People from every facet of family, society and business are becoming increasingly concerned about the impact of the carbon footprint on how we live, work and play. Environmental, social and corporate governance (ESG) is an evolving issue that’s getting much attention in the corporate world. Many investors have strong opinions about investing in corporations that make a commitment to environmentalism and sustainability. For some companies, investors are interested enough in ESG that boards can’t ignore their enthusiasm for it.
ESG encompasses a wide range of issues, including climate change, natural resources, management of human resources and people, labor standards, and consumer and product safety, and much more. How companies choose to approach these issues has an impact on their financial stability, investor interest and long-term success.
Partnering With Management on ESG Matters
Since ESG touches many parts of the business, board directors and senior managers must partner to identify and evaluate how stakeholders view the company’s approach to ESG. Boards need to consider the interests of investors, employees, customers, vendors, communities, society at-large and the economy when making critical decisions about incorporating changes that focus on ESG. Strategic planning meetings should focus at least part of the board’s time on ESG and how they can best oversee it.
Assessing the Impact of ESG
Senior managers are the primary resource for boards to begin the process of identifying which ESG issues are the most pressing regarding the company’s business and key stakeholders. It’s critical for boards to assess the impact of ESG as it affects the company’s relationship with investors, stakeholders and the public. In addition, ESG can have a palpable impact on a company’s reputation.
The board is responsible for exercising due diligence in assessing, monitoring and managing material ESG risks and any opportunities they may bring. Addressing ESG issues may require boards to develop new processes and policies. Their efforts must also extend to implementing changes and overseeing implementing of changes and any ensuing impact of the changes.
The Board’s Role in Assessing ESG Risks and Opportunities
Boards may opt to incorporate ESG changes at various junctures of the company’s operations. Beginning with strategic planning, boards need to assess which areas of the company where they could and should be making meaningful and productive changes. While ESG may provide the company with some benefit, it may also carry intentional or unintentional risks. Boards will need to decide how or if they can mitigate those risks.
ESG will affect the company’s budget, resource allocation and operational planning. Boards also need to consider whether ESG changes will impact crisis plans and incentive structures. As a matter of transparency, which is a strong component of good corporate governance, boards also need to evaluate and plan for how to communicate ESG changes to investors and other stakeholders.
Monitoring ESG Initiatives Regularly
Establishing and implementing ESG initiatives isn’t a “one and done” event. Boards should invest their time in requesting regular briefings on the impact of ESG. This means that boards will need to set up new policies for how they will oversee ESG matters. Some companies delegate ESG matters to a committee, which requires the board to develop a new committee charter. Committee charters should outline how frequently the committee reports to the board.
Other boards prefer to keep ESG reviews at the board level. Either way that companies opt to manage it, board directors must be especially vigilant regarding ESG matters that pose a material risk to the company.
Certain Industries More Affected by ESG Initiatives
Certain types of industries will inherently be more affected by ESG than others. Such industries must be clear on all the ways that ESG impacts their bottom line. ESG may provide benefits in various areas of the company’s business, although the benefits may not be readily transparent, certain or measurable. For example, ESG may provide a competitive advantage that’s difficult to quantify.
The Board’s Role in Oversight of ESG Matters
Depending on the board’s composition, boards may determine that they need additional expertise on the board pertaining to ESG. Boards may choose to accomplish this either by appointing a board member with expertise in ESG or making it a matter of full board education and development.
Some of the risks that boards may review include how ESG may disrupt their supply chains; how ESG changes affect their energy resources and whether there are any viable alternatives; how changes affect labor practices and the environment; and how ESG affects their competitive edge. Boards must also develop ways to oversee all of these areas effectively.
Communicating on the Topic of ESG
Investors and the public will surely be interested in the company’s approach to ESG issues.
Boards must be prepared to respond to investor requests or questions about ESG initiatives. Boards may try to anticipate whether shareholder activism is looming, what shareholder proposals may be coming their way, what business implications the proposals may have and what options they have for satisfying shareholder concerns. In addition, boards must make decisions about what information to include in their external disclosure and reporting forms. One way that companies have found to deal with shareholders is to offer them a preferable management-backed approach.
The right kind of disclosures can present boards with new opportunities. This is just one of the benefits in communicating ESG initiatives to the public. The company website and other marketing materials stand to inform the public about where they stand on ESG and sustainability issues and demonstrate the company’s progress with ESG.
Utilizing Digital Tools for Managing ESG Efficiently
ESG is just one of many new issues that boards must address. With increasing pressures on boards, digital tools are a huge asset in managing all the responsibilities that board directors accept. Diligent Boards and Governance Cloud provide a fully integrated, total enterprise management solution for active boards. The board portal helps to streamline meeting processes. It offers a highly secure platform for internal board communications where board directors can access electronic files, ESG reports, meeting minutes, copies of external communications, and more, remotely and around the clock.
Governance Cloud also offers virtual data rooms in which ESG committees can meet and exchange documents and other pieces of information electronically.
Governance Cloud is the premier solution for the best in board efficiency and effectiveness.