What is a board’s role in ESG?
A board of directors should always be aware that their role is to guide through delicate balance; they need to maintain an independent mindset, focus on the big picture, and keep a healthy distance from narrower day-to-day issues that management handles. The same goes for the board’s role in ESG.
How does a board oversee ESG?
Environmental, social and corporate governance (ESG) is seeing a dramatic increase in its value to firms globally (over $41 trillion in ESG assets exist as of 2022). Because of this, boards need to know what part they play because, almost inevitably, their company will end up investigating significant time and money towards success in this area.
Essentially, this boils down to two essential things:
- Finding a path: using all resources and expertise available to know precisely what ESG involves and learning where the organisation fits in the movement.
- Sicking to the path: setting goals around ESG and ensuring that they align with and are not approached separately from the company’s overall strategy.
Almost inevitably, their company will end up investigating significant time and money towards success in ESG
Finding the right path to ESG
This is a tough ask for most companies. ESG is too broad to understand in one sitting, let alone to decide how a business will tackle it.
First off, it is the boards role in ESG to recognise the importance of it. If anything – to motivate the executive to incorporate it into company strategy.
If the $41 trillion figure mentioned above doesn’t say enough about this, there are other arguments too:
- The increasing belief that engagement with ESG values (or lack thereof) has a direct, long-term influence on a firm’s profitability, its employee productivity, and the investment it will attract.
- News stories demonstrate the dominance of ESG issues; COP 26, ambitious climate goals, changes in labour laws, and ongoing debates over social issues.
- Elections are constantly fought over ESG issues, be it the growing green movement in the EU or the battle over social issues like reproductive rights, maternity/paternity leave, and at-home working in the US.
Decide the company’s priorities
Being such a broad issue, it would be impractical for the board to consider every single aspect of ESG equally. Instead, boards should recognise what industry they’re a part of and use this lens to influence company strategy.
For example, Airlines and delivery companies will be much more focused on the emissions side of ESG than, say, a tech manufacturing company.
Decide the company’s stance
ESG is a booming sector but is also a hotbed for debate. Boards should familiarise themselves with this debate and all arguments for and against ESG, particularly concerning their industry.
If a company is serious about emissions, will it follow the legally mandated targets or go further? Knowing this kind of thing in advance will provide much clarity regarding strategy.
ESG is a booming sector but is also a hotbed for debate
If a board is serious about having a role in its company’s ESG journey, it must ensure it has the right expertise to follow through. Anyone currently a board member who feels they don’t know enough about the topic should seek to learn more.
Furthermore, assuming this expertise is present on boards, it should be used. Boards shouldn’t fall into the “tick-box” trend of bringing on new, experienced members and not using that experience in practice.
Sticking to the path
As with company strategy, a board plays a vital role in reaching goals, so it needs to ensure that its input doesn’t stop at the beginning of the journey. Good boards will go far beyond that.
Ensure ESG is integrated
It’s important to remember: ESG is not a side project to be pursued by a select few individuals within an organisation. If there ever was a time when that was true, it’s over.
ESG should be considered a central portion of any company’s overall strategy. It doesn’t need to dictate that strategy entirely, but boards should not simply assume that putting together a sub-team to oversee it will do.
Without proper integration, there is a risk of conflict between ESG and other organisational priorities. As they scramble to fix discordance, this could cost the company time and money.
Be able to monitor external developments
Once ESG priorities are integrated into the company’s overall strategy, boards should continue to monitor local, national, and international developments in the related areas:
- Have new laws been passed?
- Has public opinion shifted?
- Are there new trends in the market?
- Has a recent global news story thrown a relevant issue into the spotlight?
Board members should be able to answer these questions and determine what they mean for the company.
Be able to monitor maturity
The word “maturity” is used in the context of ESG, especially when organisations have labels applied to them based on their progress. Some companies may lag, others may be reaching the acceptable standard, and others may be leaders within their industry.
Whatever the case, it’s a board’s role in ESG to be able to recognise and monitor the ESG maturity of their own company; otherwise, it would be foolish to assume that any reflection on progress is accurate.
Boards should be honest in their initial and subsequent assessments of their company’s ESG maturity. They should use pre-agreed metrics to achieve this and base their evaluation on facts, not a desire for good PR.
Be able to communicate
One of the board’s primary roles is to be a good line of communication between management and investors. With ESG, it is no different.
All members should know how to do this well, and essentially, it means having a good grasp on everything mentioned above – good communication starts with being an expert in what you’re talking about.
To fulfil its role in ESG, a board has two main tasks
- It must accurately define its own goals and ensure they are a good reflection of the company’s reputation and role in a wider marketplace
- It must ensure that it stays on the path it has set itself to reach those goals, making adjustments to company strategy where necessary
Watch Rhea Albuquerque discuss how to adapt your business to a changing world.
“ESG and the role of the board” – PwC
“The role of the board in overseeing ESG” – Deloitte
“The board’s role in sustainability” – Harvard Business Review