As a Non-Executive Director (NED), it’s likely that the concept of ESG is on your radar. But the extent to which your business has incorporated its three components – environmental, social and governance – into working practices may vary widely from your counterparts.
With this in mind, Transpire commissioned the Sustainability for Boards report on how ESG affects companies and their Boards of directors.
The report sets out to understand how ESG influences companies to include information about sustainability in their annual report. It also looked at how businesses incorporate ESG in corporate governance, core operations and the workplace culture.
If ESG is an area that you need to address, this article will help you understand the common challenges and get ideas from real-life examples and you can download the complete report at the end of this post.
What is ESG?
ESG stands for environmental, social and governance. It recognises that business decisions usually affect not just shareholders, but also external parties, and that they also have a vested interest in how the company is run.
For this reason, the ESG model puts a business’s stakeholders at its heart – its customers and employees, but also wider external stakeholders like the environment and communities.
When your business develops an ESG report, you’re essentially setting standards that you agree to operate by. This means you’re committed to working within an ethical framework that benefits your people and the planet.
One interviewee in our report summed it up well: “It’s increasingly important because the expectation from shareholders is growing and more and more people are reporting on ESG factors.”
The Board plays a crucial role in addressing and driving the ESG agenda in a company. You are responsible for setting the strategic direction of the company, and sustainability is an integral part of this.Tony Stubbs, CEO of Transpire
The three core elements of ESG
Let’s look at what this means in practice by breaking down each area of ESG.
This is about how your business considers the preservation of the world’s ecosystems. It includes your attitude to:
- Climate change
- Reducing carbon emissions
- Air pollution
- Water pollution and water scarcity
The social part of ESG looks at the impact of your business activities on the many people it serves and their interdependencies. For example:
- Customer and community relations
- Data and security
- Diversity and inclusion
- Mental health
How the logistics and processes that run your company have an impact. This might include:
- The set up of the Board of directors
- Hiring and onboarding practices
- Executive and venture partner compensation
- Political relationships, like contributions and petitioning
While the balance between the three elements of ESG often depends on your industry, there is generally more weight and attention on environmental issues.
This may be because the environment has been part of the regulatory requirements for a long time. It also has relatively clear and structured metrics and KPIs.
In comparison, the social elements of ESG can be more narrative in nature. For this reason, companies often find it harder to set meaningful, easy to measure metrics.
Why are Boards motivated by the concept of ESG?
An ESG report not only helps improve your company’s relationship with stakeholders, it can also help you to obtain investments that are crucial for driving the business forwards.
This is backed up by current trends. Funds focussed on ESG-related issues recently saw their combined assets climb to $3.9 trillion, and spending on ESG data is rising, with an annual growth rate of 20%.
“Consumers and investors are shifting to sustainable products and investments and companies that make positive social contributions,” said Transpire Founder and CEO Tony Stubbs. “This means the Board must ensure they adapt to the evolving nature of the market and adopt a strategy to allow the firm to make a sustainable profit.”
What role does the Board play in setting the ESG agenda?
The Board plays a crucial role in addressing and driving the ESG agenda in a company. You are responsible for setting the strategic direction of the company, and sustainability is an integral part of this.
We asked interviewees what the role of the Board is when it comes to ESG. There was a consensus that the Board is responsible to set the tone from the top, determining how much priority is given to ESG.
“I think the Board has to be intrinsically and fundamentally involved right from the very beginning of this process,” one interviewee told us.
“The Board can say, ‘management, we now want you to identify concrete actions and KPIs that we can measure. And then you tell us how they are aligned with the long-term objectives’.”
Does an NED need specific skills for ESG?
NEDs need good ESG knowledge to be able to challenge and question the management team on its integration.
Our research found that a specialised ESG committee can be beneficial to some companies, but it’s more important that ESG is fully integrated into the strategy of the company, with or without a committee.
“Some of the bigger firms have specialised committees, although that might not necessarily be appropriate for every organisation. So I think it’s really important for firms to take a proportional approach to how they tackle ESG,” one interviewee said.
“I think certainly, most governance committees within the firm should be thinking about how they embed ESG into their activities and into their terms of reference.”
It’s also essential for the Board to be diverse in its composition to ensure that all aspects are considered when discussing ESG at the Board level.
Challenges of producing an ESG report
Even with the drive and determination to approach ESG in a meaningful way, leadership teams can still face a range of challenges when producing a report.
These might include:
- Difficulty finding the right framework and standards for reporting
- Adequately communicating the changes the company is making
- Satisfying each stakeholder group
- Lack of ESG data
- Lack of knowledge at the leadership level
- Ever-changing regulatory requirements
Our research also found that before producing an impactful report, companies may face challenges in aligning the purpose of the company with its employees and achieving its ESG targets at all levels in the organisation.
Types of ESG reports
There are two common ways of reporting on ESG. The first is to include it as part of your annual report and the second is to create a separate ESG report.
There are pros and cons to each method. Having two separate reports may allow you to better engage with specific stakeholders and provide more detailed information.
However, by having only one report, it can encourage you to integrate ESG better by considering it in the context of your company, rather than just in general.
How are other companies approaching ESG?
We examined the annual reports of several companies from various sectors and countries listed on the Financial Times Europe Climate Leaders 2021 list.
The most obvious similarity between all the reports was using the United Nations Sustainable Development Goals (UN SDGs) as a guideline or benchmark. All the businesses align their ESG targets with the UN SDGs and most of them are signatories or participants of the UN Global Compact.
Ten out of the 13 companies also included sustainability reporting indexes, such as CDP Scores and FTSE4Good, in their annual reports.
Some companies focus on one aspect of ESG more than the others. Superdry is a good example, with two environment-related goals and one social-related goal as its main areas of focus.
This focus on the environment and climate change may be linked to the fact that its stakeholders see the environment as the most important aspect of ESG.
How to integrate ESG successfully
Integrating ESG successfully needs buy-in across the organisation. We’ve put together these recommendations to help you do it well, based on the findings of our research:
- Work with ESG experts in setting the business strategy and ESG direction of the company to elevate your initiatives and reporting.
- Provide ESG training and education for your employees to help them understand how to incorporate ESG into their daily activities and tasks. This can also help to create an ESG-positive corporate culture in the company.
- Maintain positive relationships with your stakeholders by engaging in continuous two-way communication with all groups.
For small businesses and start-ups
- It’s a good idea to integrate ESG into the company’s strategy and core purpose from the set-up. As your operations are on a smaller scale, it’s often easier to initiate changes at a faster rate.
For Board members
- Invest in your ESG education and skills to help you lead and engage in all conversations around the topic.
- Set the right tone at the top leadership level. If all Board members take a strong stance in ESG, companies should find it easier to align the values of the company with all its employees.
- Continue to put pressure on companies to be more innovative in being sustainable. Constant emphasis on ESG will keep it at the top of the agenda, especially at the Board and management level.
Download our report to find out more
There’s lots to think about when addressing ESG at Board level. Our in-depth report includes more information about the role of the NED in driving ESG forward and further recommendations for Board members.
Read in detail about the challenges other companies have faced and learn from how they have structured their reports.