Short for “Environmental, Social and Governance,” ESG represents a more stakeholder-centric approach to doing business. For today’s institutional investors, an ESG plan looks beyond the balance sheet to consider the unique risks and opportunities facing today’s companies, both now and in the future; it also considers the impact a company has on its employees, customers and the communities within which it operates. As ESG increasingly becomes top of mind for directors, it’s important to also consider the global nuances that drive focus region by region.
The relationship between ESG and the board of directors is still being defined.. Discussions around the “G” (i.e., governance) are often spearheaded by the nominating & governance committee with involvement from the full board—particularly when assessing how these risks integrate with the ERM program or impact long-term strategy. In addition, more boards are incorporating the “S” (social considerations or corporate impact) into the strategy development process; according to PwC’s Annual Corporate Directors Survey, issues like health care cost, resource scarcity, human rights, and income inequality have all surged in importance.
When it comes to structuring oversight around the “E” (i.e., environmental issues), a recent global study by the Diligent Institute found that best practices are still largely undetermined. Fifty percent of the 447 survey respondents indicated some form of board-level oversight, either by the full board or a board committee, while 19% indicated that oversight lived within the organization. Another 35% percent indicated that environmental issues are “not overseen” by the company or that they “don’t know.”
The best approach to ESG oversight will vary by board and will be influenced by industry, company type, global footprint, existing committee structure, and so on. However the board decides to structure oversight, every board member should have a thorough understanding of (a) how ESG risks impact the organization and (b) what kind of disclosure is important to their investors.
No standard set of guidelines yet specifies how boards can measure ESG. With the rapid rise of environmental, social and governance issues, investors and boards are now navigating a communication gap. Investors are pushing for more standardization, as the AFL-CIO’s Brandon Rees, Deputy Director of Corporations and Capital Markets, explains: “Companies are starting to provide [disclosure]—but because we don’t have uniform presentation of the information, it’s very difficult for investors to digest it when you’re relying on a CSR report as opposed to a uniform SEC disclosure.”
On the other hand, corporate issuers are finding that the types of ESG metrics that matter to one company may not matter to the next. Both boards and investors are increasingly turning to organizations like the Sustainability Accounting Standards Board (SASB), Sustainalytics or MSCI for reporting frameworks that offer some level of consistency and financial materiality among companies within a given industry.
Equipping Boards with the Right Data: Effective oversight of ESG will depend on whether today’s boards have the right information at their fingertips. In a research report by Forrester and Diligent, governance professionals indicated that “visibility into sustainability and ESG issues” was their greatest dissatisfier.
Do you have the data your investors have? How does your board composition compare to your peers? What skill sets is the board lacking? What conflicts of interest might your investors have uncovered? Tools like Diligent Nominations provide quick access to information helps board members identify governance red flags raised by shareholders and activists.