Boards across nearly every industry around the globe face mounting pressure to be proactive on environmental, social, and governance (ESG) issues. Yet many companies’ board and executive leaders remain uncertain on how best to approach such issues, or report on their progress to stakeholders.
A recent OnBoard survey of more than 280 board directors, administrators, and staff members in more than six countries found that while 76% of respondents said their boards are highly or somewhat focused on ESG issues, 58% said their organizations have not evaluated themselves on those issues. Nearly 90% said their boards do not have committees dedicated to addressing ESG issues, and only 9% have plans to establish such committees, according to OnBoard’s 2021 Board Effectiveness Survey.
ESG issues were a hot topic and the subject of multiple sessions at the Society for Corporate Governance’s (SCG) 2021 New Era of Governance National Conference June 28-July 1. In the keynote opening speech, U.S. Securities and Exchange Commission (SEC) Commissioner Allison Herren Lee said ESG issues have become central business considerations for corporate boards. Policymakers, rating agencies, company stakeholders, and others are looking to business leaders to implement long-term, sustainable policies that support growth and address corporations’ significant environmental and social impacts on communities everywhere.
“Increasingly, boards of directors are called upon to navigate the challenges presented by climate change, racial injustice, economic inequality, and numerous other issues that can be fundamental to the success and sustainability of companies, financial markets, and our economy,” Lee says.
The Importance of Being Proactive
Actions taken during the recent proxy season confirm a sea change on ESG issues, Lee added. For example:
- 98% of GE shareholders approved a resolution asking the company to report how it will achieve net-zero greenhouse gas emissions in accordance with the Paris Agreement
- 58% of ConocoPhillips shareholders approved a resolution seeking Scope 3 emissions reductions
- Shareholders at companies such as Amazon and JPMorgan Chase showed significant support for racial equity audits
Just last month, climate activists won three seats on ExxonMobil’s board of directors during an annual meeting that some called ”the vote heard around the world,” Lee said. Meanwhile, the U.S. has re-entered the Paris Agreement, and the SEC is seeking to improve climate and other ESG disclosure requirements for investors. The connection between ESG and shareholders’ interests has become evident, as investors and consumers increasingly make decisions based on companies’ sustainability profiles. Some of the world’s largest asset managers — including BlackRock, State Street, and others — have been vocal in stressing the importance of companies’ ESG efforts.
The message is clear: Boards have a responsibility to integrate ESG into their decision-making, risk management, compensation, and corporate transparency initiatives, Lee says. Companies face risks on multiple fronts when it comes to ESG issues: physical risks, transition risks, regulatory risks, reputational risks, and even human capital risks — as younger workers increasingly place a premium on whether a company’s values align with their own.
“Today, what your business does and says is as likely to be dissected on Twitter and Tiktok as it is to be reported in the Wall Street Journal or over a newswire,” Lee says.
Boards that proactively seek to integrate ESG issues into their decision-making not only mitigate risks but better position their companies and their business models to compete for capital based on sound ESG governance, Lee says. Three steps for boards working to maximize these opportunities and position themselves as ESG leaders include:
- Enhance board diversity. In general, boards need fresh and diverse perspectives; emphasizing diversity increases the likelihood that new directors will bring new thinking, which in turn could facilitate more current and proactive approaches to climate and ESG governance.
- Increase board expertise. Companies should integrate ESG considerations into their nominating processes in order to recruit directors with ESG expertise; training and education also helps enhance existing board members’ knowledge on these topics.
- Inspire management success. Executive compensation is a powerful tool for achieving strategic company goals, and ESG initiatives are no exception. Numerous companies — including Starbucks, McDonald’s, and Nike — have recently committed to tying executive compensation to diversity metrics.
“The more that we can have open, thoughtful, and well-researched dialogue on the specifics of these issues, the more companies, investors, and all stakeholders will benefit,” Lee says. “It’s more critical than ever for boards to explore how to integrate sustainability into their governance practices and consider specifically what is best for the companies that they oversee.”
Where to Start?
In another SCG conference session — titled “Best Bang for the Buck: ESG Reporting Frameworks for Small and Mid-Cap Companies” — four industry experts discussed how companies can begin to shape their ESG strategies.
“ESG has grown so much that most organizations have already started, but if you haven’t started, now is the time,” said Lisa Bond-Holland, Director of Environmental, Social, and Governance for South Jersey Industries, Inc. “With regulation coming down the pike, there doesn’t appear to be any way around it. ESG has finally moved into the mainstream.”
Companies should take a thoughtful and intentional approach around ESG, begin collecting their data and other relevant information, and establishing their disclosure processes, Bond-Holland says. Unfortunately, there is no single framework companies can use to ensure ESG compliance. Rather, there are numerous framework options for companies, making it difficult for business leaders to know where to focus their efforts. In that sense, forthcoming regulations will be helpful in guiding organizations and driving unification of standards, said Dena Acevedo, Senior Director and Assistant Corporate Secretary for Juniper Networks.
For now, the Sustainability Accounting Standards Board (SASB) is a good starting point, with industry-specific guidance that offers a baseline for what information companies should be collecting. Organizational leaders also should have ongoing communication with directors, investors, and regulators to keep a pulse on what issues they feel are important to emphasize, and which companies they view as ESG leaders worth emulating, said Tony Richelieu, Vice President, Corporate Secretary and Associate General Counsel at KB Home.
Establishing internal ESG standards and processes is an ongoing effort that will evolve and solidify over time. Business leaders should review their internal processes and identify what they have to support ESG in terms of expertise and reporting. The panelists agreed that building a cross-functional team to guide and champion those efforts is essential. Such a team may include leaders from legal, risk management, human resources, communications, and investor relations, among others.
“ESG isn’t a silo,” Acevedo says. “It’s something that really requires the entire organization to get behind to really leverage and do right … You want to make sure that people within your organization are sensitized and understand what you’re doing and what you’re reporting. Having a unified voice is always better.”
The important thing is to be transparent, she adds. Even if an organization’s ESG initiatives are in the early stages of development, company leaders should be upfront with investors and other stakeholders about what they are doing, and how they are working to do better in the future. “It’s all about making the information flow as easily as possible to the people who are looking,” Richelieu says.
At a fundamental level, boards and other executive leaders need to understand their company’s purpose and mission, and how those align with ESG issues. There is no stronger champion for these efforts than the board of directors, Bond-Holland says.
“It’s not all about just the standards and the metrics … it’s about telling your story of who you are as a good corporate citizen and the purpose of your organization,” she says. “You have to look at all of your stakeholders. It’s not just your investors. It’s your customers, your regulators, your employees — ESG is about all of those elements.”
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