"Companies that recognize the importance of adapting to changing socio-economic and environmental conditions and focus on stakeholder capitalism are better able to identify strategic opportunities and meet competitive challenges." -Betsy Atkins, Board Member, Wynn Resorts, SL Green Realty, Volvo CarsIt's no secret that ESG makes business sense. Fast Company reports that 40% of millennials have taken a job — sometimes with a pay cut — because of company sustainability. And in a survey by Just Capital, 78% of respondents purchased a product, invested in a company, posted on social media, or showed other support for a company because of the firm's positive behavior.
Conversely, 'if you don't [begin to take ESG seriously], the capital in your company will start to channel away from you,' warned Brian Moynihan, chair of the World Economic Forum's International Business Council. BlackRock reinforced Moynihan's assertion earlier in 2020 when it identified 244 companies that are making insufficient progress with ESG; they took voting actions against 53 of the companies and put the other 191 'on watch.'
Even so, too many companies ' and the boards that deliver oversight ' are still acting as though ESG is a 'nice to have' rather than a competitive imperative. 'I suspect the resistance to ESG is actually a lack of clarity around the term itself,' board member Betsy Atkins said in a recent article and virtual panel for the Diligent Institute.
How can boards move themselves and their companies 'from acronym to action' on ESG issues and avoid being left behind? Some tactics follow.
Engage With ESG Research and Resources
ESG escalation and empowerment starts with knowledge. Is your board aware that ESG investing is estimated to represent around $20 trillion in AUM, about a quarter of all professionally managed assets globally? Does it know where the ESG capital is flowing? Is your board apprised of the latest developments in ESG frameworks, disclosures and reporting technologies?Board members must stay abreast of the current ESG landscape. Organizations like the Deloitte Center for Financial Services are keeping close tabs on the ESG investment landscape. Sharing their insights with your board on a regular basis can help everyone understand that ESG is real, significant, on stakeholders' minds and core to business decisions.
It can also be useful for directors to learn about the type of information investors seek and how these stakeholders are engaging with companies and boards on ESG issues. BlackRock sheds some insight in its Commitment to Sustainability Report:
'Our approach employs a natural escalation process. If we are not satisfied with a company's disclosures, we typically put it 'on watch' and give the company 12 to 18 months to meet our expectations. (The complexity of many sustainability issues may necessitate detailed reviews of operations by the company if it is to make substantive disclosures that inform investors.) If a company has still failed to make progress after this timeframe, voting action against management typically follows.'
Learn About the Frameworks and How They're Being Applied
Another crucial step is for boards to learn about the various ESG frameworks and metrics, particularly those that apply to their specific industry.For a starting point, the World Economic Forum's International Business Council has developed common ESG standards that draw from a wide range of frameworks and metrics worldwide, including:
- The GRI Standards
- The GHG Protocol
- SASB
- TCFD
- OECD
- The European Commission
- The Science-Based Targets Initiative
- The Project for Inclusive Capitalism
It can be illuminating to see how other organizations are addressing ESG issues and aligning their ESG goals with company strategy.
Diligent's 'Voices of ESG' interview series is one resource profiling leaders across industries and from around the world, asking questions, such as: What frameworks do their companies follow? How did they arrive at their ESG targets? How do they maintain transparency and traceability across the supply chain? Answers to these questions can provide valuable guidance and inspiration for moving forward.
Get Actively Involved in Stakeholder Engagement
"A company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders." Larry Fink. CEO, BlackRockListening to stakeholders and responding to their interests, concerns, and needs is core to ESG oversight — and a powerful way to engage directors on ESG issues. Start by evaluating the landscape. For instance:
- How is the management team listening to employees, customers, shareholders and communities?
- How are these insights making their way to the board?
- How is the organization leveraging technology to learn more about what's important to stakeholders?
Boards must concurrently consider their own engagement with stakeholders on ESG issues. BlackRock, for instance, 'emphasizes direct dialogue with companies on governance issues that have a material impact on financial performance. We seek to engage in a constructive manner and ask probing questions.'
Effective stakeholder engagement requires a combination of high-tech and high-touch tactics. In its Investment Stewardship overview, BlackRock specifies that it expects 'to have access to a non-executive, and preferably independent, director(s) who has been identified as being accessible to shareholders where appropriate.' Meanwhile, board members must ensure their organizations have the proper tools and data to begin operationalizing ESG effectively.
Operationalizing ESG: A Checklist for Boards
Operationalizing core ESG principles is a journey. While the process involves many stakeholders across the organization, the commitment to ESG starts with the board. In this ESG Roadmap, we offer next steps for boards that are wondering: Where do we go from here?
