For many, the term ESG (environmental, social, governance), conjures notions of investors chasing feel-good stories of sustainability, diversity, and ethics. But given the heightened interests from various stakeholders, corporate directors need to know that ESG is much more. Far from being just window dressing, there are real risks at play when it comes to ESG issues, and even more opportunities to be seized. The COVID-19 pandemic has only served to make this more evident.
ESG issues are increasingly seen by shareholders as a window into the future, with a clear hierarchy emerging. Leading companies view ESG issues as a business imperative: they manage risks while capitalizing on opportunities, including sharing their story and vision for the future, setting themselves up for long-term success and value creation in the process. Laggards, on the other hand, ignore the topic as a whole or still think of ESG as a check-the-box exercise grounded in philanthropic activities.
In this respect, the tone at the top can make the difference between a company landing at the front or back of the pack. Understanding why the board of directors should oversee ESG issues is the first step. But as with many things, the real work is in the details – so how can boards fulfill their critical role in ESG oversight? We outline 4 key tasks:
- Link purpose and strategy
- Establish reliable ESG information
- Craft the right disclosures
- Allocate oversight
Link purpose and strategy
From the board’s unique vantage point, its role is to determine whether the company has appropriately articulated and defined its purpose, and assess whether that purpose is linked to and reflected in its strategy. This should be comprehensive and consider the right stakeholders.
Establish reliable ESG information
Companies can choose from a variety of disclosure regimes for their ESG information, and using the right metrics is key. Guided by the concept of materiality, the board should affirm that the information prepared by the company is consistent and reliable.
Craft the right disclosures
With purpose and strategy linked, and the right information available, the company can determine its key messaging. For the board, this means ensuring that this messaging translates to the company’s disclosures. Checks should be set up to evaluate what information is disclosed, where it is disclosed, how it is reviewed, and whether it fully reflects the company’s purpose and strategy.
Allocate oversight
Overseeing how the ESG strategy aligns with the company’s business strategy is a job for the full board. But each committee also has ownership over some element of ESG issues, and so coordination and communication are key.
The maturity scale for ESG disclosure
Judged by how well they tell their ESG strory through disclosures, companies generally fall into one of the three stages of maturity:
As companies face financial pressures from many sides resulting from the pandemic, those that take a broader view of their long-term strategy, including responding to ESG issues, may be in a better position to confront these challenges. While making it through the immediate crisis must be the first priority, boards can also take this opportunity to shift the conversation to longer-term concerns.
Many companies will emerge from the crisis looking different. Now may be the time to work out how to incorporate issues like climate change and income inequality into the organisation’s strategic goals—particularly as these topics remain top of mind for investors focused on the long-term viability of their portfolio companies. For companies that have traditionally focused on the narrow question of financial performance quarter to quarter, 2021 may offer the inflection point to consider the broader, long-term context.
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