Some boards may think ESG is one issue they can move to the back burner.
After all, the events of the past year — including unsuccessful activism campaigns, accusations of greenwashing and mounting conservative resistance — might indicate a waning appetite for the board’s involvement in environmental and social issues. Many board members are likely relieved.
But, in a business landscape strewn with evolving and emergent risks, directors must not overlook how ESG issues continue to evolve rather than recede.
This means the pressure is on for getting ESG right. Now more than ever, boards must grasp the issues, they must maintain the proper oversight, and they must incorporate ESG into their overall corporate strategy.
Greenwashing Backlash Calls for Heightened Transparency
We’ve all become familiar with the activist and investor movement against greenwashing, from last year's exposé on H&M's spotty scorecard system to Earth Island Institute's lawsuit against Coca Cola. It gained new gravity at this year’s Davos conference. The head of the UN himself decried today’s “dubious” and “murky” benchmarks and frameworks and called for “credible” and “transparent” transition plans for achieving net zero.
We’re also seeing “value” activism, typically not financially motivated, converge with financially driven shareholder activism. This means corporations have more to prove from their ESG efforts.
Meanwhile, bottom-up demand for sustainable investment marches on. Both individual and institutional investors will continue to lead the call for ESG to be embedded into corporate strategy. This makes assessing ESG performance even more complicated. Companies that want to succeed will need new tools, methodologies and technologies. They need ESG scores.
Why ESG Scores Mean So Much
Corporate disclosures, and shareholder relations, are all about trust. ESG scores build this trust by using verifiable data to remove the subjectivity about where the company stands in each of the environmental, social and governance pillars. ESG scores provide transparency backed by real data. They’re indispensable to the executives, investors, asset managers, regulators, shareholders and other stakeholders who regularly need to review and benchmark companies and assess potential ESG risks.
ESG scores may seem optional now. But investors soon will be asking about them. It’s no secret that shareholders are more engaged than ever. In the Diligent Institute’s 2023 What Directors Think report, almost one third (32%) of respondents noted that the board had engaged more frequently with shareholders over the past 3 years. Directors need to be ready for these meetings and conversations, and they need to come prepared with data.
As Diligent CEO Brian Stafford wrote in December, "Unless, and until, organizations can effectively bring together the disparate sources of critical ESG data, they can't effectively define, communicate, implement, track, report and assess better ESG practices, and net zero or any other commitment will remain just that."
Personal Consequences Ahead for Lax Oversight
Lax oversight in areas like workforce diversity and climate change is no longer something corporations or their boards can get away with. Shareholders, including large institutional investors, have been turning their disapproval into votes, proposals and legal action.
During annual meeting season last year, shareholders and activists submitted over 200 environmental and social resolutions to corporations nationwide — a record. ClientEarth’s legal action against Shell’s directors for “mismanaging climate risk” may have been the first action of its kind, but will not be the last.
With these trends and recent regulatory developments, boards are now more likely to end up in a court of law, and less likely to fare very well there. In the United States, Delaware courts now say stockholders can pursue claims against directors seen to be falling short on overseeing risk management and compliance.
Directors can protect themselves from potential activism and litigation while still constructively engaging with shareholders by providing clarity on how the company's ESG initiatives will create shareholder value, and by extending their oversight as ESG regulations reach into supply chains. By understanding how investors perceive their ESG scores and proactively working to improve them, boards can further demonstrate their commitment to ESG for shareholders and activists.
Scores Are a Starting Point
As boards lean in to ESG scores, however, they must tread carefully. While a critical source of information and useful tool for cutting through the noise around ESG performance, ESG scores are a starting point, not a silver bullet.
The consistency of ESG scores and data quality may raise concerns: In some cases, the scoring company may rely on publicly available information for one business, while another business may actively provide more in-depth and detailed information. And, for now, ESG rating providers still define and measure metrics in different ways.
Nevertheless, forward-thinking boards are already using ESG scores to:
Identify ESG-related risks and opportunities
Assess how specific ESG initiatives align to broader strategy
Evaluate how the board is handling ESG oversight, including how committees align with various ESG initiatives and whether members have the knowledge and skill needed for effective oversight
ESG scores offer the baseline that businesses need to measure their success and align ESG to their broader strategy, demonstrating to shareholders and activists that they take these initiatives seriously.
"Through a more science- and fact-based approach, which leverages scalable technology, complex challenges can be solved," says Rebeca Minguela, Founder and CEO of Clarity AI. "Decision-making tools and ‘add-ons’ for sustainability assessment are available and will get better, faster. These – along with a healthy dose of our collective human commitment – will empower us to reach our common goal of realizing a truly sustainable world."
When ESG is not just a promise, but truly integrated into the DNA of the company, it drives both purpose and profits. Learn more about Diligent ESG.