The Corporate Director Podcast Episode 21 with Paul Washington

Listen to Episode 21 on Apple Podcasts
Guest: Paul Washington, Executive Director of the ESG Center at The Conference Board

Host: Dottie Schindlinger, Executive Director of the Diligent Institute

In this episode:

  1. Why aren’t more CEOs prioritizing climate change? According to Washington, their plates are already full of more immediate concerns about economic pressures, intensifying competition, and geopolitical instability.
  2. How will Blackrock’s new disclosure requirements impact reporting? Balancing multiple frameworks with a company-specific sustainability story will be a multi-year challenge.
  3. How should boards respond to Davos’ vision of “stakeholder capitalism”? Getting the right people and information to the boardroom is a start.

Summary:

ESG is having its moment on the world stage: Teenage climate activist Greta Thunberg addressed the 50th meeting of the World Economic Forum. This year’s updated “Davos Manifesto” focused on the broader social purpose of corporations – echoing a similar move by the Business Roundtable. And just before this convergence of global power players in the Swiss Alps, Blackrock CEO Larry Fink’s annual letter outlined new climate change disclosure requirements for publicly traded companies.

Yet PwC’s annual CEO survey reports that climate change isn’t even among the top 10 issues of concern for CEOs. When The Conference Board surveyed C suite executives about their hot-button issues, climate change ranked only 9th, up from 11th the year before.

In this episode, Dottie Schindlinger, Executive Director of the Diligent Institute, talks about this confluence of trends and contradictions with Paul Washington, Executive Director of The Conference Board’s ESG Center.

Why aren’t more CEOs prioritizing climate change?

CEOs have a lot of different risks on their mind, according to Washington, and the ones that are really paramount are the ones directly involving the economy. Think recession risk, global trade, competition, a tight labor market, and more demanding consumers—not to mention global political instability and declining trust in political and policy institutions.

“The Fink Letter Illustrates that climate change is going to have an important impact on the economic landscape over time, including in the reallocation of capital,” he explains. “But it’s not a first order economic issue for CEOs who have tons of other stuff on their plates.”

“CEOs have a lot of different risks on their mind, and the ones that are really paramount are the ones that are directly involving the economy.”

– Paul Washington, Executive Director of the ESG Center at The Conference Board

Are non-CEO corporate directors looking at the landscape differently? Schindlinger wondered.

Although one can’t generalize, “There are those who see their job as focusing on risks that may not be top of mind for management,” Washington explains. “Those directors have a broader perspective, and they are saying, ‘We really ought to be looking at this risk. What are we doing about climate change?’”

How will Blackrock’s new disclosure requirements impact reporting?

As announced in Larry Fink’s letter, Blackrock is now requiring companies to adhere to both the Sustainability Accounting Standards Board (SASB) guidelines (or disclose a similar set of data that is relevant to their business), and Task Force on Climate-related Financial Disclosures (TCFD) —by the end of the year. How are companies going to do that? Schindlinger asks.

Washington says it’ll be a challenge for years to come because of the numerous reporting frameworks: the GRI reporting framework, the UN sustainable development goals, and so on.

“It’s really part of a broader challenge that companies are facing,” he says. On one hand, companies are trying to report in a way that satisfies various stakeholders including investors like Blackrock, who understandably want comparability across companies. On the other hand, they must satisfy their shareholders’ information needs, which can be a more targeted, company-specific disclosure.

“In many ways, it’s in a company’s best interest to tell their sustainability story authentically and in a way that reflects that particular company’s priorities and circumstances,” Washington says.

Amid these competing, and escalating, reporting demands, many companies are experiencing “disclosure fatigue,” he reports.

“I think there’s going to be internal pressure within companies to have more focused disclosures in this area and more effective disclosures in terms of reaching different audiences, which to some extent flies in the face of standardization.”

– Paul Washington, Executive Director of the ESG Center at The Conference Board

How can boards respond to Davos’ vision of “stakeholder capitalism”?

The Davos vision of “stakeholder capitalism” in many ways reflects the 2019 Business Roundtable statement about the purpose of a corporation. That said, to what degree can companies be flexible as they consider interests broader than the economic interests of their shareholders? The answer varies, especially when the legal landscape has not changed, which is the case for U.S. corporations.

“I think most people would agree the boards are allowed to consider other stakeholders in the fulfilling of the fiduciary duties,” Washington says, “but I think there are a fair number of folks that think that ultimately that needs to tie back to long-term shareholder value.”

Start by navigating these issues is with the nominating and governance committee, he suggests. Do you have the right people on your board to address this broader array of issues and broader range of stakeholders?

Another area is with the sustainability information the company provides to the boardroom as a whole. “I think the most important thing the directors can do is to ask management how they are thinking about these long-term factors,” Washington says.

 “While investors are certainly talking much more about sustainability and issues like climate change, it is unclear how much they will give a company a  pass on short-term economic performance.”

– Paul Washington, Executive Director of the ESG Center at The Conference Board

Are corporations ‘sociopaths’?

Washington shared a great read by former corporate lawyer James Gamble, who posits that corporations are populated by great people who are trying to do the right thing but are legally obligated to act in the narrow economic interest of just their shareholders, which can lead to unhealthy behaviors. Washington recently had the opportunity to interview Gamble on The Conference Board’s podcast and posit, “If corporations are sociopaths, what do we do about it?”

Gamble, Washington explains, argues for a new framework in which shareholders are served not just as economic players but as human beings. “How do you make sure that what you were doing is actually also serving society?” he says. “Because everyone who works at a company is working at for a place that has been given the license to operate by society, so you can’t lose sight of that broader obligation.”

Listen to Episode 21 on Apple Podcasts

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