The Woodland Trust is currently running a powerful awareness campaign to underline that, despite the immediate pandemic threat, the existential threat of climate change has not disappeared. Similarly, social problems from child poverty to modern slavery are still impacting lives. Additionally, inequality and prejudice, vigorously highlighted during the Black Lives Matter protests of the summer, continue to remind us that our world is complex and imbalanced. Increasingly, consumers, investors and the public are scrutinising the actions (and inactions) of corporate entities and demanding that they go beyond simply a tick-box approach to meeting regulations. Boards are being challenged to adopt an environmental, social and governance (ESG)-focused mindset and apply it to every aspect of business strategy
If the solutions were straightforward, organisations would be further along the road of ESG transformation. It requires a shift from the dominant profit-oriented focus to a broader, longer-term definition of what constitutes success. All the while, it demands recognition that global factors such as climate change and social inequality have a tangible impact on risk and business potential that must be integrated into strategic planning.
Profit remains important, but it must be profit with purpose.
Defining Purpose and Values in a Wider Context
At the Diligent Modern Governance Summit 2020, Pamela Passman, experienced Board Director and Microsoft Corporation’s former Deputy General Counsel, Global Corporate and Regulatory Affairs, acknowledged both the difficulties and the urgency of advancing the ESG agenda in the current environment. She said, “In a time when it is difficult to even reliably predict your business trends, there’s a natural reaction that it would also be difficult to expect management teams to have a systematic process for identifying the environmental, social and governance trends that are likely to impact their strategy over the short, medium and long term. But that work must continue.”
Expectations of companies to provide leadership on a whole range of economic, social, health and environmental issues, and to use their market power, not just their voice, to drive systemic change have never been so high, and the speed at which information can spread about a company has never been so fast.
Pamela Passman, former Deputy General Counsel, Global Corporate and Regulatory Affairs, Microsoft Corporation
Despite this urgency, boards must avoid becoming involved in the operational elements of ESG, as Helle Bank Jorgensen, CEO and Founder, Competent Boards noted: “It is hard for board members not to become [too involved in] management at the moment, but the board needs to give space to management to respond to the situation.”
The board’s role, emphasised Jorgensen, is to define the organisation’s statement of purpose in the context of its wider stakeholder community – employees, customers, community and investors. The board must look beyond profit and explore how the business can find solutions to the problems faced by people and planet. By doing this, she says, boards set the tone to apply to all decisions and communications to build an ESG-first culture.
It is, however, important that the board commits resources, not just ideals, to ESG initiatives. The board must be prepared to deliver continuing oversight to monitor progress, as Jorgensen continues: “Once you have ESG incorporated into the organisation’s purpose and values, you also need to ensure that the board has regular oversight. It is important that everyone on the board understands these issues.”
Metrics and Reporting – Measuring What Matters
A key pillar of board oversight is identifying the metrics that boards need visibility of to track progress. These could include carbon emission reductions and the enforcement of supply chain standards on subjects such as ethical purchasing, energy consumption and raw materials handling. Increasingly, procurement departments are deploying ESG monitoring tools across areas such as supplier management. Boards need to have visibility of the data those tools deliver and link it to strategic goals.
Similarly, consistent and transparent corporate reporting is foundational to building trust in companies’ ESG efforts. Reports must be substantial and demonstrate that the business is going beyond lip service to drive real change in the organisation. There is also growing investor pressure and regulatory interest in companies reporting meaningfully on their initiatives, particularly around climate change.
Former Governor of the Bank of England Mark Carney, now a UN special envoy on climate change, recently recommended that banks should link executive pay to climate goals. Carney has also been an influential voice calling for nations to mandate that companies report in line with the recommendations of the Task-Force on Climate-Related Disclosure, described by environmental magazine www.edie.net as a “framework which, crucially, requires […]organisations to foresee the impacts of various scenarios of warming on their future viability.”
With ESG-reporting a growing trend, boards must ensure that they have oversight of the key metrics required to document and evidence progress.
Passman believes that integrated reporting is essential and ESG should be pulled out of departmental silos and elevated to the strategic level: “Companies will be judged on the transparency of their ESG disclosures, the consistency of what is being reported on and that there is continual improvement in meeting stakeholder expectations,” she says.
Director Training and Succession Planning
Building board competence to oversee ESG performance is an important undertaking and one that governance professionals will find increasingly part of their remit. On a day-to-day basis this might involve delivering information on ESG topics and helping directors to benchmark performance against industry peers. With a wealth of data available there is a real risk of information overload, so developing processes to curate and distil information from trusted sources will be essential.
Company secretaries should consider whether they, and their directors, would benefit from ESG training. Initiatives such as the Competent Boards certification programme and ESG-focused events organised by ICSA offer valuable perspectives on pursuing strategic ESG objectives.
Of course, bringing diverse perspectives onto the board is another essential component of prioritising ESG. When considering composition and skillsets boards should give weight to candidates with experience in ESG as part of a wider move to appointing more diverse directors and promoting a culture of diversity and inclusion from the top.
Building an Intentional ESG-Mindset
Above all, it is necessary for boards to be intentional about applying an ESG lens to the inevitable changes underway in their organisations. Amid turmoil, if companies are to become more resilient then their leaders must be conscious of the full spectrum of ESG risks and opportunities.
When new suppliers are being added to re-establish supply chain resilience there is an opportunity to set high standards of environmental and social performance. When office buildings are being reconfigured to serve a workforce that no longer congregates around the corporate building, there is an opportunity to consider the effect on consumption and expenditure, but also on the mental health and wellbeing of a displaced business community.
More than ever, it is important that directors understand the impacts of their decisions not just financially, but societally. It is also critical that they are proactive and accept their responsibility to drive meaningful change. As Jorgesen expressed it: “We might have said in the past that ‘cash is king’ but right now care is queen. Board directors have a duty of care and they need to be prepared to act, not wait to be activated.”
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