The Rising Tide of ESG - Navigating the Road Ahead

Kira Ciccarelli
As discussion around environmental, social, and governance issues (ESG) in the business world reaches a fever pitch, many questions and uncertainties remain. Corporate leaders are seeking concrete answers to the following questions: Who should own ESG within an organization? Should it be embedded in the compensation of company executives? Which reporting frameworks should be used? What should be disclosed? The future of business as we enter a new era of more stakeholder-centric practices ensure that these questions and many others need to be answered.

At Diligent's Modern Governance Summit 2021, we brought together governance, risk and compliance professionals across all industries to explore the top issues facing businesses today. Throughout our various sessions, we highlighted the perspectives of experienced and forward-thinking business leaders, activists and thought leaders in this space.

Over the course of our two-day virtual event, we discovered one glaring commonality across our programming: ESG was mentioned in nearly every single panel discussion, keynote speech and product session, regardless of whether the topic of the session specifically referenced ESG. Whether through the speakers themselves or through participants engaging in the chat, ESG kept cropping up. Taken together, the conversation was centered around three overarching directives:
  • Work proactively
  • Think holistically
  • Plan for the long term

Work Proactively

ESG regulation is coming, and so are increased mandates on diversity as an essential tenant of the ''S'' in ESG. Increasing diversity throughout organizations, particularly at the board and senior leadership levels, has gained traction in the last few years and will continue to do so as countries across the globe set requirements and mandates. The same can be said for the other aspects of ESG, with legislation and calls for action around climate change and social justice continuing to gain momentum.

As Jessica McDougall, a Director for BlackRock Investment Stewardship stated: ''We've been talking about ESG disclosure, particularly focused on TCFD and SASB, for the last four years. In 2021 and beyond, as the impact of sustainability factors on company performance become increasingly evident, we are looking for urgency from companies in disclosing their plan for how their businesses will adapt to the net zero transition. For us, disclosure is essential in enabling investors to make more informed asset allocation decisions.''
"For us, disclosure is essential in enabling investors to make more informed asset allocation decisions." -Jessica McDougall, Director for BlackRock Investment Stewardship
These pressures from governments, regulators, investors, employees and other stakeholders will only intensify in the coming years. Coming up with a plan now and equipping relevant teams and leaders with the tools they need to succeed will ensure your organization is operating at an advantage as regulations and mandates go into effect.

Andrew Droste, Head of Stewardship (US) for the Carbon Tracker Initiative summarized the need for clear, quantifiable disclosure: ''I'm looking forward to 2021 and 2022 10-K disclosures where we have high-quality quantitative data based on a number of shareholder proposals we saw passed related to EEO-1 alignment. Transparency around such measures will be critical.''

Think Holistically

It's crucial to take a holistic approach to incorporating ESG throughout all levels of your organization, and to think about ESG as part of your larger company strategy, and not in their own silos. As Ning Chiu, Partner at David Polk & Wardwell LLP indicated: ''Some people have a formal committee and some people have a less formal structure. But, the important thing is that they work together within their organizations to make ESG a strategy opportunity, and a risk mitigation issue, across the company.''

ESG has implications for almost every single aspect of your business, from talent acquisition to risk and compliance to public relations and ultimately to the success of your company overall. As stated by John Rudy, VP-Legal, Corporate Counsel & Assistant Secretary at Wynn Resorts: ''We have to think of ESG less of a compliance checklist, and more so as part of the culture of an organization. It will require more than just a sustainability department. It all has to come together to an actionable, measurable program.''
"We have to think of ESG less of a compliance checklist, and more so as part of the culture of an organization." -John Rudy, VP-Legal, Corporate Counsel & Assistant Secretary, Wynn Resorts

Plan for the Long Term

As you create and execute strategies around ESG, it's important to think about the long term. ESG should not be considered a check-the-box exercise, and therefore needs to be incorporated into your organization's plan for long-term value creation. The effects of reducing carbon emissions, for example, will take years to materialize and measure.

McDougall reiterated this long-term approach: ''We are of the position that companies who consider their stakeholders within the context of their long-term strategy are in the best position to deliver long term results to their shareholders. It is within that context when we speak to companies that we seek to understand how they're considering how ESG topics pertain to their strategy.''

Similarly, when thinking about your company's plan to specifically support diversity, equity and inclusion, it should mark not only short-term gains that can be achieved, but also lay out a long-term strategic framework. There is always a higher standard to achieve and to maintain. As Dr. Dambisa Moyo, Co-Principal of Versaca Investments, global economist, author and board member stated: ''Diversity in a broad sense has been shown consistently to generate higher returns on invested capital and higher returns on equity. Corporations have the ability to go beyond internal hiring when thinking about diversity, and they need to do so to drive success.''

Entering Uncharted Waters

As we move into last quarter of 2021 and begin to prepare for 2022 and beyond, few might have predicted the size, scope and trajectory of the ESG landscape. When the COVID-19 pandemic struck, many believed that ESG issues would be relegated to the back burner and would remain a luxury item and not a strategic imperative at most organizations.

If anything, the last eighteen months have proven that, rather than being put on hold, ESG is roaring forward. It's topping the priority lists of corporate leaders, employees, clients, investors and regulators alike. There is no one-size-fits-all approach for managing ESG, and each company's journey will look different. However, by working proactively, thinking holistically, and planning for the long-term, your organization can make a lasting and positive impact.