Special Reports

What does ESG mean to your company's board?

BDESG

ver the past few years, Environmental, Social and Governance (ESG) has become more than a responsibility. Board members are told to view it as a key differentiator in enhancing relevance and trust among organisation’s stakeholders and as an opportunity to build a more sustainable business.

Its proponents believe that built strategically, an ESG programme creates valuable impact on an organisation, community and the planet for years to come. It’s believed that if you are good with carbon footprint, you’re usually good financially because you’re operating efficiently.

While most directors whom I’ve engaged agree that their companies are paying more attention to ESG matters, they also acknowledge the fact that clear agenda and ownership are often lacking in the actual strategic thinking of their organisations.

One wonders then: if ESG is related to the organisational performance not just for the short-term but for the long-term, how come companies are not taking it too seriously?

Let it not be forgotten that ESG means different things to different companies. In fact, there is evidence that the global pandemic has affected companies’ ESG priorities and agenda differently.

In industries that are more economically challenged, some companies have been prompted to temporarily reduce ESG investments as they struggle for short-term liquidity and long-term solvency. In contrast, among companies that have not been hit as hard, directors do not feel any pause in their companies’ ESG agenda; therefore, priorities have generally not changed.

In industries such as chemical, oil and gas, transportation and energy, environmental matters have long been a top business priority and risk management focus.

According to directors from these industries, it is instinctive to think about the environmental impact of their businesses, such as battling climate change as well as protecting clean air and water. In other industries, the environmental agenda is often less mature and still evolving.

In that regard, the definition of social matters under the ESG umbrella is very broad, ranging from different aspects of human capital management to the company’s commitment to its customers and the communities it serves.

Some see ESG in talent management as a major component of a company’s assets. To such directors, ESG means focus on inclusion and diversity, succession planning, workforce up-skilling, leadership development and building a compelling organisational culture.

In such organisations board discussions view effective use of human capital and the ability to attract, grow and retain the best talent as top business imperatives.

There are also directors who attach a lot of importance to returning value to local communities. They feel they have social responsibility towards the communities in which they operate, especially when they are in less developed markets, obtaining social licence to operate.

They believe that in the long run, investments in local communities create a sense of pride among employees. This in turn fortifies a strong culture.

It is easy to realise that boards’ focus on environmental and social matters may also be motivated by expectations from investors. In that regard, many directors believe that institutional investors continue to be primarily driven by operational and financial excellence.

In fact, whereas the leaders of institutional investors highlight ESG as priorities in public, their investment professionals are usually pushing hard on operational and financial performance during shareholder engagement forums.

In developed markets, particularly in Europe, the evolving regulatory environment also continues to push environmental and social matters, such as greenhouse gas emissions, waste disposal, gender pay gap disclosures and data privacy on to board agenda.

These regulatory requirements prompt institutional investors to raise more ESG-related questions at the board level, further pushing companies to develop their ESG agenda. In industries and countries where these regulatory pressures are less prominent, ESG may be a lower priority for the board.

Ultimately one of the driving forces on the nature of the board’s agenda on ESG is the belief that it is key in safeguarding the company’s reputation. This comes from the belief that ESG’s goals and outcomes directly impact the company’s reputation with the public and employees.

The boards that have taken this stance discuss ESG in the context of managing business risk. They argue that failure to appreciate the ramifications of certain environmental or social issues may attract public scrutiny and, in some cases, harm the business’s reputation and financial return.

Dr Ogola is director of the Institute of Strategy and Competitiveness

Strathmore University Business School