How Corporate Boards Should Oversee ESG
Read Time: 4 Minutes
Corporate board members are getting the message that ESG issues can’t be ignored. Unfortunately, there is little in the way of tactical guidance available to help them deal with the environmental, social, and governance matters they face.
It’s worth noting that despite how ESG has come to dominate business agendas over the last couple of years, it remains vague and subjective. The issue of climate change, for instance, is vast. Elements of it may or may not apply to a company on which a board member serves. Social issues, such as racial and gender equity, are fraught with controversy. And while governance usually gets the least attention in the media, it’s typically the one that’s of most direct interest to boards because it involves their composition and structure, voting rights, shareholder battles, and proxy disputes.
So how should boards define ESG, monitor and manage it for better company results, communicate ESG issues to investors, and structure themselves to become more ESG savvy? The following may provide a useful multistep guide to the process.
The first step is for management and the board to assemble a team to conduct a thorough strategic audit and materiality assessment of the company’s ESG status and vulnerabilities. Since the topic covers so much turf, broad input is needed. The company’s chief executive and top managers in finance, human resources, and legal and investor relations should be involved. In smaller and private companies, the board chair probably should take the lead in this exercise.
Second, invest in outside advice from legal counsel, shareholder services experts, other consultants, or specialized ESG talents. Many are now available.
Third, you will need a materiality assessment, which digs into what your company is, where it currently stands, and who its stakeholders are. To obtain the necessary information, identify a sample group of internal and external stakeholders and explain that insights will be used to inform the company’s ESG strategy. You should ask them a range of questions, including what sustainability looks like for the company, the measures that are relevant for its industry, and what they think about social issues including human rights, community impact, diversity, and inclusion, as well as environmental issues such as the company’s carbon footprint, water stewardship, greenhouse gas emissions, waste management, and overall sustainability.
Survey Your Team for Deeper ESG Insights
Following your materiality assessment, develop a numerical materiality survey that reflects the assessment’s results and will generate quantitative data that can be analyzed and explained. In the survey, allow space for written insights and comments, which can provide valuable feedback. After you launch the survey, follow up with laggards to ensure receiving a comprehensive response.
When analyzing the survey results, create a forced ranking to understand the issues most important to each of your stakeholder groups. The result should be a formal matrix graph that plots the significance of each factor. Share it with respondents to see if they agree with the accuracy of the findings. Then create a formal sustainability report or summary, which should be shared widely and publicly.
Seek ESG Opportunities
Another step in the materiality process is assessing double materiality, which means looking at those issues that present risks and opportunities that are going to be material from financial and nonfinancial perspectives in the future.
Take climate change as an example. A business should understand how its physical and transition risks are going to affect its overall value. Severe weather events might hit manufacturing facilities or supply chain security. Climate regulations might mean that some of a company’s most important products and services may not be viable 5 or 10 years from now.
The end product of this exercise for boards should be a strategic social profile and heat chart on the company’s business sector and industry, as ESG factors vary greatly based on location, company history, acquisitions, mergers, divestitures, ownership, shareholder base, and other factors. Identify the hot-button issues for your owners, whether the company is public or private. Also, catalog important stakeholders and possible future ESG issues.
Apply Your Findings
After the report is complete, a board should work with management to select the appropriate ESG reporting frameworks to follow. These frameworks are grading systems for a company’s ESG performance efforts and are offered by several national and nongovernment organizations.
Finally, it seems that more and more boards are thinking about organizing a distinct ESG committee. These are not common yet but are likely to become so. Whether or not an ESG committee is in your board’s future, attracting directors with expertise in environmental, social, or governance issues will become increasingly important.
About Ralph Ward
An internationally recognized writer and commentator on the role of directors, boards, and the future of governance worldwide, Ralph Ward publishes the online email newsletter Boardroom INSIDER. He is also the author of the books Board Seeker (2018), The New Boardroom Leaders (2008), Saving the Corporate Board (2003), Improving Corporate Boards: The Boardroom INSIDER Guidebook (2000), and 21st Century Corporate Board (1997). Ward speaks internationally and presents a Boardroom Masterclass seminar worldwide, with recent programs in the Middle East, Asia, and Africa.
This ESG article is adapted from the GLG Webcast “Board Oversight on ESG Issues.” If you would like access to events like this or would like to speak with ESG experts like Ralph Ward or any of our approximately 1 million industry experts, please contact us.
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