The term ESG is still relatively new, but the past several years have already seen a shift in how organizations approach it.
Until recently, most ESG measures were voluntary and treated as “nice-to-haves” — indicative of a company’s good will and commitment to the right practices. But now, in order to satisfy stakeholder demands and stay compliant with ever-evolving regulations, ESG frameworks have become must-haves for most organizations.
And not only that, but many stakeholders now expect a company’s ESG practices to define and justify a company’s purpose, as well as what that purpose means to the broader society.
Given this shift, today’s ESG challenges need a collective response — from companies, the public and the government.
At Modern Governance Summit 2022 (MGS), a panel of climate, diversity and policy experts discussed the growing importance of ESG and how organizations can prioritize ESG issues to set the stage for long-term success.
The Role of the Board
While some argue that more regulation equals more risk, that’s rarely the case, as Veena Ramani, Research Director at FCLTGlobal, explained.
“The lack of government engagement on climate change means risks are enhanced, not that they’re going away,” said Ramani. “It’s the board’s job to work with management and ensure the organization makes smart decisions that allow it to be positioned for long-term resilience and success.”
Indeed, boards must examine, and reassess if needed, the company’s purpose, answering introspective questions like: What is the purpose of our company? What do we add to the world that delivers value over time?
As the steward of an enterprise, the board must also work with management to ensure the company is creating long-term value and resilience in what will inevitably be a low-carbon future.
“There’s money to be made as we transition to a decarbonized economy, and the companies that do that are the ones that will do well,” said Michael Levine, Chief Sustainability Officer, V.P. Sustainability and Managing Counsel at Under Armour, Inc.
How do boards efficiently allocate capital to create an organization that is resilient and that still sees opportunities while transitioning to more sustainable means?
Ramani advises approaching ESG initiatives like any other business decision. “It’s all about risks and opportunities,” she said. “Many companies make the mistake of seeing environmental issues as a silo, separate from the rest of the organization. But these are business and financial issues and risks, so they should be treated as such: run them through the companies’ risk management systems. Identify the risks and opportunities, then figure out how to navigate a path toward long-term success.”
Finding Clarity Amidst the Chaos
Despite its clear business logic, ESG has become a divisive topic, whose critics range from congressional leaders to Elon Musk. Still, the controversy that surrounds ESG shows us that these issues are more relevant than ever.
To avoid being distracted by all the noise, companies should strive to keep people at the center of their ESG initiatives.
Leaders can work to demystify ESG by moving away from labels and toward meaningful goals, while working to understand how those goals and metrics impact people.
“The number-one stakeholder is the worker,” said Martin Whittaker, CEO of Just Capital. “Not surprisingly, we were all reminded of this after COVID. The ‘S’ is ESG has become much more important, although less understood. How can you possibly have a successful business if you’re not investing in human capital?”
Focusing on the mental health and wellbeing of employees is the path to financial and competitive success, but so is showing them that your values align with theirs. As the “Great Resignation” demonstrated, today’s employees will move on and seek other opportunities if they feel a company’s values aren’t in line with their own ethics. To avoid losing valuable human capital, boards must figure out how to create an engaged workforce.
“After the pandemic, we realized that cash is still king, but care is queen,” said Helle Bank Jorgensen, CEO of Competent Boards. “If you don’t care for your employees or suppliers, how can you expect them to care about you? We can learn so much from our stakeholders, but we need to open our ears and actually listen.”
And employees aren’t the only people businesses stand to lose if they fail to prioritize ESG measures.
“You have to think about who will be your customers three years from now, and what they will want,” advised Jorgensen.
Planning for Long-Term ESG Success
The panel offered several tips for organizations that want to achieve long-term ESG success:
- Actively listen: Monitor external signals and identify the right time and narrative for developing the company’s point of view, policies and strategies
- Know your audience: Make sure you are communicating with the right language that makes an impact
- Collaborate with leadership and management: Work to operationalize these new policies and create accountability within the respective units and teams, so ESG frameworks don’t just become another “check-the-box” requirement
- Get clear data: “Companies must figure out what they stand for and what they actually want to do, then go get the data on where they stand,” said Whittaker. “Then they must go get help and find someone who can help them improve. You can’t act if you don’t know where you are.”
Is the World Hanging in the Balance?
Given the geopolitical issues, inequalities and environmental crises that characterize today's world, it’s important for organizations to understand the broader impact of their business and consider the role they’d like to play in achieving progress.
We are at an inflection point — businesses must balance their choices between positioning their companies for long-term value creation, versus short-term wins. Navigating these decisions can only be done through business strategies that consider environmental, social and governance issues.
By pushing aside divisive labels, leaders can get to the heart of these issues and work to find solutions. Technology can provide the data and insights your organization needs to get started.
Modern solutions like Diligent ESG can calculate your greenhouse gas emissions while automatically collating your data and producing pre-configured audit-ready reports, so you have the information you need to continuously improve.