Asking the right questions about ESG in the boardroom
UN Secretary General Antonio Guterres has declared the latest report on climate change from the IPCC to be “a code red for humanity”. This latest warning highlights that environmental, social and governance (ESG) issues not only have a material effect on companies’ financial performance but go to the heart of existential risks facing business and society at large.
As a result, a host of regulatory and legislative measures are emerging to drive corporate transparency, disclosure and reporting around ESG. So, what does this mean for Boards and their non-executive directors?
The ABC of ESG
Issues such as climate change, gender pay equity, forced labour and modern slavery are changing the corporate landscape through their impact on the buying and investment decisions of consumers and shareholders. Research also shows that ESG performance impacts a company’s ability to attract and retain the best talent.
Organisations that fail to address these issues risk both financial and reputational costs. Some of the most pressing concerns for companies are:
- Climate and the environment
The energy sector is addressing the use of fossil fuels through investment in more renewable sources and is being hit with legislation to make big changes quickly. Shell PLC has recently been ordered by a Dutch court to reduce carbon emissions by 45% by 2030, forcing them to accelerate their target of becoming net zero by 2050.
- Human rights
Violation of human rights is seen low-down in the supply chain, with labour exploitation being a key issue in manufacturing globally. The FT describes the “dark factories” in the UK garment industry, who appear to operate outside the law. In a country where the minimum wage for adults is £8.36, Boohoo have been accused of offering wages as low as £3.50/hour. Beyond consumers being reluctant to support the business, shareholders are cautious, and firms are reluctant to be associated with the brand; Boohoo lost their auditor, PWC in October 2020.
- Diversity and inclusion
There is increasing pressure to improve diversity on the board from bodies such as the UK Watchdog and Nasdaq who are putting quotas on the number of ethnically diverse and female members a board should have. Loreal have reported that their focus on diversity in 2017, from advertising campaigns to board composition, has had a positive impact on growth and revenue.
- Health and wellbeing
With consumer markets leaning towards a healthier food offering, retailers switching out the unhealthy snacks for nutritional alternatives. Reports show that 63% of Nestle’s offering do not meet a recognised definition of health, and some products never will. They are re-evaluating their global portfolio to meet the needs of a more health-conscious market by producing lower-fat and sugar alternatives.
Isn’t this the same as CSR?
In recent years, corporate efforts to demonstrate social responsibility have fallen foul of accusations of greenwashing and are increasingly perceived as being more about PR than meaningful social change. Of course, CSR marked an important step in the evolution of businesses taking ownership of their impact on society and the environment. But, as the global business landscape has become increasingly complex, the need for a more robust framework for judging corporate behaviour has emerged. The UN Sustainability Goals and Paris Agreement are recognised as the leading ESG framework for policy and large businesses. Recent EU regulation includes:
- Disclosure regulation: firms with over 500 staff must report on social and environmental challenges and investment firms must report the integration of ESG risks and consider the adverse effects of their investments.
- Taxonomy regulation: a framework to encourage sustainable investment by using six objectives to determine whether economic activities are ‘sustainable’
- Amendments to MiFID, AIFMD, UCITS: laws have been amended to update risk management policies, the due diligence process, integrate sustainability training and update the suitability process to include sustainability preferences
- Due Diligence laws: companies must conduct human rights due diligence into their supply chains
What does this mean for Boards?
As Datamaran, a leading provider of ESG risk management solutions, has suggested “If there is one lesson we can take from the events of 2020 and 2021, it is that risks from the outside world, such as those tied to public health, climate change or Diversity and Inclusion, are now manifesting themselves in uncoordinated ways and display stronger impacts than before, becoming financially material in the blink of an eye. Yet, companies are still slow in their reactions.” It’s hardly surprising then that ESG expertise is becoming an increasingly desirable attribute in the NED recruitment process or that 89% of EU companies link executive remuneration with ESG metrics.
If you’re not an ESG expert, some key questions to ask are:
- Are you confident you have full oversight of ESG issues?
- What information on ESG risk is available to the board?
- What metrics and/or reporting standards should you be using?
- ESG blind spots – how do you know what you don’t know?
- Should you establish an ESG committee?
At Transpire, we are thought leaders in this field. We have identified three key questions that board members need to be able to answer:
- What motivates the business to address and report on ESG?
- To what extent does the current reporting on ESG/ESG initiatives meet the expectations of stakeholders?
- How does a business’s ESG structure change the required qualities, skills and knowledge of board members?
We’ll be tackling these questions in further blogs in this series to guide businesses looking to strengthen their ESG strategy. Also, keep an eye out for our ESG faculty events, reports and more!
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