5 Ways Boards Are Not Properly Addressing ESG

Nicholas J Price
The expectations of shareholders around ESG (environment, social and governance) are moving quickly past awareness. Presently, and moving forward, shareholders are expected to be much more proactive regarding ESG issues. What is the range of issues that concerns them?

  • Climate change
  • Water resources
  • Working conditions
  • Human rights
  • Employee diversity
  • Gender inequality
  • Board diversity
  • Executive pay

Institutional investors like BlackRock and Vanguard are taking a longer perspective on corporate performance than they have in the past. Large institutional investors have significant influence on allocating capital, the price of shares and selection of board directors. They've done their homework and know that ESG directly relates to good governance, and good governance leads to growth and prosperity.

As an example of the institutional investors' perspective, in 2017, BlackRock called on CEOs in the United States to adopt a sense of purpose and to broadly address the goals of society. BlackRock has made it clear that they believe that companies that exercise leadership on social issues are in the best position to produce long-term value for investors.  

What Is the Danger of Not Addressing ESG Properly?

The danger of not addressing ESG properly is that investors may pass you up in favor of the competition.

In 2017, the asset manager at State Street Corporation took a strong stance about male-only boards with the approximately 400 publicly listed U.S. companies. The company voted against the chair or most senior board members of the governance committee where all board directors were male. This stance may stem from financial research that Credit Suisse and MSCI published within the last several years that showed that companies with female directors generated better returns than all-male-led companies.

There's no question that ESG is a major up-and-coming issue and will be for some time. Here are five ways that boards aren't properly addressing ESG issues that investors are sure to take notice of:

  1. Not Linking ESG to Strategies
It's one thing for companies to financially or otherwise support a cause or publicly state their beliefs. Investors are looking for more than that. They want assurance that companies are linking ESG to strategies and operations. There are a couple of reasons for this.

First, investors know that companies that integrate ESG issues into their strategy will have a stronger commitment by management and stronger oversight by the board, just as they have with other strategic initiatives that are developed with long-term value in mind.

Unilever provides a strong illustration of how ESG benefits the company, the investors and society. Under the helm of CEO Paul Polman, the company set some clear ESG goals:

  • Cut water use in connection with its product by 50% between the years 2010 and 2020.
  • Achieve 100% sustainable sourcing of agricultural raw materials.
  • Reduce consumer waste disposal by 50%.
  • Achieve an even greater reduction in manufacturing waste.

How did they fare? The brands connected with those goals grew 50% faster than the rest of the business and represented 60% of the company's growth. This illustration makes it easy to see how ESG benefits all parties.

  1. Failing to Address Diversity
While the fact that women have been under-represented and underpaid at the senior leadership level has been discussed vaguely in the past, the issue is coming out of hiding. Investors are taking note of the connection between diversity and inclusion and corporate growth.

At Blackstone in the United Kingdom, men earn an average of 30% more per hour than women. Many companies are taking a page from the Institutional Limited Partners Association's (a firm with $2 trillion in investor capital) book by adding questions about diversity issues at the general partner level in their due diligence questionnaires.

Today's investors are savvy to the fact that diversity gives companies a competitive advantage and they want to see diversity take root in the business rather than be a sideline issue.

  1. Failing to Proactively Communicate Their ESG Efforts
Companies that get their feet wet with ESG efforts won't do themselves any favors by keeping that information to themselves. The communications or public relations department plays a big role in proactively communicating the company's ESG goals.

Companies need to formulate their ESG messaging and make it consistent throughout the corporate website, proxy statements, press releases and social media. Proxy advisory firms are already looking for ESG information and how they can use it for their reports. This development is sure to become more defined in the coming years. 

  1. Directors Should Continue Integrating Broader Social Considerations into Risk Assessment Practices
ESG issues present opportunities for companies. Investors and boards are also aware that those same ESG issues bring risks. Setting ESG goals and making them part of the corporate culture could lead to the lack of proper resources, sexual harassment, climate change issues and more.

Risk assessment issues related to ESG must be evaluated and addressed on a regular basis. Boards should review their approach to ESG assessment tasks and determine which committees should be involved. Boards also need to ensure that they're being transparent with their conclusions and that they incorporate them into their public disclosures.

  1. Evaluating the Board's Role in Oversight of ESG Issues
Investors are looking for assurance that today's boards are considering whether there are any ESG issues or trends that could significantly impact the company's ability to create long-term value and sustainability. In addition to identifying areas in which the board can integrate ESG issues into their strategies, boards need to decide how they can best apply corporate resources toward ESG goals and risks. Board oversight of ESG issues may prompt boards to look at supply chain disruptions, energy sources, alternative energy sources, labor practices and environmental concerns. Boards should make sure they're satisfied with their role as overseers of ESG matters and investors will be looking at that as well.  

ESG & Modern Governance

The heavy focus on ESG issues is a modern approach to corporate governance. Modern issues call for modern solutions for how boards can address and oversee ESG issues. Board management software by Diligent is the best suite of digital tools for a modern approach to corporate governance. From a highly secure board portal to the entire suite of governance tools that comprise Governance Cloud, Diligent supplies boards' needs to manage all aspects of ESG.
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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.