The buck stops with you: A 6 step plan for Board governance of ESG
Environmental, social, and governance (ESG) has become, and should be, a burning issue for boards as their most influential stakeholders, from investors to customers and employees to regulators are demanding businesses address and adapt to increasingly pressing environmental and social factors.
Failure by boards to have a handle on what this means for their business can not only risk financial performance but could also constitute a breach of directors’ duties which could result in action against the Company, and directors individually.
However, many boards are struggling with how to manage this increasingly important context within which they are operating.
A recent study by Boston Consulting Group and Insead found that 64% of directors expect institutional investors to put forward new ESG-related proposals at their next annual general meeting but as many as 70% of directors reported that they are only moderately or not at all effective at integrating ESG into company strategy and governance. (BGC and Insead Board ESG Pulse Check 2022)
Boards have a unique vantage point
Boards sit at the crossroads of timescales, keeping the executive team accountable for delivering short- medium term value while ensuring the business is charting a course that will deliver value in the long-term. They must use this position to ensure the business’ strategy identifies and addresses the environmental and social factors that are material to the success of their business and that there is robust governance in place to make sure the plans are implemented effectively and responsibly. Boards therefore need to proactively engage with management on the ESG agenda in order to drive sustainable value for all stakeholders.
“Boards that expand and enhance their focus on ESG will be positioned to help the companies they oversee build sustainable business models—and sustained value creation.”
What do Boards need to do to address ESG
Be the challenging voice to drive progress
Challenge the Executive team on the company’s ESG strategy to ensure it is focusing on the issues that are most material to the business, that it outlines clear targets and details comprehensive plans to deliver the objectives. A good first step on this is to review and discuss the company’s ESG report with the executive team, interrogating the data to ensure the narrative is credible. If an ESG report doesn’t exist - your first question is obviously why not.
Ensure effective oversight of ESG plans
Establish and implement a governance process to review the company’s progress towards its ESG objectives based on data and evidence in order to identify areas of risk from lack of action or a change in circumstances.
Incorporate ESG risks (short and long term) into the business’ risk management process
Risks arising from Environmental and Social factors are increasingly pressing for companies and therefore need to be managed in the same way as all other business risks.
Drive integration of environmental and social risks and opportunities into the company strategy
ESG is not a stand alone, compliance exercise. Understanding how businesses can mitigate risks and optimise opportunities presented by the changing environmental and social context is a fundamental element of the overall company strategy.
Consider ESG factors in all major decisions
There will be environmental and social considerations in all large decisions and the board can use its unique vantage point to ensure these are considered in decision making whilst also ensuring that the director’s responsibility to promote the success of the business is ESG led.
Stay ahead of the game to futureproof the business
There is a risk that companies focus purely on the ‘now’ of ESG rather than having an eye on the future. Boards can play an important role in helping companies stay ahead of a fast-moving ESG agenda, conducting horizon scanning to ensure that future risks and opportunities are identified.
The first step Boards need to take is to ensure the whole board is aligned behind what ESG actually means for their business, not as a compliance, tick box exercise, but as a fundamental lens through which to see the context within which the business operates. This may require education, openness to new perspectives and creating time on the agenda for discussion but failing to act now could be hugely detrimental to future success.
As always, if you would like to discuss the any of the areas covered in this article, please get in touch with jane@thethrivebusiness.com.
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