
concrete implementation tools and policies
institute-wide capacity and alignments
prevention of negative externalities
transparent disclosure and verification frameworks
regular monitoring and updates.
While this is an emerging area of good practice, evidence from the state-owned oil and gas sector demonstrates that implementation may be lagging across some SOEs. In a Natural Resource Governance Institute assessment on the energy transition plans of selected national oil companies (NOCs), only 9 out of 21 large NOCs publicly acknowledged climate transition risks in their strategies (with the manner and depth differing), while four mentioned the use of transition risk assessments. Only five NOCs explicitly mentioned strategies to mitigate transition risks.
Source: OECD, (2022[17]), OECD Guidance on Transition, https://doi.org/file:///C:/Users/irmscher_k/Downloads/7c68a1ee-en.pdf; Climate Policy Initiative, (2022[18]), What Makes a Transition Plan Credible?, https://www.climatepolicyinitiative.org/wp-content/uploads/2022/03/Credible-Transition-Plans.pdf; Natural Resource Governance Institute (2024[19]), Facing the Future: What National Oil Companies Say About the Energy Transition, https://resourcegovernance.org/sites/default/files/2023-11/Facing%20the%20Future%20What%20National%20Oil%20Companies%20Say%20About%20the%20Energy%20Transition.pdf
In addition to environmental matters, the corporate strategy should also cover material risks related to human and labour rights, consumer protection, disclosure, and anti-bribery and corruption, among other areas. These priorities can be elaborated in a dedicated action plan. For example, a human rights due diligence plan can help identify salient risks and establish appropriate grievance mechanisms, in line with the broader strategy. Similarly, a diversity action plan can help promote fairness and equal opportunity within the organisation’s workforce and leadership. This may include setting diversity targets, ensuring inclusive hiring processes and conducting pay equity reviews.
Sustainability-related priorities and commitments can also be translated into relevant corporate policies such as codes of ethics or conduct, and labour policies (see example in Box 3.4) reflecting the values and priorities of the organisation. Corporate-level policies ensure that all parts of the organisation act consistently with the strategy and provide a shared understanding of expectations and processes. Boards should ensure alignment of such policies with the corporate strategy and monitor their implementation.
Vattenfall is a Swedish state-owned multinational power company, active across Europe. It offers electricity, district heating, renewables, EV charging and energy services.
The group has integrated sustainability in its strategy, target-setting, decision making and risk management. To integrate sustainability in all its actions and decisions, Vattenfall has also developed several guiding policies, including:
Sustainability policy: demonstrates the group’s contribution to the UN SDGs and highlights its commitment to a “just transition”. This includes continuously identifying risks and opportunities in its entire value chain, ensuring a diverse and inclusive workforce, and actively co-operating and engaging with stakeholders to improve sustainability performance.
Environmental policy: commits to reduce environmental footprint, notably by reducing GHG emissions (and becoming carbon neutral by 2040), safeguarding biodiversity, and optimising resource use, notably by engaging in the circular economy.
Human rights policy: ensures respect for human rights across operations and the value chain via due diligence processes including risk assessments and awareness-raising. The policy is also complemented by a separate Human Rights Action Plan.
Statement on slavery and human trafficking: details actions in supply chains to combat slavery and human trafficking.
Tax policy: aims for transparency and ethical taxation; paying correct taxes in jurisdictions where value is generated.
Code of conduct and integrity: defines expected behaviour for all employees and group companies, promoting ethical and responsible business practices.
Code of conduct for suppliers and partners: defines Vattenfall’s requirements and expectations to ensure that suppliers and partners share the same values throughout the value chain. This code is accompanied by a guide aimed at supporting implementation.
Health and safety policy: describes the overriding principles for health and safety.
Source: Vattenfall, (2025[20]), Policies and Management, https://group.vattenfall.com/sustainability/policies-and-management
Strategies and policies should be regularly reviewed and updated to reflect regulatory changes, emerging risks, shifts in stakeholders’ expectations and other lessons learned from practice.
Establishing appropriate sustainability-related indicators and targets
To effectively monitor performance, boards should approve a set of relevant, consistent and decision-useful indicators and targets aligned with the corporate strategy as recommended in the SOE Guidelines. Indicators help to identify what to monitor and report on, while targets set a benchmark for goals the SOE commits to achieving within a defined timeframe. Indicators will vary company by company based on the materiality assessment and should include:
cross-cutting indicators (e.g. GHG emissions, waste generation, gender and diversity)
sector-specific indicators that relate to the SOE’s operations (e.g. flaring volumes for oil and gas, or land rehabilitation in mining).
Targets set a benchmark for performance by defining expected levels of progress within a given timeframe. Good practice involves setting specific, measurable, achievable, relevant and time-bound (SMART) targets, particularly in areas material to the SOE’s operations and impact. These should rely on verifiable and auditable metrics. For example, an enterprise may track water consumption and set a target to reduce total freshwater use by 20% by 2030. Setting such targets help:
inform strategic decision making
track and evaluate performance
engage in meaningful dialogue between shareholders, board and management
strengthen sustainability reporting
build stakeholder trust by providing credible information.
Several countries have set expectations for SOE boards to embed sustainability into their corporate strategies and develop specific indicators and targets to this effect. Table 3.2 and Box 3.5 provide examples on how SOEs can be encouraged to set and pursue sustainability targets.
Data collection by the company can be facilitated with a variety of tools and monitoring mechanisms including:
simple tools, such as surveys to monitor targets (e.g. related to employee satisfaction)
more sophisticated systems, such as sensors or software (e.g. to monitor GHG emissions, water consumption or waste levels) (OECD, 2022[21]).
Progress against indicators and targets should be integrated into the reporting process and aligned with internationally recognised reporting standards (see Chapter 4 for more information). Monitoring should also be used proactively to inform the development of a new corporate strategy, support board-level decision making within the risk management framework and to drive performance improvement.
Note: *NDCs are countries’ self-defined national climate pledges under the Paris Agreement.
**The Science Based Targets Initiative (SBTI) aims at supporting companies into identifying and setting specific GHG emission reduction targets in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement. The initiative is supported by the Carbon Disclosure Project (CDP) and the United Nations Global Compact amongst others.
Source: Ministry of Finance of Germany, (2024[22]) The Principles of Good Corporate Governance and Active Management of Federal Holdings; Government of Finland, (2024[23]), Sustainable growth through state ownership, https://valtioneuvosto.fi/en/-/sustainable-growth-through-state-ownership-government-adopts-resolution-on-state-ownership-policy; Ministry of Finance of the Netherlands, (2022[24]), State-Owned Enterprises Policy 2022.
In Sweden, SOEs are expected to identify a set of five to seven “strategic targets for sustainable value creation” based on four key factors: 1) financial performance; 2) public policy objectives; 3) materiality assessment; and 4) other relevant strategic issues for the SOE, including digitalisation and/or security aspects where relevant (see Figure 3.6 below).
Source: Government Offices of Sweden, 2021, Annual Report for State-Owned Enterprises 2021, https://www.government.se/reports/2022/09/annual-report-for-state-owned-enterprises-2021/.
All targets are discussed and tracked by the state owner during regular owners’ dialogue meetings. The targets must also be long-term, challenging and trackable, as well as clear and comparable (e.g. CO2 emissions, workplace injuries, employee or customer satisfaction, sick leave percentage).
Luossavaara-Kiirunavaara Aktiebolag (LKAB) is a state-owned international high-tech mining and minerals group and a producer of refined iron ore products for steel production. To align with the state owner’s expectations, LKAB developed seven sustainability-related strategic targets in two different areas (see Table 3.3).
Note: * LKAB follows SVEMIN’s roadmap for biodiversity. SVEMIN is an industry association for mines and mineral and metal producers in Sweden. The goal is to contribute to increased biodiversity in the regions in which LKAB operates by 2030.
The interim goal for 2026 is for LKAB to have established a systematic way of working for increased biodiversity. In 2022, a guide describing the goal and way of working was developed, and workshops were held.
** The target for the share of women will be replaced by a 60/40 gender distribution target in management by 2030.
Source: Government Offices of Sweden, (2023[25]) Annual report for state-owned enterprises 2022, https://www.government.se/reports/2023/09/annual-report-for-state-owned-enterprises-2022/
To support board-level oversight of sustainability, SOE boards may consider the following practices:
Embed sustainability into core strategy. Oversee the integration of material sustainability considerations as part of the core corporate strategy and business model. This should ensure alignment with long-term value creation and expectations set by the state owner, and take into account the interests of stakeholders.
Guide and oversee materiality assessments. Support the identification and prioritisation of sustainability-related risks and opportunities, and impacts. This process should involve internal analysis and external stakeholder consultations.
Guide and oversee the development of implementation roadmaps or action plans. Support the development and execution of corporate action plans (e.g. transition plan, human rights due diligence plan) and policies (e.g. code of conduct). These plans should identify relevant resourcing, governance and targets, and should be regularly reviewed and updated.
Approve relevant KPIs and monitor sustainability performance. Monitor performance with sustainability indicators and targets that are aligned with the corporate strategy. These should include:
cross-cutting and sector-specific indicators (e.g. GHG emissions, workplace diversity)
SMART targets (e.g. cut emissions by 50% by 2020)
verifiable and auditable metrics (e.g. tonnes of CO₂ emitted per year).
3.2.2. Supervising and incentivising management
A key responsibility of the board of directors is to assess and monitor management’s performance, including that of the CEO, and ensure alignment with the enterprise’s strategic objectives, including those related to sustainability. In line with the corporate strategy, sustainability-related expertise could be factored into CEO and other executive appointments to ensure leadership is equipped to guide the enterprise accordingly.
Boards can also decide on the remuneration of the CEO and other key executives. SOE boards should consider sustainability matters when assessing and monitoring management performance (Guideline VII.B.3).
SOE boards also decide on the remuneration of the CEO and other key executives, often within the broader framework of a remuneration policy identified by the state owner. The SOE Guidelines recommend that boards consider sustainability matters when assessing and monitoring executive performance.
Sustainability-related compensation can take the form of a variable component, such as bonuses or long-term incentive plans, tied to KPIs on sustainability. These incentives should be structured around credible metrics (mix of qualitative and quantitative), such as emissions reductions targets, employee well-being or resource efficiency (see also Box 3.6). As recommended by the SOE Guidelines, such KPIs should:
incentivise a long-term perspective
be linked to material elements of the SOE’s strategy
be based on high-quality, preferably audited and/or assured, data and metrics.
In practice, while relatively few listed companies globally use sustainability-related executive remuneration, uptake is higher among large European and United States firms, particularly in emissions-intensive sectors (Figure 3.7).
Sustainability-related executive remuneration has become common in large European and US listed companies.
Source: OECD Corporate Sustainability dataset, LSEG. See Annex for details; reported in OECD, 2024, Global Corporate Sustainability Report, https://doi.org/10.1787/8416b635-en.
A number of jurisdictions – such as Austria, Colombia, Finland, France and the Netherlands – have begun to set expectations for sustainability KPIs to be integrated into executive remuneration policies in the SOE sector. In Finland, for example, SOE boards are expected to align executive incentives with sustainability objectives that have business relevance and SOEs in emission-intensive sectors are expected to introduce measures aimed at reducing climate impact. By 2022, nearly 90% of Finnish SOEs had integrated these into their executive remuneration. Common indicators include progress on carbon footprint and emissions, employee well-being and satisfaction, and occupational safety (Prime Minister’s Office of Finland, 2022[26]). In some jurisdictions (e.g. Croatia, Iceland, Japan), non-monetary incentives, such as awards and recognition programmes have been introduced at both corporate and state ownership levels to promote strong performance and enhance sustainability practices among SOEs (OECD, 2022[27]).
In a report published in 2022, PriceWaterhouseCoopers (PwC) and the Centre for Corporate Governance at London Business School reviewed market practices and academic evidence on linking executive remuneration to sustainability (referred to as “ESG” in the report). It suggests considering four key dimensions when integrating sustainability criteria into remuneration:
Input versus output: performance measures can be based on inputs (i.e. actions towards a goal, e.g. implementing an internal carbon pricing mechanism) or outputs (i.e. results achieved, e.g. reduction in GHG emissions). While output measures are generally preferred by investors for their perceived objectivity and clear link to pay outcomes, input measures may be more suitable in certain contexts (e.g. strategic transformation). As such measures tend to be more qualitative, they should be transparently disclosed, with their link to pay clearly explained.
Individual KPIs versus scorecard: focusing on a few KPIs to measure performance may be more appropriate when one or two sustainability issues are clearly dominant. However, many organisations face multiple material issues, in which case a scorecard – covering a broader set of relevant KPIs linked to material issues – is more suitable. Such scorecards should be transparently disclosed and carefully weighted so that all components carry an adequate individual importance.
Annual bonus versus long-term incentive plan (LTIP): companies must decide whether to use an LTIP or an annual bonus. Because of their long-term focus, several environmental goals align better with an LTIP. However, some sustainability goals, such as health and safety objectives and even gender remuneration targets, can be effectively assessed in a single year. According to the report “setting aggressive, well-calibrated, one-year goals is preferable over imprecise long-term ones.”
Underpin versus scale targets: sustainability metrics are often best applied as scaled targets, with threshold and maximum performance levels. This is particularly relevant for transformational objectives such as energy transition, where full achievement is not always the expectation. Scaled measures allow for ambition at the top end while still rewarding partial progress. In contrast, underpin (pass/fail) measures may be more appropriate for issues perceived as minimum standards such as health and safety, where failure justifies a reduced payout.
Note: These criteria were identified to apply to all companies and not specific to SOEs.
Source: PwC and London Business School, (2022[28]) Paying Well for Paying Good, https://www.pwc.se/sv/esg/paying-well-by-paying-for-good.pdf.
Despite these developments, opinions differ on the effectiveness of sustainability-linked pay in driving performance. Evidence from market practice and academic research (Box 3.6) offers guidance that can influence the credibility of sustainability-linked pay.2
Finally, boards can promote performance and accountability by scheduling regular reviews of progress in meeting sustainability-related KPIs. Where underperformance is identified, corrective actions should be taken. Boards can also encourage capacity-building for management to address implementation challenges and improve results over time.
To incentivise SOEs’ management to adopt a long-term perspective and perform on sustainability in line with the corporate strategy, SOE boards may consider the following practices.
Appoint sustainability-aware leadership. Integrate sustainability expertise into CEO and executive appointments to ensure leadership is fit for purpose.
Design long-term incentive structures. Ensure that executive remuneration schemes are carefully designed. They should incentivise a long-term perspective aligned with matters material to the SOE’s strategy.
Align with state guidance on remuneration. Consider any guidance on executive remuneration that may be elaborated in the state’s SOE remuneration policy.
Use relevant and transparent KPIs. Carefully select key performance indicators depending on material sustainability issues for the organisation. Such indicators must be transparently disclosed and their link to pay clearly explained. Their monitoring should be based on high-quality, credible, and (where possible) assured data.
Encourage long-term performance with non-financial incentives. Use non-monetary incentives and recognition schemes to reinforce sustainability-oriented performance.
3.2.3. Establishing effective risk management and internal control systems
The SOE Guidelines highlight the importance for boards to develop, implement, monitor and communicate effective risk management systems. These should embody a coherent and comprehensive set of internal controls, ethics and compliance programmes or measures, including those which contribute to preventing fraud and corruption. Sustainability considerations should be an integral part of this process.
SOEs should integrate sustainability considerations into their risk management and internal control systems, including by conducting risk-based due diligence (Guideline VII.B.2).
This section addresses two critical pillars of board oversight: 1) risk management as a forward-looking framework for identifying, assessing and addressing sustainability-related risks; and 2) internal control as the assurance framework that supports risk detection, control and organisational accountability.
Together, these systems enable SOEs to anticipate challenges, comply with legal and regulatory requirements, and implement sustainability strategies in a robust and credible manner.
Risk management
The existence of a sound, integrated risk management system, grounded in risk-based due diligence, can support SOEs achieve sustainability goals and long-term value creation. For this, boards should ensure that the system effectively identifies, prevents and mitigates:
material sustainability-related risks and opportunities affecting the enterprise
actual or potential adverse impacts from the enterprise’s activities or its business relationships, including on human and labour rights (e.g. child or forced labour), and the environment (e.g. climate change, pollution, biodiversity loss).
Source: COSO and WBCSD (2018[29]), Enterprise Risk Management. Applying enterprise risk management to environmental, social and governance-related risks, http://chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://docs.wbcsd.org/2018/10/COSO_WBCSD_ESGERM_Guidance.pdf
These risks and impacts often fall under strategic, financial, operational or compliance categories (see Table 3.4), and may include specific concerns such as supply chain human rights issues or reputational risks. Regular risk assessments support more informed board-level decision making.3
Effective risk governance requires a structured risk management system that includes robust due diligence processes to identify the risks of adverse impacts. The SOE Guidelines encourage SOEs to adopt an integrated approach to managing risks, meaning that risk management and due diligence should be treated as interconnected elements of a single, coherent process.
The framework builds on COSO’s core Enterprise Risk Management (ERM) principles and adapts them specifically for sustainability (ESG) risks. It focuses on the following five main components:
Governance and culture: a strong framework begins with clear governance and a culture that supports accountability and ethical behaviour. Good practice involves establishing board oversight of sustainability risks, clarifying roles and responsibilities across the organisation, and embedding sustainability into corporate values and decision making. Boards should foster a risk-aware culture that encourages transparency and early identification of sustainability issues.
Strategy and objective-setting: organisations should integrate sustainability considerations into their strategy development and define objectives that align with long-term value creation and public expectations. Leading practice includes defining the enterprise’s risk appetite in relation to sustainability goals (e.g. decarbonisation) and embedding sustainability risks into strategic planning and investment decisions. Sustainability should be viewed not as a separate objective, but as integral to achieving the organisation’s overall mission.
Performance: organisations should identify, assess and prioritise sustainability risks in relation to their impact on strategy and operations. Good practice means using both qualitative and quantitative methods to evaluate risk likelihood and severity, incorporating sustainability indicators into performance monitoring, and aligning risk response actions with the organisation’s strategic priorities. Risk assessments should also consider emerging issues and opportunities, such as evolving climate regulations or stakeholder expectations.
Review and revision: as the sustainability landscape evolves, organisations must continuously evaluate the effectiveness of their risk responses and adapt accordingly. Good practice includes regularly reviewing risk registers, control mechanisms and mitigation plans, and incorporating lessons learned from incidents, audits and stakeholder feedback. A flexible and adaptive approach ensures that sustainability risks are not only managed reactively but are anticipated and addressed proactively.
Information, communication and reporting: organisations should ensure consistency across financial, sustainability and regulatory reports, and communicate how sustainability risks are being governed and managed.
Source: COSO and WBSCD, (2018[29]), Enterprise Risk Management. Applying enterprise risk management to environmental, social and governance-related risks, http://chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://docs.wbcsd.org/2018/10/COSO_WBCSD_ESGERM_Guidance.pdf Source: COSO and WBSCD, (2018[29]), Enterprise Risk Management. Applying enterprise risk management to environmental, social and governance-related risks, http://chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://docs.wbcsd.org/2018/10/COSO_WBCSD_ESGERM_Guidance.pdf
Several frameworks exist on the management of sustainability-related risks. One of the most relevant and practical frameworks available, including for SOEs, is the 2018 guidance on “Applying Enterprise Risk Management to Environmental, Social and Governance-related Risks” by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and the World Business Council for Sustainable Development (WBCSD) (Box 3.7). This framework is designed to help boards and senior leadership integrate sustainability risks into their strategic and operational decision making.
In addition, the OECD Due Diligence Guidance for Responsible Business Conduct provides an overarching framework on due diligence to help companies along any part of the supply chain to address actual and potential adverse impacts. These impacts encompass sustainability, covering human rights, employment and industrial relations, environment and bribery, and other forms of corruption that may be caused or contributed to through their own activities or directly linked to their operations, products or services by a business relationship (Figure 3.8) (OECD, 2023[30]).
Source: OECD, (2018[31]), OECD Due Diligence Guidance for Responsible Business Conduct, https://www.oecd.org/en/publications/oecd-due-diligence-guidance-for-responsible-business-conduct_15f5f4b3-en.html.
The OECD has developed sector-specific due diligence guidance for agriculture, minerals, extractives, garment and footwear, and finance, and is currently developing additional instruments to help companies mitigate environmental and climate-related risks. Such guidance can provide useful frameworks for embedding sustainability within core corporate operations, including risk management systems.
Boards are expected to ensure that management effectively identifies, assesses and prioritises sustainability-related risks. This process generally starts with a risk assessment aimed at mapping both inward risks (impacts to the company) and outward impacts (risks from the company and, where relevant, its supply chain to people, the environment and society). Such assessments can draw on the materiality assessment (see previous Section 3.2.2) and other tools such as human rights and/or environmental due diligence. It should incorporate internal input and stakeholder consultation, where relevant.
The process is likely to focus on identifying material risks and opportunities that are relevant to the corporate strategy and business objectives.
Once identified, risks should be assessed based on their likelihood and severity and determine the enterprise’s insulation or resilience to them (e.g. scenario analysis, stress testing). Box 3.8 showcases how Sweden’s largest energy company Vattenfall implements scenario analysis to plan for various physical and transitional risks.
In 2022, Vattenfall, a fully-owned Swedish SOE, carried out an in-depth risk assessment of all its business areas, encompassing both physical and transitional risks. In 2023 and 2024, this risk assessment was refined through a scenario analysis in view of aligning with the EU Taxonomy's requirements for assessing and reporting on climate risks.
The two Intergovernmental Panel on Climate Change (IPCC) climate scenarios: Representative Concentration Pathway (RCP) 4.5 (+2ºC) and RCP 8.5 (+4ºC) have been used to conduct the physical climate risk and vulnerability assessments for Vattenfall’s operations. The scenarios represent an intermediate and high GHG concentration scenario (Figure 3.9).
Vattenfall identified the transition to fossil-free energy sources as a key opportunity tied to its business model. This transition offers growth opportunities for Vattenfall, mainly related to potentially higher demand for electricity, but also related to additional services such as energy storage solutions (e.g. batteries).
Source: Vattenfall, (2024[32]), Annual Report 2024, https://group.vattenfall.com/globalassets/com/sustainability/vattenfall-annual-and-sustainability-report-2024.pdf
Once material risks and opportunities and assessed, structured tools (e.g. risk registers, heat maps) can be used to prioritise them. Mitigation plans should be devised to define actions to avoid or mitigate such risks, including preventive measures and corrective actions. For example, relevant measures may include diversifying supply chains to reduce the enterprise’s environmental impact. As such, it is worth recalling that risk management is not only about identifying or mitigating risks – it also helps enterprises identify sustainability-related opportunities, such as innovation in energy use, resource efficiency or new green markets.
During these processes, the board should review and challenge risk assessments and monitor progress against risk mitigation measures. It should also periodically review the enterprise’s risk exposure and the effectiveness of its responses. This also means ensuring that the risk management system is dynamic and able to adapt to new developments, stakeholder expectations or emerging sustainability-related risks. This involves reviewing internal audit findings, third-party assessments and lessons learned from past incidents.
Internal controls
The board’s understanding of risks and opportunities, as well as of the functioning of the risk management system, should be underpinned by strong internal controls, which will help ensure that oversight activities are responsive to sustainability-related issues, including related risks and opportunities. Internal control generally includes the internal audit function, and ethics and compliance mechanisms.
The internal audit function can enhance the enterprise’s strategic sensitivity to sustainability issues (Amoako et al., 2023[33]). It provides assurance by reviewing the accuracy and comprehensiveness of sustainability-related data and its compliance with relevant laws and regulations. Further elements could include conducting periodic audits of sustainability-related policies and processes.
The internal audit reports inform the board and its relevant committees and can include recommendations on how to strengthen sustainability governance. In this context, the board should review audit plans to ensure sustainability considerations receive adequate focus and act on audit findings as relevant. The board should also ensure that such considerations are reflected in the enterprise’s ethics and compliance programmes, where applicable. Such programmes play a key role in shaping how enterprises address their sustainability responsibilities, including through relevant tools and measures such as:
Codes of conduct or ethics: these codes should clearly articulate the SOE's values, ethical principles and expected standards of behaviour for all employees, from the board down to frontline staff. They should be integrated into human resource and other relevant corporate policies through clear rules and procedures, with regular training and communication to ensure understanding and adherence. For SOEs, these codes often incorporate specific provisions related to public service ethics, conflicts of interest in dealings with government and the appropriate use of public resources.
Grievance mechanisms: robust mechanisms are essential to encourage stakeholders, including employees and their representative bodies, to report concerns to the board without fear of retribution. These mechanisms should provide confidentiality for the reporting person, or anonymity at a minimum. Relevant mechanisms include whistleblower channels, public complaint offices or community liaison officers for people living near company operations (e.g. mining sites, factories).
Internal controls, ethics and compliance programmes or measures should also be extended to subsidiaries and where possible to third parties along the value chain as recommended by the G20/OECD Principles of Corporate Governance and SOE Guidelines. SOEs dealing with third parties (e.g. agents and other intermediaries, consultants, representatives, distributors, contractors and suppliers, consortia, and joint venture partners) are likely exposed to sustainability-related risks that go beyond their own legal person. This risk may be particularly high for corporate groups involving large and complex organisations or with suppliers engaging in complex value chains. For example, the French national railway company, SNCF, has extensive internal controls and compliance measures that extend to its various subsidiaries (e.g. SNCF Réseau, SNCF Voyageurs) and its numerous contractors and suppliers for infrastructure projects and services. This includes anti-corruption clauses in contracts and supplier codes of conduct (SNCF, 2023[34]).
To ensure effective enterprise-level risk management and internal controls, SOE boards may consider the following practices:
Foster an ethical culture. Set the tone by establishing a strong ethical culture that promotes integrity, accountability and transparency across the enterprise.
Oversee the risk management framework, including by:
approving and regularly reviewing the risk management framework – ensuring that it includes robust due diligence processes
ensuring that management identifies, assesses and responds to material risks and opportunities (including adverse impacts) – in line with the enterprise’s strategy and sustainability objectives
periodically reviewing and challenging risk assessments
monitoring progress against risk mitigation measures and their effectiveness.
Monitor and evaluate internal controls, including by:
overseeing the design and effectiveness of internal controls – including the enterprise’s ethics and compliance programme (e.g. code of conduct, accessible and trusted grievance and reporting mechanisms)
ensuring that internal controls cover sustainability-related risks, including adverse impacts
identifying potential weaknesses in the control system and ensuring management takes corrective action
approving the internal audit charter, strategy and annual work plan
reviewing audit findings, including those related to ethical lapses, compliance failures or sustainability-related data quality.
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← 1. Over the last few years, there has been mixed evidence regarding the effect of sustainability-related measures on financial returns and corporate performance. OECD evidence suggests a positive relationship between sustainability-related practices and the financial performance of companies (OECD, 2022[1]), which other research notes is stronger for high-risk and large enterprises (Chen, Song and Gao, 2023[36]).
← 2. Attention should also be paid to the potential risk that such schemes encourage executives to portray sustainability performance of the enterprise as positively as possible, and even to hire a third-party reviewer who is more likely to provide a favourable opinion (OECD, 2024[12]).
← 3. A 2018 OECD survey showed that SOEs which conducted risk assessments on an annual basis, as is most common, report fewer risks and consider their internal control and risk management systems to be more effective (OECD, 2018[35]).