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How Boards Can be ESG Leaders, Not Followers
Board Advisory

How Boards Can be ESG Leaders, Not Followers

Board leaders gather to discuss how to best tackle ESG challenges

In June 2022, Egon Zehnder held the latest event in its Corporate Governance Exchange (CGX) series, which brings together chairs and Nomination & Remuneration Committee chairs to share insights and challenges for board members who want to increase their strategic impact.

This CGX event focused on “ESG and the Role of the Board,” and featured Douglas Peterson, President and CEO of S&P Global, as a guest speaker.

The Challenges of Defining and Measuring ESG

“ESG” stands for Environmental, Social, and Governance—three metrics that investors, consumers, and other stakeholders are using to evaluate companies based on their wider climate and social pledges. But despite the straightforward acronym, defining what each metric truly represents and how progress can be measured are subject to debate.

“We’re now in a situation where around the globe there are no consistent standards or even consistent meanings for what ESG is, how you should report it, and how you should follow through on it,” said S&P Global’s Douglas Peterson.

Such vagueness can compromise the values ESG stands for, turning a company’s pursuit into more of a “tick the box” exercise with an unambitious or unfulfilled agenda. But there are ways to cut through the inconsistences. Peterson said that boards should first delegate responsibility for ESG goals by figuring out which board committee as well as which executive in the company will oversee the strategy. Boards may even choose to create their own exclusively ESG-focused committee. The next piece would be disclosure: voluntarily reporting on ESG data and analytics, such as through a sustainability report, impact report, or community responsibility report.

As for defining what progress on ESG goals looks like, that will vary from company to company. An advertising firm will have a very different environmental profile than an oil company, for example; yet goals can go beyond industry parameters, touching not just on carbon but on water usage, chemicals, supply chain, and more.

Event attendees discussed the “alphabet soup” of organizations currently designing ESG metrics and disclosures, all vying to become the global standard. Fortunately, some of these organizations are converging under common initiatives, including the International Sustainability Standards Board and the Task Force on Climate-related Financial Disclosures. It’s important for companies to become familiar with the various reporting requirements across these standards and, ultimately, play a role in helping all businesses, regulators, and others come together around a common set of standards, definitions, and disclosures.

Why Companies and Investors Strive for ESG goals

As chair of the Bipartisan Policy Center’s ESG Taskforce and promoter of ESG at his own company, Peterson opened the discussion by explaining why companies, investors, and consumers are drawn to ESG ideals.

“We see that there’s a whole generation of organizations and people that want to know more about where they’re investing,” he said. “They want to know what is the impact of where I’m investing on the planet, on people, on how the world is going to look in the next 20 years...Are those companies pursuing a green future or low-carbon future, or do they have in place policies which mean that they will have a diverse board of directors and diverse approach to how they manage their people in the organization? Are they supporting their communities?”

This is very different mindset than an investor who may only care about financial returns. And it extends up to company leaders themselves as well. “I cannot have a meeting where we don’t talk about ESG, said Peterson. “I don’t think I’ve had a meeting in the last year with a CEO, CFO, or board member where at some point in the conversation we didn’t talk about ESG.”

Several factors and global news events shaped this newfound focus on ESG. The murder of George Floyd in Minneapolis in 2020 put a harsh spotlight on racial inequities. The negative impacts of climate change are risking people’s physical safety as well as companies’ bottom lines.

Peterson said that the younger workforce is driving such change at their own workplaces, calling it a “global phenomenon” as this generation seeks to join companies in which values, purpose, and passion are all aligned.

Overcoming Pushback Against ESG Values

It’s important to remember that there may be pushback against ESG values from investors still gravitating exclusively toward returns, or others who see such pursuits as too political or “woke.” There can be a healthy debate around these issues, yet some attendees stressed that ESG values are important because, in the end, a broader mandate can bring benefits to not just shareholders, but employees, customers, and society as well.

Another issue of contention surrounding ESG is cost. As one attendee explained, “ESG costs money. And ESG can drain a fair amount of resources in order to get from Point A to Point B.” With the problem of global inflation continuing, situations can develop in which consumers want companies to seek climate and sustainability solutions, but do not want to pay for it.

On this issue, Peterson cautioned that pursuing ESG goals will not be automatically more expensive than the alternative. Some industries can easily transition to an ESG mindset and save money doing so; for example, hosting meetings virtually rather than flying attendees across the globe. For industries that can’t so easily lower their carbon footprint, spending research and development dollars in pursuit of cleaner products will help long-term viability.

“I don’t think we can start with the assumption that ESG is expensive,” said Peterson. “I think that ESG as a practice will provide you more stability, better risk management, better controls. And in the long run, there will be benefits and I don’t think that it will be a cost.”

One historic example that was brought up was Unilever. Years ago, as the anecdote goes, a family member of the CEO asked why a bottle of the company’s shampoo came with so much extra plastic packaging, and in a container that was much bigger that the amount of product that came in it. Reevaluating this discrepancy allowed the company to reduce their ecological footprint and advertise their sustainability to consumers—all while saving money at the same time.

“I think you need to ask these questions over and over and over,” said Peterson. “Curiosity and asking a lot of tough questions is going to be one of the ways that we can improve and that we can do better.”

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