The board’s role in elevating ESG: 3 steps for directors
ESG has had a turbulent few years, graduating from auxiliary concern to front-and-center priority, and now again under scrutiny from many directions. Yet all hype and handwringing aside, it’s clear that ESG will remain a corporate priority for years to come, as the public's demand for businesses with strong backbones for ethics and sustainability continues to rise, and as regulators continue to introduce ESG mandates.
The ESG rollercoaster of the last few years, however, has left many businesses and boards feeling somewhat adrift. How can boards meaningfully understand ESG frameworks? What is the relationship between these frameworks and the bottom line? And, to get down to a brass-tacks concern: How can ESG frameworks be operationalized across a business?
Answering these questions will not be a simple or one-time affair. If they're not already, boards must begin to grapple with ESG on a regular basis, returning to it again and again, and building their knowledge base in order to ensure that their businesses are able to keep up with evolving demands.
What follows are common gaps between boards and their ESG goals, as well as a few ways to think through them — and eventually close them.
1. Close the understanding gap
The first problem boards encounter with ESG frameworks is that there are simply too many. With a broad range of possible frameworks, each capturing different aspects of ESG, how should boards know which to align themselves to? While there have been some attempts to standardize these frameworks by bringing them all under one roof (such as the recent launch of IFRS S1 and IFRS S2), these efforts remain nascent.
Understanding ESG requires diligence. To build their ESG literacy, boards must have a way to audit the various regulation and frameworks that might be applicable. Every organization is at a different point on its pathway to ethics and sustainability. Businesses will have to balance the need for a bespoke ESG strategy against the need for it to be “benchmarkable” and intelligible to stakeholders.
Of course, not every ESG framework will be relevant to every business. For example, a logistics business will likely be more concerned with the sustainability of their supply chains, and businesses involved in energy will be concerned with environmental impact. In trying to create a healthy marriage between the needs of a business and ESG demands, boards will want to study peers with similar ESG risk profiles and see what is working with their approaches and what isn’t. In each industry, there are leaders to emulate and others whose example serves more as a cautionary tale.
2. Set priorities
The other problem boards often encounter has to do with making ESG a priority. This is an example that board members have to set from the top. If the board makes ESG a priority, and insists that executives make ESG a priority, that will flow down throughout the organization. But within an organization, there are is a variety of dispositions toward ESG, often influenced by the discourse du jour as well as, at least in the case of a corporation, their priority to maximize short-term value for shareholders. Often this latter priority is framed as sitting in binary opposition to ESG prerogatives. Smart boards should note immediately that this framing represents a false dichotomy. There is a strong business case for ESG concerns.
As an example, let’s return to the supply chain example above. Increasing the sustainability of a supply chain is not solely a matter of ethical governance. Because it largely focuses on identifying and reducing waste, an effective ESG framework also significantly enhances that supply chain’s efficiency. ESG therefore can come with meaningful positive externalities for business.
Aside from examples like this, boards must also frame investing in ESG as a long-game strategy to protect and foster reputational equity. The public’s appetite for stories about shady business practices remains insatiable. While some companies may be resilient to these kinds of embarrassments, it’s not a principle that any board should make a habit of testing. From the positive side of reputation management, many of the biggest business leaders in the world are thinking seriously about ESG and adopting robust frameworks through which their business decisions can be guided, interpreted and evaluated. These include corporate behemoths like Apple, General Electric and Proctor & Gamble. Taking ESG seriously is a way for a board to broadcast that it isn’t a dinosaur with outdated priorities but rather a leader at the frontier of how businesses think about the value they deliver.
3. Put ESG into action
Implementation is the ultimate hurdle for boards interested in ESG. This challenge is most often downstream of the first two: How could a board implement frameworks if it's grappling with which to choose, as well as prioritizing ESG in the first place? Still, there are some specific intricacies to implementation. A main one relates to delegation. A board may choose from a number of ways to structure its ESG strategy. One way that assuredly won’t work is to simply silo ESG concerns off as the sole responsibility of an individual or small team within the organization. Usually, this is a lip-service strategy that is doomed to inefficacy — ESG needs to be a common thread running through all aspects of the organization.
Though full-on siloing is not the correct response, appointing a committee to focus specifically on ESG is becoming a popular strategy: About half of companies surveyed by Diligent in 2023 noted that this is their preferred approach. Committees, if properly empowered, can ensure that the work of ESG compliance moves along unencumbered by the ever-growing plate of agenda items that boards must deal with at the macro level of an organization’s functioning. That said, to avoid the undesirable siloing effect, it’s important that oversight falls ultimately on the shoulders of the board as a whole.
Some part of the solution also comes down to the tech stack a company has to support its ESG compliance. Housing an organization's ESG data and reporting capabilities in a comprehensive platform often helps make addressing ESG a streamlined and seamless process rather than a patchwork disaster.
In a landscape where ESG has become a linchpin of success, the role of boards of directors has evolved significantly. Boards must go far beyond simply listing ESG as a priority. Moreover, directors must take responsibility for defining, leading implementation, and overseeing reporting and enhancement of ESG efforts. The implications of ESG noncompliance can reverberate through financial, reputational and regulatory spheres.
An action plan for future-ready ESG board reporting
In a landscape where ESG has become a linchpin of success, the role of boards of directors has evolved significantly. Boards must go far beyond simply listing ESG as a priority. Moreover, directors must take responsibility for defining, leading implementation, and overseeing reporting and enhancement of ESG efforts. The implications of ESG noncompliance can reverberate through financial, reputational and regulatory spheres.
A new Diligent executive brief defines how organizations can build future-ready strategies for effective nonfinancial reporting and disclosures. The brief outlines how audit leaders should be leveraging technology to gather not just more data, but the right data — and how the right technology should simplify the challenge of surfacing the insights that matter and presenting them to the board in an intuitive and compelling way. The brief also gives boards a clear plan for prioritizing ESG action in 2024 and beyond. Download the executive brief here.
