In the wake of the COVID-19 pandemic and numerous social justice crises, boards are increasingly turning their attention to ESG management, building on the growing interest in and awareness about environmental, social and governance concerns. PwC’s 2020 Annual Corporate Directors Survey showed that 84% of directors now agree that companies should be doing more to promote gender and racial diversity, and 67% now say that climate change should be considered when planning strategy (up from 54% in 2019).
But does this mean that boards are managing differently now?
- 51% of directors say that their board fully understands how ESG affects the company
- 49% say that ESG issues are linked to the company’s strategy
- 38% believe that ESG issues can affect the company’s financial health
Yet, incorporating ESG management represents an opportunity that boards can’t afford to miss. Here are six elements of ESG management that your board should incorporate.
The 6 Elements of ESG Management Your Board Should Incorporate
Element 1: Material ESG Issues
In its 2020 report, “Measuring Stakeholder Capitalism,” the World Economic Forum defined material ESG issues as those that are “important, relevant and/or critical to long-term value creation.” Understanding how material ESG issues affect the business and its stakeholders is essential for boards. More effective oversight will help boards report on issues beyond the balance sheet, make more informed decisions about investments and gain a more complete understanding of the types of risks facing the business.
Element 2: Strategic Alignment
Aligning the ESG strategy with the overall business strategy will help ensure that the company sees the greatest return for its efforts. When committees are established to work on specific issues, such as gender diversity or environmental impact, coordination and transparent communication between them is essential to ensure that this alignment is maintained, even as business conditions change and the company adjusts its priorities to respond.
Element 3: Board Oversight
In addition to ensuring that the business complies with all relevant laws and regulations, board oversight should also encompass ESG issues when reviewing the capital allocation. When mergers and acquisitions are considered, it’s vital to investigate the ESG stance of the target company.
Effective oversight strategies help the board ensure that all business elements comply with relevant laws and regulations. Oversight of ESG management also helps boards clarify their ESG purpose and then ensure that the purpose is reflected in the overall organizational strategy. With this level of oversight in place, boards can also ensure that the business meets stakeholder expectations for ESG behavior.
In an environment when companies and brands are increasingly expected to be at the forefront of social change, simply following the law is no longer enough. Fully understanding the opportunities and risks inherent in ESG issues will increase the chance of creating value and decrease the chance of destroying it.
Element 4: Policies and Initiatives
The more clearly the board defines its ESG policies and initiatives, the more effective they will be. Specific policies or initiatives that boards may want to implement include: taking climate change into account when determining strategy, increasing gender and racial diversity within the board as well as within the company, and encouraging board members to express dissenting opinions about company strategy.
Element 5: Metrics and Goals
There are several different standards and disclosure regimes for ESG information, including guidelines published by the WEF, the SEC, the UK Treasury and the EU. The board plays an essential role in determining which metrics are right for the company and how progress toward specific goals will be evaluated.
Having determined which metrics will be followed, boards must establish guidelines about regular reviews to ensure they continue to reflect the company’s purpose and strategy. Considering the potential impact of ESG information, boards should also create procedures for disclosure: what information should be published, where and how often.
Element 6: Monitoring
Once policies and initiatives have been created, and there are guidelines for collecting, reviewing and disclosing ESG information, boards must monitor the impact of their ESG strategy. Here the board must look beyond the balance sheet and consider the broader environmental and social effect of the company’s actions.
As businesses position themselves to grow in the future, boards that integrate ESG management into their operations will likely find themselves drawing ahead of the competition, not only in the balance sheet but in the increasingly important role of change leader. As Clare Wardle, General Counsel and Company Secretary for Coca-Cola’s European Partners states, “People tend to think sustainability is just about the green agenda. But we think of how it’s going to make this company give a sustainable return to its shareholders over the next 50 years.”
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