A new survey suggests that although corporate directors are aware of the growing importance of ESG issues to the future of their companies, they are not fully confident that their boards can meet the lofty ESG goals that shareholders are pushing for. However, as more shareholders, regulators and proxy advisory firms continue to view ESG issues as material to a company’s bottom line, it is critical that corporate board members enhance their understanding of how a strategic application of ESG goals can satisfy stakeholders and bolster profitability.
The survey, conducted by the Boston Consulting Group and the INSEAD Corporate Governance Centre, revealed the following:
• Roughly 70% of directors said they are “only moderately or not at all” effective at integrating ESG into company strategy and governance. • Although directors think their boards should devote more time to strategy regarding ESG issues, more than half (53%) said they are not effective at doing that. • Although boards see addressing climate change as a top priority, only 55% of directors at companies with a net-zero commitment, said their organization has prepared and published a plan for hitting that target. • A full 43% of directors cited the ability of the company to execute as one of the biggest threats to delivering on ESG goals.
Perhaps the most important takeaway from this survey is the need for companies to develop strategies for dealing with individual ESG issues. The ESG concerns for every company are different, so corporate board members will have to conduct deep internal analysis to determine their company’s most critical ESG risks and—perhaps more important—ESG opportunities.
Strategies to mitigate the greatest ESG risks can be developed with appropriate timetables for compliance with climate change commitments, diversity goals and other stakeholder concerns. Furthermore, strategies to incorporate sustainability measures into company operations (such as switching to renewable energy sources, reducing waste, exploring expansion into diverse markets, implementing energy efficiency measures, increasing recycling efforts, etc.) can be implemented to save money and show stakeholders and regulators that the company is making good-faith efforts at ESG commitments.
The board and management’s strategies and rationale for their approaches to the various ESG concerns can be communicated and explained to all stakeholders, emphasizing the benefits of the plan and forecasting the long-term benefits to the company. This type of transparency can demonstrate that directors are knowledgeable regarding ESG issues, thereby justifying their positions on the board. It can also help mitigate litigation regarding certain ESG issues, such as being sued for non-compliance with climate change laws or certain employee management issues.
The shift toward ESG strategy might be viewed, in some ways, similarly to the digital transformation strategies many companies developed some years ago. The implementation of new technologies was necessary for companies to remain competitive within a rapidly changing business landscape. Once the difficulty of change process was over, many companies improved productivity and financial performance. With proper planning and strategy, the same can be achieved as companies focus more on ESG.
The growing emphasis on ESG matters is rapidly changing stakeholder expectations of corporations. Boards would be wise to weigh the advantages of being proactively responsive to these changing expectations with strategies that improve the company’s financial position while addressing stakeholder concerns.