AUG 14, 2019
How Boards Are Adapting To Environmental, Social, & Governance Issues
Environmental, Social, and Governance (ESG) criteria is an increasingly important set of guidelines and standards for a company’s operations that socially-conscious investors use to evaluate investments and savvy consumers utilize in purchasing decisions. A great definition breakdown of ESG states, "...environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights" (Investopedia). This trifecta of intertwined focus areas has proven to be challenging for many companies and their Boards, some with catastrophic effects. Many Boards are aware of the importance of ESG in their strategy and governance, but have struggled to successfully implement and fully leverage this concept. This is because ESG at the Board level has widely been viewed as solely a risk matter rather than a strategic opportunity.
The biggest challenges I currently see in boardrooms relating to ESG include:
- Satisfying multiple constituency groups. Boards must be able to not only view ESG through the eyes of existing or potential investors, but also through the eyes of consumers. These constituency groups are not always fully aligned, but are of absolute equal importance.
- Strategy. ESG needs to be part of the overall strategy for it to be fully adopted by the organization, effective, and measurable.
- Risk. Willingness to include ESG into a Board's and entire organization's risk modeling. Internal and external ramifications need to be considered.
- Increasing transparency. Boards are somewhat confused on 'what else' should be disclosed in support of positive, recognizable ESG efforts.
- Treated as a passing fad. Viewing ESG as the latest short-term fad can prove costly. For example, corrections to environmental issues are long-term endeavors likely to span decades or centuries into the future. They will not go away quickly - in fact, they will likely get worse before they get better.
- Connecting the dots. The abstract exercise of connecting global issues such as human rights, climate change, access to water, or child labor to specific impacts to an organization can prove to be time consuming and costly.
- Missing the mark. Some Boards are solely focused on ESG as a 'necessary evil'(reactive/risk point) to avoid instances of negative exposure. Mature Boards are challenging their organizations to leverage the massive upside of ESG by flaunting their commitment and actions to create a better world. This upside can be experienced on both the consumer/investor side as well as the employee side.
These listed challenges are not small by any means, but with a little mindfulness and a slight tweak in thought processes, they can be conquered.
A great way for a Board Director to think about ESG in their work is to reference the concept of the Triple Bottom Line, or TBL, in their strategic thought processes. John Elkington, a British management consultant and sustainability guru, coined the term in 1994 as his way of holistically defining and measuring performance in corporate America. The TBL theory recommends that companies commit to focus on social and environmental concerns just as feverishly as they do on profits. Instead of one bottom line, he contends there should be three: Profit, People, and The Planet (where 'People' measures how socially responsible an organization has been throughout its operations, and where 'The Planet' measures how environmentally responsible a firm has been).
People + Planet = Social + Environmental Responsibility
At its core, TBL seeks to gauge a corporation's level of commitment to corporate social responsibility (CSR) and its impact on the environment over time. Take a moment to think about how the companies you serve would currently rate on this measurement system. Now, take a moment to think about how a LOW TBL score would affect your business based on investor and consumer sentiment and perception. Now, take a moment to to think about how a HIGH TBL score would affect your business based on investor and consumer sentiment and perception.
Boards that actively embrace ESG concepts in their inner workings of strategy, governance, risk, and decision-making are effectively guiding their companies into the future. Ignoring ESG in your strategic planning could likely get your organization a negative 'honorable mention' in a future executive education case study.