Some very important issues are causing environmental, social and governance (ESG) issues to appear on board agendas more often than they used to. ESG is challenging for boards of directors because of its uncertainty, unpredictability and external forces. Today's boards have to be up for the challenge because their company's sustainability is on the line. ESG is a major factor in competitiveness. Even the most progressive companies have to be quick to respond to sudden changes, causing boards to have to think on their feet as issues arise.
Today's marketplace demands that companies take an enterprise risk management approach to their duties of oversight and planning. Boards that take ESG seriously will be able to handle ESG more readily with the assistance of a board governance management software system.
ESG Is Evolving Into a Major Board Issue
Investors are starting to hone into the 'G' in ESG. As corporate risks become more complex, investors are becoming more concerned about the board's role in strategy, risk and capital allocation. Those issues rightly all fall under the board's fiduciary duties.
Boards, or whomever they delegate risk management to, must pay particular attention to ESG-related risks such as environmental disasters, labor relations, safety incidents and scandals.
Enterprise Risk Management (ERM) and Its Connection to ESG
Boards are wise to consider ERM as the foundation that supports ESG risks and trends. ERM and ESG must be considered as a connection that affects risk, strategy and decision-making. Boards that take an approach that integrates ERM and ESG make it easier to assess their overall resource needs which, in turn, makes it easier to allocate capital appropriately.
An enterprise risk management approach to oversight helps to change stakeholders' expectations that impact a company's ability to achieve their goals and objectives. Considering the integration of ERM and ESG encourages boards to measure and disclose ESG information, which ultimately makes the company more resilient and competitive.
Boards Face Unique Challenges With ESG
Boards must consider any and all factors related to sustainability because the stakes are high. Boards that practice good stewardship and focus on their fiduciary duties will recognize that they need to openly support the notion of sustainability as it connects to ESG.
Investors have many concerns about how boards address ESG. It's a known fact that sustainability factors influence financial outcomes. The stock market relies on long-term gains for profitability and boards that consider ESG have the opportunity to drive long-term value for the company.
While investors are also talking about the importance of ESG, they're seeking greater transparency of ESG as assurance that the board takes it just as seriously. Investors would like to see more evidence of how sustainability drives value and protects it over the long term through board communications and engagement.
Essentially, investors expect board directors to have a good understanding of ESG. Investors place their trust in boards that have strong oversight over ESG.
ESG Risks Create Opportunity
It's not a new concept that opportunities come with risks. A 2018 Deloitte report on sustainability gives us a few examples of how ESG creates opportunities for growth and advancement.
Companies that fail to pay attention to the areas of energy, waste, water and emissions can cause troubles for boards such as fines, legal issues, regulatory concerns, reputational loss and extra expense. The opportunity comes as a way for boards to invest in making sound changes in environmental practices like improving resources and waste management and addressing risks associated with our climate.
Boards must also consider how poor labor practices can lead to fines, penalties, lost operational time and high employee turnover. Boards that oversee management decisions about talent and supply chain practices will realize lower costs and greater productivity, and will position themselves well to attract the best talent.
Changes in the marketplace call for the need for boards to change consumer and commercial expectations. This presents an opportunity for boards to highlight their investment in positive environmental and the social benefits of their products and services that increase their competitive edge.
Board Governance Management Software Paves the Way for Responsible Enterprise Risk Management
Governance experts advise boards to take a long-term approach to enterprise risk management. The best way they can do that is to implement a board governance management software solution that includes fully integrated software solutions — an ERM system like Governance Cloud by Diligent.
Governance Cloud provides all the digital tools that boards need to communicate their business strategy to shareholders and stakeholders to assure them of the company's sustainability in light of ESG. An ERM software solution helps boards consider the full scope of stakeholders and establish their point of view on ESG issues.
Diligent Boards, along with the integrated solutions of Governance Cloud, allows boards to work more closely with senior managers to help define ESG risks and make decisions about how they can measure and disclose them with some degree of accuracy. Investors expect information on ESG to be transparent and understandable. They're interested in disclosure of ESG topics, risks and trends and how the board measures and monitors them.
Some Final Words on ESG and Sustainability
In essence, investors want to hear about ESG and sustainability directly from the board and managers before a problem gets out of control and hits the media.
There are many signs that ESG is taking the lead on long-term risk factors. In 2017, Deloitte and Forbes conducted a survey that showed that sustainability was the top risk for senior leaders. In January 2018, the World Economic Form's Global Risks Report also showed environmental concerns as a top concern. Their report states that all categories of environmental risks have a high degree of likelihood and stand to have a strong impact over a ten-year period.
ESG is just one of many new issues that corporate boards are facing. Oversight of marketplace issues is becoming more connected and complex. A board management governance software system like Governance Cloud is quickly becoming a necessity to address the complex and evolving challenges that boards of directors face daily.
Learn More About Diligent's ESG Solutions
Learn how Diligent's ESG solutions are helping companies operationalize ESG principles, track progress against standards, and monitor stakeholder sentiment.