The critical role of boards in addressing ESG issues

Boards of directors in nearly every industry worldwide face increasing pressure to be proactive on ESG issues. Yet many corporate boards and executives remain uncertain about how best to address these issues or report their progress to stakeholders.

A recent OnBoard survey of over 280 directors, trustees and staff in more than six countries found that while 76% of respondents said their boards had a strong or somewhat focus on ESG issues, 58 % said their organizations did not rate themselves on these questions. problems. Nearly 90% said their boards did not have committees dedicated to addressing ESG issues, and only 9% intended to create such committees, according to OnBoard. 2021 Board Effectiveness Survey.

ESG issues were a hot topic and featured in several sessions at the Society for Corporate Governance (SCG) New Era of Governance 2021 national conference from June 28 to July 1. become central business considerations for boards of directors. Policymakers, rating agencies, business stakeholders and others look to business leaders to implement long-term, sustainable policies that support growth and address companies’ significant environmental and social impacts on businesses. communities around the world.

“Increasingly, boards of directors are being called upon to address the challenges presented by climate change, racial injustice, economic inequality and many other issues that can be fundamental to the success and sustainability of businesses, financial markets and our economy,” Lee said.

The importance of being proactive

Actions taken during the recent proxy season confirm a sea change on ESG issues, Lee added. For instance:

  • 98% of GE shareholders approved a resolution asking the company to outline how it will achieve net-zero greenhouse gas emissions under the Paris Agreement
  • 58% of ConocoPhillips shareholders approved a resolution calling for Scope 3 emissions reductions
  • Shareholders of companies such as Amazon and JPMorgan Chase have shown strong support for racial equity audits.

Last month, climate activists won three seats on ExxonMobil’s board of directors at an annual meeting that some have called a “vote heard around the world,” Lee said. Meanwhile, the US has re-entered the Paris Accord and the SEC is looking to improve climate and other ESG disclosure requirements for investors. The link between ESG and shareholder interests has become evident as investors and consumers increasingly make decisions based on corporate sustainability profiles. Some of the world’s largest asset managers, including BlackRock, State Street and others, have highlighted the importance of companies’ ESG efforts.

The message is clear: Boards have a responsibility to integrate ESG into their decision-making, risk management, compensation and corporate transparency initiatives, Lee said. Companies face risks on several fronts when it comes to ESG issues: physical risks, transition risks, regulatory risks, reputational risks, and even human capital risks, as younger workers place more and more importance of aligning a company’s values ​​with their own.

“Today, what your business does and says is as likely to be dissected on Twitter and TikTok as it is reported in the the wall street journal or on a newswire,” Lee said.

Boards that proactively seek to integrate ESG issues into their decision-making not only mitigate risk, but also better position their companies and business models to compete for capital based on sound ESG governance , said Lee. Boards strive to maximize these opportunities and position themselves as ESG leaders in three steps:

  1. Increase board diversity. In general, boards of directors need new and diverse perspectives. emphasizing diversity increases the likelihood that new directors will bring new thinking, which in turn could facilitate more current and proactive approaches to climate and ESG governance
  2. Increase board expertise. Companies should integrate ESG considerations into their appointment processes to recruit directors with ESG expertise; training and education also helps to improve the knowledge of current board members on these topics
  3. Inspire Management Success. Executive compensation is a powerful tool for achieving strategic business objectives, and ESG initiatives are no exception. Many companies, including Starbucks, McDonald’s and Nike, have recently committed to tying executive compensation to diversity metrics.

“The more we can have an open, thoughtful and well-researched dialogue on the specifics of these issues, the more companies, investors and all stakeholders will benefit,” Lee said. “It is more critical than ever for boards to explore how to integrate sustainability into their governance practices and to specifically consider what is best for the companies they oversee.”

Where to start?

In another SCG conference session – titled “Best Value for Money: ESG Reporting Frameworks for Small and Mid Caps” – four industry experts discussed how companies can start shaping their strategies. ESG.

“ESG has grown so much that most organizations have already started, but if you haven’t started, now is the time,” said Lisa Bond-Holland, director of ESG for South Jersey Industries. “With the regulations coming in, there doesn’t seem to be any way around it. ESG has finally entered the mainstream.

Companies should take a thoughtful and intentional approach around ESG, start collecting their data and other relevant information, and establish their disclosure processes, Bond-Holland said. Unfortunately, there is no single framework companies can use to achieve ESG compliance. On the contrary, there are many framework options for businesses, making it difficult for business owners to know where to focus their efforts. In that sense, the upcoming regulations will be helpful in guiding organizations and driving standards unification, said Dena Acevedo, Senior Director and Deputy General Secretary, Juniper Networks.

For now, the SASB is a good place to start, with industry-specific guidance that provides a baseline for what information companies should collect. Organizational leaders should also have ongoing communication with directors, investors and regulators to keep a pulse on what issues they consider important to highlight and which companies they consider ESG leaders worth emulating. said Tony Richelieu, Vice President, General Secretary and General Partner. lawyer at KB Home.

Establishing internal ESG standards and processes is an ongoing effort that will evolve and solidify over time. Business leaders need to review their internal processes and identify what they have to support ESG in terms of expertise and reporting. Panelists agreed that building a cross-functional team to guide and champion these efforts is essential. Such a team may include heads of legal, risk management, human resources, communications, and investor relations, among others.

“ESG is not a silo,” Acevedo said. “It’s something that really requires the whole organization to pull together to really leverage and do the right thing… You want to make sure that people within your organization are aware and understand what you’re doing and what that you report. Having a unified voice is always better.

The important thing is to be transparent, she added. Even if an organization’s ESG initiatives are in the early stages of development, business leaders need to be upfront with investors and other stakeholders about what they are doing and how they are working to do better at the future. “It’s about getting information to flow as easily as possible to people who are searching,” Richelieu said.

At a fundamental level, boards and other leaders need to understand their company’s purpose and mission, and how these align with ESG issues. There’s no better champion for these efforts than the board, Bond-Holland said.

“It’s not just about standards and metrics…it’s about telling your story about who you are as a good corporate citizen and the purpose of your organization,” she said. “You have to look at all of your stakeholders. It’s not just your investors. They are your customers, your regulators, your employees – ESG is about all of these.

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