There is still a gap between what boards say is important when it comes to topics related to the environment, social and governance (ESG) and the actual delivery. You could say the intentions are good, but that they fail to transform intentions into actions.
The time has come for boards to take ownership of their organisations’ ESG agenda. The point being that in a rapidly changing world with an increasing number of interconnected challenges, the role of business and finance in society is changing as well. We have moved from a one-dimensional focus on financial targets to a more multifaceted approach.
In fact, most business leaders are already experiencing the increasing demand for proof that companies are doing more, more than just delivering financial returns and being compliant with laws and regulations. Instead, the sign of a successful company today is to have a clear purpose and a strategy that illustrates its contribution to society. It is also clear that it is good for the business. McKinsey summarises the business value creation of ESG into five concrete areas:
- facilitating top-line growth
- cost reductions
- minimising regulatory and legal interventions
- increasing employee productivity
- optimising investment and capital expenditures.
A concrete example is climate change and the risks following this. These are risks that if managed and mitigated correctly will have a direct impact on the company bottom line. Some illustrative examples of climate change related risks are:
- regulatory risks (ex. new legislation or carbon pricing)
- physical risks (ex. extreme weather events)
- technological risks (ex. electrification)
- social risk (ex. unemployment due to shifting away from carbon)
This is merely one area within ESG that is putting increased pressure on boards to show that these risks are understood and managed. For sure, many are long-term issues, but the board needs to understand and take leadership for both the short-term and long-term horizons in this context.
How to navigate in a landscape of uncertainty
The increased focus on how businesses can, and are expected to, not only manage new types of risks, but also care about societal challenges has moved regulators and other stakeholders to put rising pressure on both financial markets and businesses to incorporate ESG (environment, social and governance) considerations into the regular business agenda and processes.
The European Commission is driving this topic with a firm hand through their “Action plan on financing sustainable growth” launched in 2018. In fact, we have many reporting requirements, standards, and frameworks to adhere to. To name a few – IFRS, The green taxonomy, TCFD, CDP, SDG 2030, CSRD, GRI and many more. On top of these there are an increasing number of sustainability rating agencies that the financial markets and creditors rely upon.
There is a plethora of terminology and acronyms making many business leaders frustrated that valuable time is being taken away from driving the business forward. Many are looking for a turnkey solution to manage the ESG topics, but the truth is that the board needs to learn how to navigate this uncertain landscape without a compass.
The best advice here is to focus less on the terminology, the frameworks, and the reporting. Instead, look at the substance of your business strategy, the outcome of your stakeholder dialogues and your materiality analysis. The packaging and communication of your ESG efforts will then be perceived as authentic and trustworthy.
Where to begin with ESG in the Board Room?
Indeed, sustainability is a broad area covering most parts of the business and therefore many find it challenging to bring the subject into the boardroom agenda. However, by taking ownership the board will improve the likelihood that the ESG strategy and priorities are relevant to the business and thereby secure successful implementation. In fact, businesses that embed stakeholder value and ESG topics increase their resilience by improving their ability to transform with changes in society.
The best advice is to do your homework. A good first step is to convene a working group among senior management and board members to conduct a proper examination across the organisation evaluating where you stand today. This will provide the foundation for a productive conversation on where you want to be.
A proper peer analysis to assess what the peers are doing is also a good input to the conversation. Engage with your different stakeholder groups – investors, customers, employees, regulators, analysts, suppliers, and society – to understand their view on what they deem to be the most material ESG topics for your company and industry to focus on.
Now the board can assess which topics are most business-critical and at the same time most important for your stakeholders. With this in place, you have the right conditions for a successful board ownership of the ESG agenda and the foundation for a successful delivery.
In today’s world, forward thinking boards must make sure that the company has a structured ESG strategy with the top team working towards the same goal. The BoardClic ESG Maturity Assessment allows boards to identify ESG strengths and weaknesses, increase alignment regarding ESG efforts and pave the way towards sustainable growth and progressive business opportunities.
Would you like to get an introduction to our new tool and how it can help you take your ESG governance to the next level? Book a personal demo here.