Environmental, social and governance (ESG) factors are influencing where investors put their money, how consumers are spending and how other stakeholders are making decisions about how they engage—or don’t engage—with companies. What is the role of the board in ESG? We gathered nominating and governance chairs in October 2019 to ask them about sustainability metrics, risks and opportunities and how to communicate about ESG. Several themes emerged:
1. Your acronym of choice matters.
CSR and ESG mean different things. Corporate Social Responsibility is internally driven with a focus on an organization’s commitment to give back to local communities in which they operate (e.g., volunteer hours, sponsorship of community events, etc.). ESG is broader, drilling down on material issues companies must confront to be able to identify and mitigate risks, and the road map for handling these risks comes from the CEO and board.
2. Boards don’t need to tackle every ESG-related issue.
But they do need to be clear on which issues to prioritize based on their impact—or potential impact—to the company. Given the broad swath of areas ESG encompasses, it’s likely your organization is already addressing some of them. What companies need to be clear on is which risks (or opportunities) would have the biggest impact on them, how the issues will be addressed and in what timeframe. As companies think about these risks, it’s important to also consider the risks to employees and customers.
3. What do you measure and how do you measure it?
There is a lack of consistency in metrics used by proxy advisors and institutional investors on ESG. Once companies are clear on priority ESG issues, those are the ones they must assign metrics to. However, companies must be careful not to homogenize and reduce complex ESG matters into ‘simple’ metrics. Any reporting should be individualized and give the full context of the industry and organization so that a more holistic picture can be formed.
4. Companies must tell their ESG story.
Once you have your metrics, now you need to communicate them. Getting external recognition for the identification, tracking and solutions in place for ESG matters helps a company position itself well for proxy advisor ratings and also for institutional investors who measure these factors. As these external firms start to pay more attention to ESG issues—and even demand that they be tracked when making an investment decision—it is even more imperative for the management team and Board to communicate how it is being addressed and that the information released is investor-grade information. (Highly regulated industries tend to be the furthest along in their reporting practices. For example, food and beverage companies must disclose their ingredients and Industrial companies also must report key metrics as a regulatory requirement.)
5. Define the role of the board (and management).
Some companies have added specific board committees dedicated to ESG and sustainability, and others allow the management team to take the lead and bring matters to the board for review. There were differing views from the nominating chairs in attendance.
ESG is not just one more agenda item to add to a lengthy list of oversight duties boards are already grappling with; it bleeds into every strategic conversation about risk that the board and management is having. The material issues tied into ESG have far-reaching implications for how companies are operating today—and tomorrow—and a proactive approach to identifying, prioritizing and evaluating these risks will be essential for the sustainability of any company.