As the world confronts yet another dilemma — the COVID-19 pandemic — on top of numerous pressing social justice predicaments, boards are increasingly becoming open and receptive to ESG management. ESG management aims to increase attention and awareness of environmental, social, and governance affairs.
What is Environmental, Social, and Corporate Governance (ESG)?
Environmental, Social, and Governance, or simply ESG, promotes a more stakeholder-centric business approach. The incorporation of ESG into the existing practice in doing business also allows directors to consider the global nuances that drive focus across different regions.
By adhering to ESG standards, companies ethically commit themselves to put forth the three areas that ESG stands for — Environmental, Social, and Governance — in their business processes.
Specifically, companies integrating ESG management address multiple issues that fit into the environmental, social, and governance blanket categories. Such issues include:
The Environmental facet addresses key issues focused on the preservation of the natural world, such as:
- Climate change
- Carbon emission reduction
- Water pollution and water scarcity
- Air pollution
The Social element addresses key issues focused on the consideration of humans and our interdependencies, such as:
- Customer success
- Data hygiene and security
- Gender and diversity inclusion
- Community relations
- Mental health
Focused on the logistics, as well as on defined processes for running a business or organization, Governance addresses vital issues, such as:
- Board of directors and its makeup
- Executive compensation guidelines
- Political contributions and lobbying
- Venture partner compensation
- Hiring and onboarding best practices
Relationship Between ESG and the Board of Directors
A clear-cut definition of the relationship between ESG and the board of directors has yet to be defined.
The Nominating and Governance Committee, with the full board’s involvement, often spearheads talks encompassing the “G,” or governance aspect of ESG. Particularly, G’s incorporation can affect the Enterprise Risk Management (ERM) programs, leading to the company wanting to discuss their overall long-term strategy.
More boards are actively incorporating “S,” or the social element of ESG, with issues such as health care cost, resource scarcity, human rights, and income inequality being considered in the context of a company’s strategy development processes.
The best structural practices in which “E,” or the environmental facet of ESG, is incorporated, are still relatively unknown. In a study comprised of 447 survey respondents, 50% reported some form of board-level oversight by either a full board or a specialized board committee and 19% said that the oversights were due to issues within the organization. 35% of the respondents also reported that their companies do not address environmental issues or do not know of existing overseeing structures.
6 Components of a Successful ESG Management Plan
ESG management provides a multitude of opportunities that boards of directors should consider, rather than dismiss. Here are six main elements of ESG Management that councils should consider incorporating into their business processes.
Material ESG Issues
Material ESG issues encompass issues critical to long-term value creation. By incorporating this element into business operations, boards can better grasp how material ESG issues affect the business and its stakeholders, thus helping them see beyond the balance sheet in order to create a more comprehensive report of problems. This incorporation leads to more informed decisions on business investments, gains, and profits thanks to the insight it provides into what is ahead of the company.
When ESG management efforts align with the overall business strategy, a company can reap the most significant benefits for its actions. In addition, employing this second element allows committees to work together and establish a clear and transparent network of communication that further strengthens and maintains this alignment.
Besides guaranteeing that a company complies with relevant governing laws and regulations, board oversight committees must also incorporate ESG consideration in capital allocation and budgeting. Companies must also be sure to understand a target company’s ESG stance first before signing mergers and acquisitions.
Employing effective board strategies is paramount in ensuring a company’s compliance with relevant laws and regulations. Overseeing ESG management efforts also clarifies the purpose of its presence, helping boards reflect and uphold these values in the overall organizational strategy. Additionally, panels can also ascertain that their company satisfies stakeholder expectations for ESG practices.
In today’s business landscape, it is not enough to demonstrate a loyal adherence to the law. Brands should be at the front lines of facilitating social change. Thus, it is crucial that companies fully understand the intrinsic opportunities and risks that are nestled within ESG matters. Demonstrating such understanding is pivotal in creating an impact and increasing value but also in decreasing, if not eliminating, the chances of dismantling it.
Policies and Initiatives
ESG policies and initiatives that boards may want to consider implementing are putting climate change forward in mapping out strategies, fostering gender and racial diversity within the board and the company, and encouraging everyone to speak out –with dissention being welcome –, when discussing company strategies.
However forward and progressive, boards must be firm and clear in defining such policies and initiatives to get the best outcomes.
Metrics and Goals
Boards are at the forefront in setting the appropriate metrics and goals against which employees will evaluate efforts and progress toward specific objectives. After establishing the metrics that are to be employed, boards must then lay out a set of guidelines that include regular reviews to track whether the performance goals are a true reflection of the company’s purpose and strategy.
Boards must also recognize the impact of ESG information; they must craft disclosure procedures encompassing what, where, and how often a business should publish data.
The work does not stop at creating policies and initiatives and implementing guidelines for collecting, reviewing, and disclosing ESG information. Boards must also continuously monitor and evaluate the effect and influence of their ESG strategy. Boards must look beyond objective balance sheets and into the environmental and social impact of their company’s ESG driven actions.
All companies want to grow and lead the market of their respective industries; they differ in the way they reach this goal. Boards that incorporate and embed ESG management into their business doings are most likely to not only draw ahead of the competition but, more importantly, to take on a substantial role that not everyone has the guts to — that of becoming a change leader.